Innovation depends on Angel Investors - here's why
By Rob Cossins on the 21st March 2023Investing
Angel investors are critical to innovation, taking risks where others will not. Here we'll argue that ground-breaking innovation depends on early stage investing.
Innovation takes time - if you're building a technical product, it takes time to develop. Founders can bridge the gap to revenue by either selling services, or selling a very basic Minimum Viable Product (MVP) of their product. Alternatively, they can raise from investors, who effectively bridge the revenue gap.
Angel investors take on risk where others will not, particularly for first-time founders with limited track records. Institutional investors like VCs aren't in the business of taking the riskiest bets - they want to see that either your product works, or there's significant demand from the market. Their approach is driven by their own investors (Limited Partners), who need more downside protection and require a diligent approach.
Why do Angels invest?
In the UK, tax-breaks like SEIS and EIS reduce the risk for Angel investors, meaning more capital can flow into pre-seed companies. But ultimately, Angels invest for a number of reasons, all of which combine to bring fantastic new technology to market, or to a place where institutional investors can invest.
Angels might want to build up a NED portfolio and gain some experience advising companies. Alternatively, they may be innovation-minded and want to give back some of their industry expertise, while keeping an eye on developments in the market. It might also be about returns - with the right number of companies and appropriate diversification, the returns on investment can be high.
Imagine you've spent a career in a sector, you'd want to give something back. Sometimes the best Founders come from nowhere near an industry, so Angels can help anchor them, while allowing the new companies to innovate without the baggage of existing norms. It's a synergy that unlocks huge opportunities, ideally resulting in a financial return too.
When Founders come to raise from Angels, it's easy to see them as driven solely by financial reasons, but that's rarely the case. Understanding their role in taking real risk, at the very earliest stages, will make fundraising easier. The more early stage investing, the more innovation.