The main source of finance for start-up ventures has often been referred to as the “three Fs” – friends, family and foolish investors. The second most important source tends to be business angel investors. These individuals have become increasingly important as providers of risk capital and contributors to economic growth and technological advances in recent years.
Business angels are usually high-net-worth individuals with considerable business experience of their own who invest in early-stage growth-oriented businesses. They can invest individually or as part of a syndicate, with one angel taking the lead role.
However, they bring more than money to the table. Angel investors also provide business management experience, skills and contacts for the entrepreneur. Importantly, they tend to be patient and understand that they may have to wait some time before they get a return on their investment. This makes them an attractive option for equity capital for early-stage firms.
“Angel investors are individuals who provide capital to start-ups and early-stage companies, usually in exchange taking an equity stake in a business,” says PwC Ireland corporate finance partner Mark McEnroe.
“They are typically high-net-worth individuals who have generated wealth, have retired or are semi-retired and are looking to both maintain an interest in the corporate world and generate attractive returns from their investment portfolios. The businesses they invest in are typically unsuitable for taking on debt financing given the stage of their development.”
Kevin Gam, assistant professor in finance at UCD College of Business, says angel investors can typically be motivated by having “idle money that is not making sufficient returns”.
“They will have more money than the family and friends that business founders usually turn to at the early stages but not as much as the banks or venture capital funds,” he says.
In addition to funding, angel investors can benefit start-ups with their expertise though mentorship.
“Many angel investors have significant experience in business and can provide strategic guidance and mentorship to help start-ups navigate challenges,” says McEnroe.
The experience and practical advice they bring to the table can be invaluable, in Gam’s view: “Many businesses are started up by engineers or technicians who are not experienced in managing a company. That experience can be provided by business angels. In many cases, they have invested in other businesses and are able to bring that experience as well. They can help to manage finance, market products or advise on other areas of the business.”
They can also provide valuable connections, as well as boost a company’s standing. “They typically have extensive networks that can open doors to potential customers, suppliers and other subject-matter experts,” says McEnroe.
“Having an angel investor on board can enhance the credibility of the business, making it easier to attract additional investment and talent. They also provide long-term support. Angel investors typically have a longer-term time perspective and are willing to support the business through its early growth stages.”
That longer-term view is critically important for early-stage companies that need to reinvest as much capital as possible in growth.
“Business angels usually take an equity share in the company in return for their investment,” says Gam. “The return on that investment usually comes from selling that equity share to another investor when the business is sold, or through an IPO.”
They differ from venture capital firms in terms of target returns and time horizons, he explains. Venture capital funds and private equity investors need to provide a return to their own investors and can’t wait very long for a return.
“Angel investors are using their own money and can afford to wait longer,” he adds.
In Ireland, companies and entrepreneurs seeking angel investment can contact the Halo Business Angel Partnership, a platform that connects individual angels and syndicates to start-ups.
HBAN is a network of hubs that brings together the largest start-up community on the island. The five hubs directly support more than 1,000 start-ups and operate or host more than 30 programmes. It has established strong working relationships with top-tier venture capital firms and other investors who may be seeking angels to participate in funding rounds.