What it means to raise money from Angel investors

Read time: 10 minutes
Alex-Rowe - Raising Partners

Alex Rowe Investment Principal

Alex Rowe is the Investment Principal at Raising Partners Angels, and works closely with founders and angels, to prepare opportunities for investment and manage the syndicate process.

Tell us about Raising Partners Angels?

Raising Partners Angels is a unique investor syndicate built on years of experience advising and supporting the UK’s most promising early-stage companies.

Every prospective investee company goes through a rigorous set of fundraising processes with the Raising Partners team to ensure that a number of key areas are covered. Namely, the investment strategy is set in line with the company’s long-term ambitions; the investment amount provides sufficient runway ahead of any future fundraising requirements; an achievable valuation is agreed that incentivises investors but protects founders for the long term and, crucially, the investor deck and any supplementary assets are produced to the highest possible standard, both in terms of content and design. This collaborative approach that typically lasts 6-8 weeks means we get to know the senior team inside out and investors can feel confident that any opportunity put in front of them has been thoroughly vetted and has the Raising Partners stamp of approval.

What role do angel investors play in the early-stage investment landscape?

Often the first or second cheque into a company, angel investors are arguably the biggest risk takers of any investor across the entire spectrum. They invest their own personal money and invest at an earlier stage than any other prospective investor e.g. venture capital firms, EIS funds, private equity funds, corporate VCs etc.

Very rarely can a new business survive and thrive without at first raising money from angel investors and because of that, it’s fair to say that angel investors are the lifeblood of the early-stage investment ecosystem. And their value stretches way beyond just the cash. They are often experienced executives or exited entrepreneurs themselves and, as such, can offer an array of support as a more active investor e.g. as a mentor, coach, non-executive director etc.

What is your investment process like?

Our process is straightforward. Our first port of call is to have an open and honest discussion with a founding or senior management team to discuss their needs and current investment strategy. At this point, we evaluate at a high level whether a company matches the syndicate’s key investment criteria.

We then perform a review of a company’s existing assets prior to proceeding with our investor readiness programme. As part of this programme, we work closely with the company for at least 6-8 weeks to implement a sound investment strategy and ensure that their investment assets are in the best possible shape.

Once this process is complete, we carry out additional due diligence to complement our fundraising processes and our investment committee gives the opportunity final approval before it is presented to the syndicate. At that point, details of the opportunity are made available to members via our dedicated investor platform.

Members are given a 4 week window to make an investment decision one way or another, in which they can ask any questions they may have around the opportunity or set up a 1:1 call with the founding team. There may also be an opportunity to attend a dedicated syndicate webinar. There needs to be at least £50,000 of interest from members for an investment to take place.

What are you looking for in early-stage companies?

While we are not restricted to specific sectors, we look to invest in companies that are making a significant impact on People, Processes or Planet.

In terms of more specific criteria, we look for exceptional management teams operating in a market with significant potential. We typically only invest in companies that are revenue-generating but there are exceptions to this rule for companies with significant IP and on the cusp of commercialisation. We also look for companies that have strong defensibility, either through the presence of IP or a strong position within the market. And lastly, the company must have a comprehensive business plan, 3-5 year financial projections and a clear, identifiable route to an exit.

We hear a lot about raising “smart money”, what does that actually mean?

A common mistake entrepreneurs make in their struggle to find funding is focusing too much on getting the money under specific terms and not paying enough attention to who is providing the funds.

At its most basic level, “smart money” is investment plus knowledge and advice. Smart money often comes from the most experienced, “been there and done it” investors who don’t just have experience to share but actively want to impart advice, guidance, access to their networks, etc. and act as an invaluable sounding board to the senior management team.

Whether it’s opening doors to a certain industry or direct access to prospective institutional investors down the line, smart money comes from active investors who often have specific sector experience and, as such, understand the dynamics of the market and can act as a guide through a company’s journey.

Once someone raises money from angels, what does that mean for the business? What happens next?

For businesses that raise money from angels, it is crucial to understand that Founders now have renewed accountability, not just to themselves or their team but to investors, who have taken a huge risk to make an investment. It is important to ensure regular investor updates are provided to investors, typically on a quarterly basis. It’s also pivotal to provide sufficient level of detail within these updates to make sure that investors feel engaged but also potentially so that they can provide value in any key areas. Many founders often reference ‘what we’ve struggled with’ or ‘what we could use your help on’ as a way to engage with investors and extrapolate as much value from their shareholder community as possible.

In addition, dependent on the rights that are given to investors, many shareholders will be able to participate in votes for any key business issues that require board approval and they will also have the right to protect their investment by following on and reinvesting in any subsequent funding rounds in order to protect their equity, avoiding dilution in the process. It is often important that founders look for investors that understand that they will most likely be required to follow their money. Regardless of what stage you are at in your investment journey, be it your second or fourth round of investment, any new investors will want to see that existing investors remain committed to the journey and are investing again in that round.

To sum up, as a founder, you get out of it what you put into it. i.e. if you make a concerted effort to engage your investors and display transparency and reliability when it comes to investor updates, you will be rewarded with more engaged investors and that is only a good thing.

Is raising money from angels easy? How does the process differ with Raising Partner Angels?

