In a recent blog I mentioned the growing funding gap for tech startups in London. This lies somewhere between the SEIS tax break level of £150K and the point where VCs get interested in investing at nearly £1M. Between these two points it is becoming more difficult to attract investment.
VCs are unwilling to engage at seed level unless there is clear evidence of traction (usually revenue streams). Therefore, angels are the only source of funding for many entrepreneurs. However, there is a limit to the amount an angel will invest in a single startup. They are building diversified portfolios to reduce their exposure to the risk of failures. This results in a larger number of small investments in as many startups as they can keep an eye on. In fact, research has suggested that an ideal portfolio of tech startups would comprise as many as 25 companies over a lifetime of investing. In the UK this has driven the average individual investment down from approximately £100K to around £50K. This clearly suggests that a founder looking for £500K would have to find 10 angels. So how do you build a flock of angels?
Use a platform – A platform such as Dreamstake takes some of the work out of identifying angels. By building a database, checking credentials and helping to understand their needs, a platform can save time and effort. The platform can provide the data needed to match startups with specific angels, as well as customer services to help find the best way to approach them.
Find a lead angel – Not all angels want to lead a round. Many are happy to fall in behind someone that they trust. It is a good plan to identify a smart investor with either sector or functional experience to bring to the party. This individual will attract other potential angels as well as adding value by bringing contacts and expertise.
Attract other smart angels – There is no reason to stop with one smart angel. Make a list of people who would add most value to your business. This could be individuals who have made money by selling businesses in a relevant sector.
Be proactive in deal-making – Once you have a lead angel or a core of angels, be proactive about finding others. This is basically a sales process. Be very organised about it. Plan who to approach and how to go about it. Ask others for introductions.
Makes sure they are real angels – Unfortunately, there are too many people out there pretending to be investors. They probably want to sell you consultancy. Check their credentials on linkedin and challenge them right form the start. Ask them how much they invest and how often.
Do not ask for too much – Clearly the more you ask for at this round the bigger the flock of angels you need to gather. Plan your funding rounds to avoid the gap as far as possible. It may be more realistic to stay close to the £150K mark and use this amount to robustly prove the business model before moving to VC level.
The good news is that there is more money available for UK based startups than ever before. It is just a case of planning carefully to avoid the gap and accepting that syndication may be the only answer at certain levels.