What are business angels?
The terms “business angels” or “angel investors” are normally used to describe high-net worth individuals who invest in early stage businesses. Over the past decade, encouraged by the significant tax reliefs available through SEIS and EIS (see EIS/SEIS for further detail on these reliefs), it has become increasingly common for early stage companies to seek their initial rounds of finance from business angels.
How can business angels help your studio?
The benefits for a company seeking finance from a business angel rather than a larger institutional investor such as a venture capital fund are several:
- You can normally obtain better terms from a business angel than from an institutional investor. This applies not just to the fundamental valuation of the company but also to any ancillary rights that may be requested from an investor (such as veto rights over certain decisions by the company or giving the investor a seat on the board).
- You may be able to find a business angel who acts as an advisor or mentor as well as an investor. Business angels invest in companies for a broad range of reasons and not all are driven purely by the financial return on their investment. There are many business angels therefore who enjoy advising growing businesses using their own professional experience and background. This advice, which is usually “free” (on top of the shares they receive in the company for the financial investment) can be invaluable to your studio – particularly at the early stage of its growth.
- Business angels can usually close their investment rounds quickly as, being private investors, they will not require the same internal approval process and paperwork as an institutional investor may have. The difference between a 1 month process and a 3 month process can have a major impact on a growing studio with tight cashflow.
How to find business angels?
The biggest issue with business angels is finding them! Traditionally business angels have invested in sectors other than games (such as technology and online services companies). For games companies therefore, a continuing challenge is to find angel investors who are active in the sector – especially when they rarely advertise themselves in public. The most effective way of finding business angels is to simply broaden your network as much as possible by attending industry-focussed events or conferences and seeking referrals from more seasoned players in the industry who may just refer you to the right contact.
Some business angels operate in “clubs” or “syndicates”. The angels in these groups act together so a company is likely to be able to raise a larger amount in a single process. The downside however is that these groups can sometimes act as a mini-institution and therefore lose the speed, flexibility and ‘softer’ approach of a more typical angel. Your lawyer may be able to direct you to clubs or syndicates of angels.
What should you expect from the process of raising funds from a business angel?
With the recent boom in angel investment in the UK, investors have become much more sophisticated and therefore more discerning of potential companies looking to fundraise. This has had several knock-on consequences:
- Companies raising funds from angels should treat the process akin to raising funds from an institutional investor. In other words, companies should be as prepared as possible for their interactions with the angel investor as it is frequently a highly competitive environment. The companies who are successful at this stage are normally those who have spent time refining and finalising their business plan and pitch presentation.
- Sophisticated angels typically require enhanced legal protections and paperwork as part of their investment. Companies may therefore be presented by business angels with a legal term sheet which proposes a package of rights and obligations between the parties. Although usually not legally binding, you should never sign or agree to a term sheet without consulting legal advisers.
- Many UK angels now insist that companies they invest in are SEIS and/or EIS eligible. Companies should therefore be familiar with the SEIS and EIS reliefs and their eligibility status. For further information see EIS/SEIS.