Insight into how angel investors operate, plus expert views on current investment activity.
Angel investors are critical to the startup ecosystem. These angels could be a founder’s friends and family but more often they are wealthy individuals, often with a portfolio of investments.
Understanding the nature of angel investment in the UK, and hearing how the sector is responding to Covid-19, will make founders better placed to seek funding.
Understanding the angel investor landscape
The angel investor market is a hard one to quantify as it includes a vast range of investments from a few thousand pounds to several millions. The most significant recent research was published in 2018 by the British Business Bank and the UK Business Angel Association (UKBAA). A combination of online surveys and telephone interviews found that the average angel had eight years investing experience and the majority had a portfolio of more than five companies. Angels had an average of 20% of their available assets in this form of investment.
Initial investments varied widely across the more than 500 angels surveyed, with the median investment being £25,000. It is worth considering that angel investors often work in syndicates so the aggregate amount could be significantly higher. Indeed the survey found that only 21% of angels weren’t involved in any syndicates and more than 40% invested in three or more startups as part of syndicates.
When it comes to holding their investment, angels are often in it for the longer term. Only 1% of investors expected to hold their investment for less than two years. 57% expected a 3-5 year investment with 20% assuming they will hold their equity for more than seven years.
Of course angels don’t just bring investment, they can supply expertise as well. 76% said they provided strategic advice and 64% offered access to customers, suppliers or markets. The average angel spends 1.6 days per week on their angel activities with only 4% spending five days or more.
Skills and experience are key for angel investors
Nine out of ten angels cite the skills and experience of the founder and their team as the key to securing investment, along with the potential for the business to scale. Less than 30% consider a clearly identified exit route as an important factor when it comes to investing, indeed more than a third consider it unimportant.
Angels frequently take part in more than one funding round, with 65% of those surveyed making a follow-on investment. For around a third this was an investment of less than £20,000, with a similar proportion investing more than £20,000 and 35% not making a follow-on investment.
Angels favour healthtech and pharma
Healthcare, digital health, biotech and pharmaceuticals led the way in attracting investments, closely followed by fintech. Startups that offer software as a service (SaaS) and e-commerce were the next most popular investment sectors for angels though there was activity across a broad range of sectors.
Angel investing can be high risk and high reward. This is reflected in the angels surveyed stating that 10% of their investments gave less return at exit than was invested; 45% of investments were written off entirely. However 30% of exits returned between one and five times the amount invested and 13% gave a return of more than five times the outlay.
Angels reported low numbers of exits in the first five years of investment, with the majority coming after 10 to 20 years. But such long time periods do not put angels off. Indeed the good news is that nine out of ten angels use funds gained in successful exits to reinvest in startups.
The role of angel investors in a Covid-19 world
Speaking at a recent CogX event, John Spindler, CEO of Capital Enterprise and a serial angel investor, said that angels across the country had “stepped up to bat” by supporting the startups they had invested in. But while angels were being supportive of existing investments he explained that startups looking for new investment were facing additional barriers.
“It is difficult if they don’t already know you, don’t already trust you and don’t have a relationship with you. And that’s incredibly hard to do on a Zoom call. I think this is a problem that will only really get settled when we come out of lockdown.”
Peter Cowley, another highly experienced angel investor, told Eagle Labs that while deals were taking longer under lockdown, the use of virtual events meant that there was actually more initial investment activity.
“There’s no doubt that investing in startups at the moment is more difficult for angels and it's more difficult for entrepreneurs,” said Cowley. “But that doesn't mean it won't happen. It just means that you've got to be patient and you've got to prepare the plan better. You've got to think forward and consider what the business model will look like over the next few years.”
“So, carry on approaching angels for investments, and of course those who've already got investment, you'll find hopefully that your angel group will be supporting you well.”