Mark Lyttleton works as a business mentor and angel investor, supporting early-stage businesses created with the aim of achieving a positive planetary impact.
This article explores the risks and rewards involved in providing funding for early-stage enterprises from the investor’s perspective. The attached infographic contains some interesting statistics on female angel investing in the UK.
Investing in start-ups can potentially be a very rewarding business when investments pay off. However, it is important for the investor to keep in mind that only a minority of products and companies ultimately succeed, and there is a very real risk of the investor losing their entire investment.
With over a million new companies formed globally each year, initial funding for these companies, which is referred to as seed capital or seed funding, generally comes from founders, friends and family (FF&F). In the seed phase of business development, funding is typically quite modest, simply providing the founder with sufficient financing to prove that their idea has a good chance of success. It is during the seed phase that the first employees are hired and prototypes are developed, enabling the pitching team to present the company’s ideas to potential investors or customers.
Usually, it is only once the company moves to the next stage of its lifecycle that founders seek to bring an angel investor onboard. Once the company becomes operational and starts generating income, it has progressed from the seed phase to become a bona fide startup.
An angel investor is a private individual with accumulated wealth who specialises in investing in early-stage companies. They are usually the first source of funding beyond FF&F financing.
Angel investing is extremely high risk, but can present huge rewards. Angel networks are groups of individuals who work together, sourcing, reviewing and investing, sharing due diligence in the hope of improving their odds of selecting winners. The embedded video provides more information on angel networks.
Investing in start-ups is no longer the preserve of high-net-worth individuals. Over the last 10 years, equity crowdfunding has become a mainstream financing route for many new businesses. While in 2011, just eight businesses were funded via crowdfunding platforms, by 2021, that figure had increased to more than 600, according to a report from start-up research specialist, Beauhurst. The attached PDF explores the topic of crowdfunding in more detail.