8.7 Angel investors and venture capitalists (VCs)

A business angel is an investor who can contribute both equity funding and management skills. Earlier in the course you were introduced to the UK Business Angels Association which is the trade body for Angel Investors around the UK. Normally, syndicates of individuals come together to spread their individual risk and portfolio of investments. 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.

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Transcript: Video 1 Financing a business start-up

ALEX BOND:

At first, we financed through grants. There's a lot of free money available, especially in areas of hot topics so clean energy or anything green is good, with digital things. And so, when we were initially developing it, we could find lots of grants.

When we knew we were focusing directly on hygiene auditing, there are less grants. Because, like I said, it's not a very interesting industry. And so they became harder to find, and we had to find outside sources of funding.

And we went to lots of events. We spoke to lots of investors, VC firms, and just talked them through our idea, and asked them if they wanted to invest in us.

NICK ALLEN:

Right from the very beginning, we decided that we would self finance the business. At least in the medium term, we wanted complete control over the business. There's a really important reason for that-- we didn't want to run a business that didn't have our values behind it.

It was really important to us to try and make people happy. And we have a motto for the business, which is if you're going to do something, do it really well. If at any stage you hear yourself saying that will do, then it's not good enough, and you've got to do some more work on it. So we wanted to keep control of that.

We financed it ourselves. And so I have another job. And this is a separate business for us. And our medium term proposition is not to conquer the world, it is to set something up for our daughters. So that in maybe five, six years' time, as they get through university, then there is a platform for them to use their creativity and go on from there.

EMILY PRINCE:

When I first went into it, made the decision to this – is what I'm going to do, I'm going to put my savings into it, my partner was behind me and said, right, let's do this, I did have, for the first few weeks, moments of absolute panic. Oh, my goodness, what am I going to do if it doesn't work.

But then, as soon as the first person said yes, that just seemed to dissipate. And because I knew the need was out there, it's just a question of telling people that this was available. And then, you know, hopefully it would go from there. And that's what's happened.

CLAUDIO MARTURANO:

Came to a point where I realised I had enough self funding to get it to the 11th month. And I had that agreement with my wife that that would be the point, if it didn't get to the next stage, then we would call it quits. Because you always have to have an exit strategy.

Luckily, since then, I've managed to get some funding from the government, from grants, from competitions. And I've managed to get to a point where I can now self fund for the next year and a half for these various opportunities. And the next stage, then, will be actually income. When I eventually launch, which hopefully will be by the end of October then income will be my next stage of funding.

End transcript: Video 1 Financing a business start-up

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Video 1 Financing a business start-up