Business Angel Investment in a post COVID-19 landscape: For Growing Companies

This article sets out the key themes covered in the Clarkslegal webinar. The webinar was hosted by Stuart Mullins, of Clarkslegal LLP, Steve Royffe, of the Dorset Business Angels. A recording of the webinar can be found here: [Business Angel Investment in a post COVID-19 landscape For Growing Companies].

What is Angel Investing?

Angel Investing is equity finance where a high net worth individual (the “Angel”) or, syndicate/group of Angels, takes shares in your business in return for funds. Angels will typically invest between £10,000 and £500,000 of their own personal disposable finance. Angel investing has become an increasingly popular means of early-stage funding for start-ups and young businesses looking to quickly grow their companies. Angel investing stands out from the more traditional means of fundraising as, typically, the Angel will not only invest financially but also personally, usually through parting guidance and expertise or sharing their experiences with the investees. Although this is not guaranteed and the level of involvement in the day to day running of company will be specific to the wants and needs of both the business and the investor.

In our experience, Angel investors are looking for a return on their investment, usually through an exit plan detailed in the investment agreement, within 3-8 years of investing. With that in mind businesses should look to plan their growth with at least the next 12-24 months in advance. Additionally, and it should not come as a surprise, Angels are not looking to make a loss on their investment; they will do their due diligence on your business especially as this is a personal investment. It is therefore good practice to ensure good governance from your business’s inception, this includes correct and prompt filings at companies house and disciplined investor/shareholders agreements.

Angel investing usually marks the start of 3 or 4 investment rounds. Business owners and founders will need to carefully assess how much equity they expect, or want, to have in 5-10 years’ time. There is not so much a minimum amount value of the business to aim for before seeking investment from angels or institutions. Trends suggest that Angel investors are looking at companies with a value of not less than £1 million but not more than £5 million. Similarly, profitability is neither a guarantee nor a sign of investor readiness. At a minimum, investors might expect to see evidence of revenue or proof there is a product/service people are willing to pay for – this could be in the form of paying customers or paid trials.

As mentioned above, given that the Angel is investing more than just their finances, they can often require sizeable equity, diluting the existing control of the business.

Landscape of angel funding in the next few months to a year?

Despite the heavy toll COVID-19 has had on the economy, and consequently any economic activity, many believe that a resurgence in investor confidence is either present or in the offing. Although limited, there have been a number of success stories thanks to unwavering confidence in particular markets. That said, we believe that there will be just as much caution as there will be optimism. With the threat of a major recession still apparent, Angel investors are likely to prioritise the businesses they are already involved in, perhaps by participating in further investment rounds. Similarly, those businesses that have benefited from forced remote working or that have a real awareness or understanding of the physical and mental health strains the pandemic has placed on workers, will be able to demonstrate a better resilience to fears of further economic downturn or a second wave.

Interest in tourism and leisure appears to have been placed on the back burner unless Angel investors are willing to take a long-term look/ approach. In the same vain, it is likely that businesses with robust cash flow and a plausible pass to profitability look to be the ones in the highest demand, financial commentators seem to suggest that the days of “growth at any cost” could be behind us for the foreseeable future.

Recessions have been known to inspire innovation particularly in the tech sector where the ownership or operation of tangible assets are not paramount to the businesses ability to function. It is a prospective renters and prospective employers market as much as a prospective investors at the moment. Competition has never been so fierce with many early-stage businesses unable to cope with a lack of cash flow or investment. With that in mind, we can expect to see investor agreements with more investor friendly/bias terms and lower deal volume in general.