A recent trend hitting the tech industry is for platforms to take on several—even dozens of—angel investors. They are doing this so that they can reduce administrative work and cut smaller cheques. An angel investor (aka angel funder, seed investor, or private investor) is usually a high-net-worth individual who can financially back small or early-stage start-ups and entrepreneurs. In exchange, they are typically given ownership equity in the company.
How is this useful for start-ups?
Founders of European start-ups in their early stages are increasingly welcoming start-up founders and operators as investors. By using a special purpose vehicle (SPV), or pooling these small investors into one cheque, these companies drastically reduce the hassle that typically comes with taking on additional investors. This is quite a deviation from the traditional strategy of founders limiting their investor numbers.
Some, specifically venture capitalists, have been wary about getting so many people on board. Others have realised the value in having more investors. This value may come in the form of firms being introduced to potential clients and even more investors. Founders may also find value in business advice from the angel investors.
What’s in it for the angels?
This investment strategy is not only helpful for start-ups. Angel investors also benefit from it. By opening up investment opportunities to more people, the angel investors who are unable to write high cheques will have a better chance at participating. This opportunity also applies to others, like operators and founders, who have not experienced a big cash-out yet. The median ticket size of some platforms is as low as £3,000. This is more feasible for many. However, there are risks associated with start-up investments. Therefore, individual angel investors will typically need to invest in several projects in order to benefit. The lower contributions make it so that small entrepreneurs can contribute to and reap the rewards of these start-ups.
Instead of being one of thousands of investors like they typically would be in crowdfunding efforts, angel investors are more involved in developing the business. For example, where crowdfunding would not allow them to provide advice on a product, angel investing does. It is also an opportunity to learn and grow as an investor. Angel investors can get an insight into how a founder’s business work. They can witness the dynamics within a side of the industry that they are not typically involved in. It is thus not only a constructive personal investment strategy. Angel investing is also a way for people to network and contribute ideas to an up-and-coming company.
Some angel investors see this as an opportunity to give support at an early stage to founders who may not have the right information or investor networks. The early stages are when they need funding the most. For example, some angels may choose to provide funding to female founders during the pre-seed stage. This is the period in which a founder is first getting their operation off the ground. Angels can then help them with practising pitching, further developing their business model, and compiling lists of people they should speak to when garnering first rounds of funding. This method of angels investing as a group has already led people from diverse backgrounds to become interested in angel investing. For example, one skincare company founded by a Ghanaian entrepreneur raised £126,000 from an SPV formed by a group of eight Black British investors.
By simply using an SPV, the investment process becomes more personalised because it gives founders an opportunity to connect with their investors, whether this is via group chats or other methods. Founders can form closer relationships with angels who are both new and experienced and leverage their network. It also shifts the power dynamic in that the founder has more control over the process. This is different from how investments often work. Founders usually just feel grateful to have received funding and are apprehensive about asking for non-monetary support. This flips that dynamic.
If you are interested in learning about how Private Client Consultancy can help with your portfolio, reach out to us today. We are committed to helping you make the best decisions for your circumstances and are eager to devise a strategy that meets your needs.