Mark Lyttleton: What Is an Angel Investor?
Business mentor and angel investor Mark Lyttleton has amassed a wealth of business experience and expertise, helping both private and public companies to raise the funding necessary to grow and support their businesses. This article will take a closer look at angel investing, exploring the benefits and pitfalls from both the angel investor and business owner’s perspective.
An angel investor is an individual who provides promising start-ups with funding in exchange for a stake in the business, which usually takes the form of either equity or royalties.
Although venture capitalism was previously a popular funding route for founders, venture capitalists are increasingly focusing on late-stage investment, financing just 1% of small businesses. By comparison, angel investors invest in up to 30% of the opportunities presented to them, making angel investment an appealing source of funding for entrepreneurs struggling to raise enough capital to get their venture up and running.
Angel investors are usually experienced business leaders in their own right, having built and scaled their own business empires. They are often entrepreneurs or small business owners who have the knowledge and experience necessary to recognise start-ups with a bright and promising future. Alternatively, a business angel may be a C-level company executive who has risen through the ranks, learning what it takes to run a successful business along the way. Some angel investors are professionals, like accountants, financial advisors, lawyers or even doctors, who finance small businesses as a professional pastime.
In return for investing their own money in a business, angel investors receive a minority stake in the company, which can often amount to between 10% and 25% of the company’s total equity. Although this injection of collateral can be game-changing for a founder struggling to get their business off the ground, angel investment is about much more than just money.
Angel investors offer valuable mentoring and support, providing entrepreneurs with the benefit of their business knowledge, experience, time, skills and contacts. Working closely in partnership with the companies they support, angel investors take a hands-on approach, helping to push the business forward while avoiding the pitfalls commonly encountered and realising opportunities that the entrepreneur may otherwise have missed.
Angel investors may invest alone or as part of a syndicate. With a syndicate, a number of angel investors club together, pooling not just their money but also their experience, knowledge, skills and contacts. When a syndicate invests in a start-up a lead angel takes charge, co-ordinating the investment deal and providing a vital point of contact for the business owner.
From a business owner’s perspective, angel investors offer a variety of benefits, negating the need to risk their own personal assets; providing the benefit of their contacts; making investment decisions quickly; providing access to mentoring and managing skills; and eliminating the need to pay the often elevated interest charges that attach to a traditional bank loan – if they can get a loan in the first place. However, not all founders are willing to give up a share of the company. In addition, this form of investment is generally unsuitable for investments below £5,000 or over £500,000.
From the investor’s perspective, angel investing also offers multiple rewards, providing an opportunity to support companies they feel passionate about, instilling the feel-good factor of knowing they are doing good in the world by passing on their experience and expertise. Angel investing also brings investors into contact with interesting people with fascinating ideas, including entrepreneurs and other investors, creating scope for lifelong bonds and friendships. However, it is crucial for investors to understand the considerable risks involved in investing in early-stage companies, developing solid investment strategies to help mitigate those risks.
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