A spotter’s guide to business angels…

The core definition of a business angel is someone who uses their own money to buy equity stakes in (what they hope and believe  to be) high-growth small businesses. Even though big wins rarely happen, it is generally thought that angels’ overall return on a reasonably diversified portfolio should amount to over 20% (in the fullness of time). Angels certainly hope this is true (and that “the fullness of time” doesn’t go on too long), or else they’d put their money into fine wines or racehorses instead.

Yet this broad definitional umbrella covers many distinct subtypes of business angel: so I thought a spotter’s guide to business angels might be a useful resource.

Horvath and Wainwright (as nicely summarized by Alan Gleeson) divide angels into

1. Guardian Angel (adds value from high-level experience in a relevant industry)
2. Operational Angel (adds value from significant low-level operational experience in a relevant industry)
3. Entrepreneurial Angel (adds value from hands-on experience as an entrepreneur)
4. Hands-off Angel (cash rich and time poor, so don’t really add much value beyond finance)
5. Control Freak (irrationally believe their wealth proves they have all the answers, they want control but are best avoided)
6. Lemming (invest purely from social proof [i.e. who’s already in], rather than from any due diligence)

Unfortunately, I think this is a bit more specific than practical. To me, a more useful starting point for classifying angels would be based on their readiness to invest.

• Latent angels – go along to angel meetings & presentations but have yet to make an investment. ~60% of active UK angels.
• Passenger angels – have an active portfolio (say, 5-10 investments), but pretty much always come in second. ~35% of active UK angels.
• Lead angels – proactive angel investors, that do due diligence and are comfortable leading an investment round. ~5% of active UK angels.
• Fallen angels – angels burnt too often to want to invest again, but who still have investments in their portfolio that have yet to exit/die.

So, if you’re pitching to a group of (say) 20 angels, the chances are there’ll be just one lead angel and seven passenger angels there – a single person in the room who would be prepared to fully engage with your pitch, do due diligence, and try to negotiate a valuation. So, if you’re going to get to a deal from a single pitch event, you’ll have to…

• Outpitch the other presentations by a mile (and here are some tips on how to do this);
• Establish quick rapport and a good connection with a lead angel who isn’t tapped out and has room for another company in his/her bulging portfolio;
• Just happen to be pitching an area where that lead angel is comfortable investing;
• Be running your company within an easy drive of that lead angel’s Home Counties mini-mansion 🙂 ;

Put like that, pitching to angels is a devastatingly bad numbers game: the chances of herding all these cats into a line to shoot with a single silver bullet is practically zero, so you will almost inevitably have to pitch multiple times to come close. What is worse, in the UK’s horribly misguided pay-to-pitch (and then pay 5% or more to fund) angel group culture, this means that you will end up spending a lot of money to advance in only small increments towards a deal.

My own experience is that each network and group I’ve approached when looking for funding for Nanodome has produced no more than a single angel each, which (given that both security and manufacturing are outside nearly all angels’ comfort zones) is almost certainly doing very well. On the one hand, it’s great to have a amassed a collection of passenger angels (and indeed passenger funds) all genuinely interested in having a slice of your company’s seed round, but the challenge remains finding a lead angel – and I’m not sure that UK plc currently has enough lead angels to fund all but a tiny number of startups. Caveat pitchor!

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