Raising money from angels is not easy. They will scrutinise your business plan and probe into every single nook and cranny of your growth plans. As the individuals absorbing the vast majority of the risk by investing their personal money, they have every right to do so and that’s why it’s so important to ensure that you know your stuff and feel confident in front of an investor on all parts of the business, from the numbers to the marketing plan. Naturally, they are investing to generate a financial return and the purpose of an investor deck, etc. is to give an investor just enough information to help them visualise where the return will come from and how big it could be.

Raising Partners Angels’ unique process means that founders are able to do just that, by working closely with us to curate and design an investment proposition that preempts investor questions and paints a picture of the business’ potential. So many investors will automatically dismiss a potential opportunity for a number of reasons; perhaps the company has been overvalued or the deck lacks sufficient detail; Raising Partners Angels prevents that from happening, providing founders with advice and guidance based on years of experience, helping investors to identify diamonds in the rough.

How much equity are angels looking for?

Naturally, many angel investors have varied preferences when it comes to making investments. Whilst some have a fairly broad remit, many are more specific as to their criteria and the stage at which they like to invest. That’s why we work closely with Founders to ensure that the appropriate investors are targeted and the investor assets and strategy are implemented to reflect the investors’ ideal criteria.

As a general rule, it’s advisable to give away no more than 20% of equity for any investment round that you may go through. This number can sometimes increase in the first or second round when access to capital is so critical and investors typically have slightly more negotiating power due to the early-stage of the business.

It’s always important for founders to be fluid when they approach investors. For example, if there’s an investor who is demanding more equity than you wanted to give away, it’s worthwhile to take a step back and analyse the value that this investor may bring further down the line and to take that into consideration when it comes to negotiating the final terms. If they are a sector expert and can potentially open doors to a crucial route to market, then it may be worthwhile to give away slightly more equity in order to secure that investment and that ultimate end-value.

It’s also worth noting that, in the interest of raising from an angel investor that is the right fit for you as a founder, it is a red flag if you have an investor demanding unusually large amounts of equity. Any angel worth their salt will want to ensure that the long-term financial incentive remains intact for the founder and their surrounding team. And so, in those rare occasions where an investor is seeking too much control or excessive rights and provisions attached to their investment, they may have ulterior motives and, therefore, don’t represent the right kind of investor for your business.

What are some of the common mistakes people make when raising money from angels?

Valuation – Many founders often over-value their business and, as such, do not provide investors with enough equity to make it worth their risk investing in the company. Equally, there needs to be a robust and defensible rationale behind why the valuation is set at a certain level. This should be based not just on financial projections but also market context i.e. what other similar companies have raised investment, at what valuation and what stage were they at when they completed that raise. All of these elements should inform the decision behind setting a certain valuation. A number pulled out of thin air will crumble under scrutiny.

Investor deck – The most common mistake we see in investor decks is that they are too light in detail. Many founders get scared that they are revealing too much information at an early stage but, if you’re not comfortable sharing your plans or growth objectives, there’s no point even trying to raise investment. For example, if you think there are no competitors in the market, don’t say that. It smacks of arrogance and a lack of awareness. Instead, take this opportunity to demonstrate your knowledge of the market, breadth of research and your defensibility within the market. And if you’ve taken the time to perform more research and cover more areas, you’ll hold up better when it comes to investor questions or you can show great initiative by preempting likely questions.

Investors want to see that you know your stuff inside out and when their first impression is a deck that’s only 12 slides long and doesn’t cover the market size and dynamics, the competitive landscape, routes to market, use of funds and exit strategy, it looks like you’re not prepared, whether you think you are or not.

The wrong investor – Investors will come in at different stages. It’s important to show a level of preparedness when you approach any investor, but if you start emailing a VC fund when they explicitly declare on their website that they only invest in companies with a certain amount of traction, it’s just a waste of yours and their time. Similarly, if you approach an investor in the hospitality space with a complex BioTech opportunity, the likelihood that they’re going to “get it” is minimal. You cannot underestimate the importance of researching potential investors, looking at what they’ve invested in before, or where their professional career has been spent and tailoring your communication around that.

NDAs – If you are unwilling to share a deck or an investment summary without an NDA in-place, you won’t go very far. In most circumstances, founders are given a nanosecond of attention in front of an investor and if the first move you make is to ask them to review and sign a lengthy legal document, they will chuck your email in the bin without a second thought. This is as true of angel investors as it is of VCs, who will look at hundreds of opportunities in any given year. By signing an NDA for any company, they compromise their ability to identify and review any other investment that might land on their desk. They just won’t do it, so you shouldn’t ask them to.

Runway – It’s absolutely critical to raise the right amount of investment that you need. It should be the amount of cash that allows you to achieve your next set of targets but also gives you that extra little wiggle room to allow the time needed to carry out your next fundraise. One of the oldest mistakes in the book is to leave yourself short of what you really need so we always advise that founders bake in a little bit more to give some extra breathing space as raising investment invariably takes longer than you think it will!

How can people get in touch with you?

For any business looking for advice around angel investment, or are looking to pitch to Raising Partners Angels, we invite you to take part in our fortnightly

In these sessions, you can speak directly to an investment expert about your business and take the first step to getting in front of our angels.