Guides and resources to help you on your funding journey
As the trade body for angel and early stage investing it’s our job to make sure that investors can invest effectively and that founders can raise the money they need to grow and scale their business.
We hope to give you a better understanding of how early stage investment works and whether it is actually right for you in the first place. We also want to set out the process that you should go through to get your business ready to attract and engage an investor and finally will give you some helpful tips about where to find investors and how to ultimately close a funding round.
Introduction to early-stage funding
Securing investment is an important step for all start-up and early-stage businesses but you need to ensure you are at the right stage before. We have compiled a guide to take you through the different stages your business might be at so you can understand the right time to secure investment.
Angel investing is the most significant source of investment in start-up and early-stage businesses seeking equity to grow. Whilst the market is relatively difficult to calculate, we do know that an estimated £2bn per annum is invested by Individual investors in the UK via the Enterprise Investment Scheme or Seed Enterprise Investment Scheme, either directly or as part of a managed fund. VC investment is also growing every year in the UK and there are a growing number of international funds coming over to the UK to invest in the UK’s exciting ecosystem.
In general, individual business angels will invest anywhere between £5,000 and £500,000 in a single venture, depending on the business and the growth needs whereas Seed VCs will seldom invest less than £50,000. This varies according to the disposable wealth of the individual and the opportunity identified. Seed Investors typically invest as part of a syndicate, pooling their experience and time to add more value and bring more capital to their investment. This means that larger amounts of finance above £1.5m can be raised by investors when they pool their resources.
There are multiple sources of funding for a business that is just starting out. The most prevalent is equity and it is one of the most important forms of funding because equity is often a key leverage used to unlock different types of funding, like grants.
Angel investment differs from venture capital finance which invests in businesses through managed funds, raised with private or public money. The venture capitalist manager invests the money on behalf of the fund which must be profitable and make a return for the fund’s investors. Due to high costs of administration and the need to be very selective to ensure a return on the fund, VC funds are more risk averse and thus make fewer small investments in the startup and seed stages. So, business angels are becoming more and more significant in funding new ventures by supplying smaller amounts of capital to companies that cannot be economically funded by the established venture capital market.
Unlike investing in a managed fund, business angels make their own decisions about investments they make and generally engage directly in meeting the entrepreneurs, often seeing them pitch their business. Angels also engage directly in the due diligence and investment process and are signatories on the legal investment documentation. This can be done either on their own or with a syndicate. Angel investors then follow their deal either actively taking a role on the board or actively supporting the business or may act passively as part of a group with a lead angel taking this role on their behalf.
Business angels differ from venture capital firms not only in the size of their investment, but also in their approach. Angel investing is often called “patient capital” since angels are less concerned with rapid return and exit and are prepared to support the business through its path to growth and exit over a longer timescale.
Angels cannot take more than 30% equity in a business under the EIS/ SEIS scheme, but crucially, you need to be incentivised to grow and scale up your business. Most investors understand and respect that. They also appreciate that you will also need to have equity left for future funding rounds – it is not uncommon for there to be 2-3 angel rounds prior to the business taking on larger, institutional money. In fact the later-stage institutional investors may be put off from investing and supporting that business in its growth journey if the founders do not retain a sufficient equity stake in their own business.
Valuations of early stage businesses is certainly not a science it is more of an art. As a general rule of thumb, businesses usually give away between 15% and 30% of their business in exchange for investment. the amount the company raises will increase as the business gains more commercial traction more technological advancement and builds out a more capable and diverse management team.
What you need to secure investment
As the name suggests, the elevator pitch is a quick, comprehensive summary of an idea that can be delivered in anything from 30 seconds to 2 minutes. And in many respects, it is the entrepreneur’s calling card to any would-be investor he or she happens to meet, whether in the elevator or the world at large. You will also use a written version of this as a core part of any opening emails or approaches to potentially interested investors.
