Should your business make use of angel investors?

Angel investors can be a big help to small businesses, says David Prosser. But there are downsides.

947_MW_P22_small-biz

Angel investors can be a big help to small businesses, but there are downsides.

If your business is looking for financial support, should you consider "business angel" finance? More than 15,000 angels typically wealthy individuals and serial entrepreneurs are now active in the UK, responsible for several thousand fundraising deals each year with small businesses.

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The figure is increasing, according to the UK Business Angels Association (UKBAA), as part of a broader trend towards ethical and socially responsible investment. Many angels feel a responsibility to support the next generation of wealth creators, says Jenny Tooth, CEO of UKBAA.

For businesses raising money, angels offer a number of advantages. They provide equity finance rather than debt, so they don't saddle the business with repayments or the cost of interest, or require any security. Acting individually, rather than as part of a larger corporate entity such as a private equity or venture capital fund, they can often make decisions more quickly. And since angels tend to invest in businesses in sectors where they have particular experience, they will often bring a wealth of sector knowledge and crucial networking opportunities.

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However, there are some potential drawbacks too. Equity investment means giving up some of your business diluting your ownership, which will mean you receive less value if and when you sell it. You'll also be giving up some control. Angels won't necessarily demand a majority stake in the company, but they will expect a say in its running.

Some angels, moreover, are in a position to offer more support than others. Private equity and venture capital funds are more likely to be able to help with structural support helping you formalise the governance of the company or move it on to a sophisticated technology platform.

Angels aren't charities

Nevertheless, business angels have a long record of adding value to many of the enterprises they support, and the alliance up can be a powerful catalyst for growth. Angels typically invest between £10,000 and £500,000, though larger investments are possible. They'll often look to set up the investment so that it qualifies for the enterprise investment scheme (EIS) or seed enterprise investment scheme (SEIS), two government schemes offering generous tax reliefs to investors in unquoted companies. This may require entrepreneurs to structure their financing arrangements to meet the EIS or SEIS eligibility criteria.

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