Is angel Investing right for your company?

Angel Investing 101

Is angel funding right for your company? Below is a check list that will help you to decide if and when you should seek an angel investment. In addition to these general questions, please refer to our ‘Investment Criteria’ page before applying to Cambridge Angels for funding.

Management Team

Is your team, driven, coachable, and willing to cede some control and decision-making authority to outside investors?

Target Customer

Do you have an identifiable market segment? Is there a demonstrable and significant demand for your proposed solution?

Market Size and Growth Rate

Is your target market large and growing? Can your chosen segment(s) enable the creation of a sizeable business?

Competition

Have you identified all potential competitors? Do you understand your company’s differentiation points? What barriers to entry will help your company to maintain a competitive advantage?

Technology

Have you proven the concept behind your product or technology? Can this be confirmed with data or by objective experts? Have you produced a comprehensive business plan to commercialize the technology?

Protected Intellectual Property

Have you protected your intellectual property? Have you performed an exhaustive search to be sure that you are not infringing on patents or trademarks held by others?

Sales Strategy

Do you have a plan to achieve widespread market penetration for your products and services? How will you do this as efficiently as possible? Will you create an internal, direct sales team, or will you rely on external channel partners?

Profit Potential

Can you demonstrate how high margins (15%+) and consistent cash flow growth will be achieved?

Capital Requirements

Do you require between £50,000 and £1,000,000 to finance growth activities, including product development, recruiting key staff, launching sales and marketing activity?

Financial Projections

Have you developed reasonable financial projections - including an income statement, cash flow and balance sheet and supporting spreadsheets - based on logical, realistic assumptions?

Exit Strategy

Do you have a clear exit strategy that will enable angel investors to generate a return of at least ten times their initial investment within five to seven years, or five times their investment in two to three years?

Business Plan

Have you developed a comprehensive business plan that articulates your key business strategies for how you will grow your venture?

If you would like to learn more about how business angels operate in general, please refer to our Angels section by clicking on the link in the menu.

Investment Criteria

While the dynamics of each investment will vary, Cambridge Angels typically evaluate early-stage investment opportunities according to the following broad criteria.

Copy of Management Team

Management Team

We look for teams with high-quality entrepreneurial potential - either in the company’s specific industry or in prior entrepreneurial ventures. We also look at your team’s passion for and commitment to the new business idea, and your ability to inspire confidence among future stakeholders, including employees, potential customers, and investors. As we will be working together as partners, your team’s credibility is essential. In addition, your team must be open to and comfortable with receiving input provided by angel investors.

Copy of Market Opportunity

We invest in solutions that address major problems for significantly large target markets (i.e. a market size of £100m+). Your company must demonstrate a strategy to claim significant market share or revenue. There are plenty of great business ideas - but not all businesses will generate returns that justify angel investor funding.

Copy of Use of Proceeds

Funds must be used to accelerate your company’s achievement of key milestones that increase the company’s value. We often fund activities that include research and product development, building a sales and marketing infrastructure and hiring key executives.

Copy of Growth Potential

We look for companies that can grow quickly and manage the scale necessary to succeed. Your company must demonstrate a plan to generate significant profits beyond the initial product idea. Do you have a strategy to achieve multiple sources of revenue?

Copy of Competitive Advantage

Your company must have some proprietary features that distinguish you from potential competitors or provide barriers to entry that prevent other companies from capturing your customers with a similar offering. Attributes that convey competitive advantage include intellectual property protection, key know-how, and scarce human resources (i.e. knowledge and skills).

Copy of Strategic Fit

The Members of Cambridge Angels have significant executive experience in a variety of fields. One of the benefits of working with angel investors is the active coaching and contact network that such investors can provide. As such, there must be a fit between our Members and your team and idea.

Copy of Technology

We prefer to invest in first-of-a-kind new ideas, rather than incremental enhancements to common products and services. Is this a nice-to-have, or a need-to-have product or service? However, we approach highly complex, esoteric technologies with caution. The concept behind the technology must be proven and verifiable. Further, we avoid science projects that don’t demonstrate a clear path to commercialization.

