Angel investment can be a very lucrative path to take for start-up businesses. It can provide an alternative to traditional private equity (PE) investment, where funds will typically be looking for established and already profitable enterprises that they can invest in and fund to facilitate the business moving to the next level.
Start-ups who know they are unlikely to be profitable in the early stages of their life cycle, typically from day one to perhaps the end of year three, can benefit massively from angel investment. Angel investors understand the challenges faced by start-ups and are sympathetic to their situation, and if they can see potential in the business plan will be happy to invest.
However, only exceptional businesses will attract angel investment. In an interview with Bloomberg TV, Anthony Clarke, CEO of Angel Capital Group, said, “Companies that are suitable for angel investment, I’d describe that as probably the top 3%, because these are high risk businesses, they do need money for developing their products and services before they can go out and get proper sales.
That is high risk…you have to have a highly scalable idea for your business to attract angel money.” Clarke went on to describe the level of return the typical angel investor will be looking for, adding, “We, as angel investors, will be looking for a 10 times return on our money over five to seven years.”
Considering that angel investment may go into a start-up business that isn’t going to be profitable until year three or four, it gives an idea of the scale of performance that will be needed to deliver these returns, and demonstrates exactly why the “top 3%” is such a lucrative group to be a part of.
Clarke also noted that lifestyle businesses aren’t attractive to angel investors as they typically have low barriers to entry and competition can be fierce. Businesses and entrepreneurs who want to seek angel investment should make sure they have a unique and potentially high value idea, perhaps even before they start the business, and definitely before they start going down different angel investment channels.