Why Angel Investors Still Matter in an Age of Venture Capital

But long before many businesses are ready for a major venture capital fund, somebody has to be prepared to back them when the outcome is far less certain.

Often, that person is an angel investor.

A recent announcement from the British Business Bank offers a useful reminder of just how important that part of the investment ecosystem remains.

The Bank has committed a further £10 million to invest alongside Haatch's SEIS and EIS funds, taking its commitment to those funds to £30 million. Alongside a separate £32 million angel syndicate platform managed by Haatch, the total British Business Bank capital managed by the firm now stands at £62 million.

Behind those numbers is a much bigger story about how young companies get funded.

Before Venture Capital Comes Early Belief

Institutional venture capital can be transformational for a growing company.

But many businesses simply aren't ready for it when they first need external funding.

They may have an early product but limited revenue. They might have a small number of customers, an unproven business model or a founding team that has never built a company before.

For a large institutional investor, that can be too early.

For an angel investor, it can be precisely the point at which an opportunity becomes interesting.

Angel investors typically invest their own capital and can therefore make decisions differently from institutional funds managing money on behalf of others.

That allows them to participate at a stage when the investment case may still depend heavily on the founders, the size of the potential market and a belief in what the business could become.

More Than the First Cheque

The value of an experienced angel investor isn't necessarily limited to capital.

Many have built businesses themselves.

Others have experience in finance, technology, sales, marketing or particular industries.

For a first-time founder, access to that experience can be extremely useful.

An angel might introduce a company's first major customer, help recruit a senior employee or challenge assumptions before an expensive mistake is made.

They may also help a founder understand what future institutional investors will expect to see.

That can make angel investment an important bridge between starting a company and becoming ready for larger pools of capital.

It's something we saw in our recent look at Childs Farm, where founder Joanna Jensen has spoken about both the capital and professional experience her early angel investors brought to the business.

Where EIS and SEIS Fit

Of course, backing companies this early involves considerable risk.

Many startups will not succeed, and investors can lose some or all of their capital.

That is part of the reason schemes such as EIS and SEIS exist.

They are designed to encourage individuals to invest in smaller, higher-risk companies by providing tax incentives where the relevant conditions are met. HMRC currently provides Income Tax relief at 30% for qualifying EIS investments and 50% for qualifying SEIS investments, subject to the applicable rules and limits.

Those incentives don't turn a poor investment into a good one.

Nor do they remove the commercial risks of backing an early-stage company.

What they can do is change the risk equation sufficiently to encourage more private capital towards businesses that may otherwise struggle to access it.

And that matters because the earliest cheque can sometimes be the hardest one to secure.

Combining Private and Institutional Capital

The latest Haatch announcement also demonstrates how the distinction between angel capital and institutional capital is becoming less rigid.

Rather than operating separately, public, private and angel capital can work alongside one another.

The British Business Bank says it and Haatch have now co-invested in 208 companies. Haatch itself has invested in more than 200 businesses with a combined portfolio valuation exceeding £1 billion. More than 70% of its fund investment has gone to companies in the UK's nations and regions outside London.

Under the latest commitment, British Business Bank capital can add £85,000 alongside a £250,000 investment, allowing larger amounts of capital to reach companies at a very early stage.

That model is interesting because it isn't about replacing individual investors with institutions.

It's about using different sources of capital together.

The Investor Who Comes Before Everyone Else

Successful startups often look obvious in hindsight.

Once a company has thousands of customers, an experienced management team and institutional investors around the table, it's easy to understand why people want to invest.

The difficult decision happened years earlier.

It happened when the product was unfinished.

When the team consisted of a handful of people.

When revenues were uncertain.

When the founder was still trying to prove that the opportunity existed at all.

Those are the moments when angel investors can have an outsized impact.

And while venture capital will continue to play an essential role in helping companies scale, a healthy startup ecosystem needs investors willing to participate at every stage of the journey.

Because before a business can become an attractive venture capital investment, somebody has to be willing to believe in it first.