Your deck is the main document you will use to engage potential investors. Think of it like a glossy sales brochure that explains what is exciting about your product but also goes into why it’s going to make such a big impact on the market. It also covers things like your financial projections the management team behind it and even the deal for the investor. It is a carefully crafted overview of the investment opportunity. There are many resources online with great examples of successful pitch decks and even in-depth guides as to how to put together the perfect deck. Do your research and do not hold back from investing in having the deck professionally designed.
As a general rule of thumb, if you cannot get the full swathe of your idea across in less than 20 pages (excluding appendices and supporting material), you probably need to spend more time distilling the essence of what makes your idea so special.
Make sure you have a full suite of financials, including P&L, Balance Sheet and Cash Flow Forecast. The financial forecast should be based on sound, researched assumptions and justify the need for investment.
Profit projections detailing projected profits for the first year on a monthly basis and for the next two on a quarterly basis. For the sake of comparison, you should also include actual historic profit and loss for the previous two years, supported, wherever possible.
Cash flow projections detailing projected profits for the first year on a monthly basis and for the next two on a quarterly basis. Extra care should be taken with the important issue of immediate cash flow. Given that such matters will inevitably provide the starting point for any investor negotiations, your projections should also detail the absolute minimum of new cash that will be required over the next twelve months in order for the business to survive.
Balance sheet projections are less important but can be a useful tool for outlining possible funding structures. Wherever it is relevant to do so you should also include a recent historic balance sheet and adjust for any directors’ loans to be capitalised.
Latest audited accounts should be included in full when available.
You should consider speaking to an accountant. Firms with a lot of experience in working with start-ups can be found in our membership directory.
Completing an Angel investment requires legal processes to clarify and confirm the deal terms and protect all parties concerned. Both investors and entrepreneurs are advised to seek legal advice from lawyers who are experienced in doing investment transactions of this size and nature, notably incorporating the EIS and SEIS schemes, they can be found in our membership directory.
The Enterprise Investment Scheme allows high net worth individual investors to invest money in a business and to claim significant tax relief against that investment, thereby reducing the risk attached to that investment by a considerable margin. In fact, 90% of investors in the UK invest under EIS or SEIS. That means if you were a seed stage business looking to raise investment you must make sure that you are eligible for this scheme.
To find out more about EIS or SEIS and whether you qualify, visit the Enterprise Investment Scheme Associations website.
To get support and advice around accessing EIS or SEIS for your business and how it can affect a funding round, speak to speak to a leading law firm in our membership directory.
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How and where to find investors
Anyone with the knowledge and financial capacity to make an investment could be an angel investor. Although we represent about 18,000 via our members, there are countless more out there who we do not yet know. Looking for investors can seem a daunting task at first, but there are plenty of resources available to support you and many angel groups for you to approach.
There are several brokerage and support firms out there that can help you find and close early stage investment. You can find them in our membership directory.
A funding round can take a long time to complete and the longer it takes, the more obstacles or issues will arise with the investors that you pick up along the way. Another, better deal may come along, or unforeseen personal circumstances may preclude an investor from investing. It is also important to remember that most investors do not have to invest, they can always sit on their money and wait for something else to come along. You however must raise the investment to maintain your growth trajectory.
Prior to investing, angel investors will normally seek to review all the aspects of the deal. This enables them to investigate the key aspects of the business and the investment proposal before committing to an investment. Research has shown that doing at least 20 hours due diligence considerably increases the chances of a more positive outcome from the investment.
Securing the investment you need for your business will very rarely come from just one source. Angel investors typically invest between £10,000 and £50,000 into a business so if you are looking to close a sizeable round of investment, you will need to engage multiple investors to do so.
Investors come in many forms, it is always best to fill your investment round with investors who can assist you the most both now and further down the line.
The foundations for a successful working relationship are laid long before anything is actually signed. Be clear and honest with investors from the outset about the nature of the partnership and about what they will expect of you in terms of contact, information or accounting.
Equally important is clarifying the kind of involvement they will have (if any) over and above the purely financial one, as strategy development, pay decisions, product testing or otherwise.