Copy of Exit Strategy

Our Members typically seek returns of at least ten times their initial investment, within seven years. This level of return on investment is essential due to the high risk and likelihood of failure among early stage ventures. Thus, a clearly articulated exit strategy - how angel investors will gain such returns - is essential. For example, do you plan to sell the company to an established corporation in your industry? Or will your exit be through subsequent rounds of financing - venture capital or the public markets? Angel investors are not just interested in the strategy you select, but more importantly in the how - the operational strategy that shows specific steps you will take to achieve the exit.

Securing Funding – Our Application Process

Step 1 - Self Assessment

Before submitting your business plan for our consideration, you should first determine whether angel funding, and specifically angel funding from our group, is right for your company. We strongly encourage you to read the entire “For Entrepreneurs” section of this website prior to deciding whether or not to apply for funding from Cambridge Angels.

Step 2 - Application

If, having thoroughly browsed our website, you would like to officially apply for funding, you should email info@cambridgeangels.net.

Your initial email should include a brief overview of the business, telling us in no more than one page about:
- Your technology, any IP, and why it’s better than the competition
- Traction so far / planned route to market and your business model
- Team
- Funding until now, how much you’re raising and at what valuation
- Whether you envisage further funding rounds being necessary in the future
You can include links to a business plan or any other documents with the email if you wish.

We will then decide if your company should be invited for an initial screening presentation at one of our regular “informal pitching sessions”. Please note that we will only invite you to one of these sessions if we believe you have a realistic chance of securing funding from our Members, therefore a significant proportion of applications will be turned down without Cambridge Angels ever meeting you in person.

Step 3 – Informal Pitching Session

If, after reviewing your application, we believe that your idea could be an attractive investment opportunity for some of our Members, you will be invited to deliver a 10-minute “informal pitch” to a sub-group of our membership here in Cambridge. No presentation aids (e.g. PowerPoint slides) are allowed at these informal pitching sessions, as each company only has a 30 minute slot in total, of which we reserve 15 minutes for Q+A and a further 5 minutes for feedback at the end.

We always try and provide feedback that is valuable to you and your business, and believe that we have a moral obligation to share our honest opinions with you, rather than simply saying “nice idea but not for us” as so many other Angel groups do. As a consequence, occasionally we advise an entrepreneur not to proceed with their idea at all, and quite often we suggest that they radically alter one or more aspects of their current approach.

In order to proceed to the next stage in our process (a formal presentation at one of our dinners), you will need to secure a Sponsor that is already a Member of Cambridge Angels. As you can imagine, all of our Members see dozens of new investment opportunities each year, so they are very selective about which companies they Sponsor. More often than not, even if your business seems like a fantastic opportunity to one of the Members that attends the informal pitching session, they will still want to spend a few months mentoring your company before agreeing to be your official Sponsor at a Cambridge Angels dinner event.

Step 4 – Formal Dinner Presentation

If your company is successful in gaining a Sponsor from within our current membership, your Sponsor may choose to request permission from our Chairman for you to formally pitch for investment at one of our regular Dinner Meetings. These meetings take place in private, and the precise location rotates between about a dozen different Cambridge Colleges.

Usually two companies are selected to present at each Dinner Meeting, with each company being allocated a 30 minute slot, which should be split equally between your pitch and a Q+A session. At the end of the second company’s slot, there is normally about 10 minutes left before dinner is announced; during this time any of our Members who are considering investing in your business may approach you to ask some more detailed questions about your plans for your business.

When dinner is announced, we bid farewell to both companies, at which point our Members then retire to a private room. A thorough discussion of each investment opportunity (i.e. presenting company) takes place over dinner, during which your Sponsor will ‘defend’ your pitch on your behalf. By doing so, they are effectively guaranteeing that they will invest in your company alongside any other Members that choose to participate – hence why our selection process at the informal pitching stage is so rigorous.

You may therefore be interested to learn that about 50% of the companies that have presented at one of our dinner meetings over the past six years have received funding from our membership.

Step 5 - Due Diligence

Like most Angel groups, the amount of time that we invest in due diligence is directly correlated to the amount being invested. However, even where the investment amount is at the higher end of our funding range, we do not undertake due diligence that could be compared to that undertaken by a VC.

