Crash Course in: becoming a business angel

You've accumulated a decent amount of capital and now the idea of investing in start-up businesses appeals. But have you got what it takes to be an angel?

by Alexander Garrett
Last Updated: 05 Jul 2011

Show us the money. You'll need at least £50,000 to £100,000 to spread over up to a dozen investments, says Chris Allner, who chairs investment for Octopus Ventures and its network of private investors. But, orphans and widows, take note: 'You may not get it back, so it should represent only 5% or 10% of your total assets,' he adds.

What are you looking for? Most angels are looking for more than just financial investment. 'It's a great way to get involved in young businesses and pass on your knowledge and experience,' says Tracy Light, head of marketing at network Angel's Den. 'A lot of our members want to give something back to the business community.'

Steel your nerves. A Nesta study in 2009 found that 56% of angel investments ended in failure. 'At times you'll think the business won't survive and at others you'll be elated by it winning a big contract. It's definitely not for the fainthearted,' says Allner.

Join the club. The best way to get exposure to investment deals is through a club or network. Some heavily vet potential investments, others such as Angel's Den offer something akin to an introduction service. In most cases, you'll have access to investment expertise, professional services and the opportunity to pool investments with others. 'Investing alongside others enables you to share due diligence and corporate governance,' adds entrepreneur and business angel Gary Dixon.

Aim high. Pick investments which offer the possibility of a high return - say 10 times your initial investment - to cover those which don't make a return.

Be patient. Your funds will usually be tied up for three to five years. 'The timescale can be frustrating,' says Dixon, 'especially as the management can change its strategy and that's not in your control.'

Roll up your shirtsleeves. Research suggests that if investors take a hands-on approach - bringing in their own expertise and contacts - the chances of success are increased. You don't have to stick to what you know but that's where you can add most value.

It's the management, stoopid. 'What you're looking for is a hard-working, ambitious team who will work their balls off to make it successful,' says Dixon. Allner adds: 'The founders should have "skin in the game" - a meaningful stake that incentivises them.'

Study the small print. Make sure the contract spells out exactly what shares you are buying and what rights they confer, as well as what will happen if things go wrong.

Do say: 'The satisfaction from mentoring these start-ups is as important as the return.'

Don't say: 'Sounds like a great idea, and you are my next-door neighbour, so how much do you want?'

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