8.7 Angel investors and venture capitalists (VCs)
A business angel is an investor who can contribute both equity funding and management skills. Normally they do this as a syndicate to spread their individual risk. Both angels and venture capitalists (VCs) can provide funding for businesses that don’t want to go public but do want to expand. Business angels may take up board director roles and their investment over a period of at least three years.
Venture capital is the term given to groups of investors who provide equity funding for early-stage, innovative and high-risk businesses. The venture capitalists expect a high return on their investment to be achieved in the medium term. Venture capital may also support the business with advice and guidance.
A survey of 158 UK-based angel investors showed that 56 per cent of the investments made by angels terminated at a loss, with ‘most of them losing their whole investment’ (Nesta, 2009). Angel investors require high returns to compensate for the high risk; overall returns of 22 per cent for UK angels were noted (Nesta, 2009).
Investors tend to want to be involved at the very early stages of reasonably well-established businesses with ambitions to grow substantially, but without the financial backing to do it on their own. That is to say – they have the potential to ‘scale up’ and the business plan to demonstrate this.
Many business owners reject equity finance because they don’t want to give up control of their business or they may have a social mission that does not fit with the ambitions of investors. Angel and VC investors will want a seat on the board (or more), and will insist on strong governance and regular meetings. They will want monthly management accounts and regular reports from the management team. So while you get the benefit of their finance and their knowledge, contacts and experience, you will effectively be accountable to them for this.
A VC investor will expect to see an exit route (that is, a way to realise the gains on their original investment in cash) outlined by the business.
Now watch our entrepreneurs discuss how they financed their business start-up and some of the issues about matching expectations of investors with their own ambitions and ideas.