This is because our Members invest their own money, and therefore choose to rely on their instinct, experience and the opinions of other Members, rather than relying on an expensive and time-consuming due diligence process designed to verify the statements made in your business plan, presentation, and financial projections.

However, as many of our members primarily invest in people, they are likely to want to hear more about your team’s background and track record. If you play an active role in facilitating this process, it will help to expedite a final investment decision from our Members.

Step 6 - Term Sheet Negotiation

After successful completion of the due diligence process, interested Members will present you with a Term Sheet that defines the structure of the investment deal - including the amount / type of equity, as well as rights relating to our representation on your board of directors, amongst other things.

Whilst Cambridge Angels have invested in a wide range of companies in recent years, it is worth noting that many of our deals have been structured to qualify under the Enterprise Investment Scheme (EIS). To qualify for EIS, the Terms must meet certain criteria laid down by the UK Government – if you would like to learn more about EIS then please click here.

Step 7 – Execution

When all parties are satisfied with the terms and language contained in the Term Sheet, the deal can be executed. Both sides may wish to instruct legal counsel to assist in the final negotiation and drafting of Shareholder Agreements, etc, and if for any reason the deal does not close then our Members’ legal costs will be borne by us. However, please note that it is much more common for the deal to close relatively smoothly at which point our Members’ legal costs will be passed on to you (subject to the cap in fees agreed during Step 6).

Step 8 – Beyond Funding

Closing the deal is only the beginning of your involvement with Cambridge Angels. Our track record speaks for itself, but the main reason we have been so successful to date is because of the active involvement of our Lead Angel (i.e. your Sponsor) in mentoring your business in the long-term. They are able to proactively leverage not only their own network of contacts, but also the contacts of every other Member of our group – as well as helping to arrange discussions with other investors for “follow-on funding” should your business plan require this.

Some useful resources

Some Thoughts on Company Valuations

Your valuation must fit within our risk/reward expectations for angel investments. Typically, we look for pre-money valuations below £2m for seed round investments.

Full Dilution

In arriving at the pre-money valuation, we take into account the effect of all commitments to issue shares (i.e. the ‘fully-diluted’ number of shares). More specifically, the fully-diluted number of shares includes all shares that you would issue if all unconditional and contingent commitments to issue shares were to be given effect (e.g. exercise of share options and warrants, conversion of preferred shares, exchange of debt for equity, etc.). It is also worth noting that Cambridge Angels encourages start-ups to reserve a reasonable number of shares for a stock option pool to help sign up the ‘key hires’ needed to ensure your Management Team has the right mix of skills to give you the best chance of success in your chosen markets.

Pre-Money and Post-Money Valuations

In simple terms, the pre-money valuation is the value you put on your company before securing the additional capital you seek through your next funding round. To calculate your pre-money valuation, multiply the number of fully-diluted shares immediately prior to the proposed financing by the price/share of the proposed financing to yield the pre-money valuation. To arrive at the post-money valuation, simply add the additional capital sought to the fully-diluted pre-money valuation.

Alternatively, if you are more comfortable with offering a certain percentage of your company for a certain amount of investment, simply divide the proposed financing by the percentage offered to arrive at the post-money valuation, then subtract the additional funding from this post-money valuation to calculate your pre-money valuation.

These are just two different ways to calculate the same valuation, hence they yield identical results.

Investment Value vs. Company Valuation

It is important to bear in mind that early stage investors such as Cambridge Angels are likely to have their equity interest in your company diluted (i.e. made smaller) by later investors. For example, if our Members invested £500,000 at a pre-money valuation of £1m during your “Angel Round” of financing, then we would own 33% of your company when this round is closed.

However, if a Venture Capital firm subsequently invests £5m the following year at a £5m pre-money valuation, Cambridge Angels would own just half as much of your company after this “VC Round” even though your company value has more then tripled in value from the Angel Round post-money valuation of £1.5m.

As a result, because of the early stage at which we invest, it is worth being aware that Cambridge Angels generally receive 20-40% of any given company’s fully diluted equity in exchange for investing at such an early (and therefore high-risk) stage of your company’s development.

If you would like guidance in relation to how to write a business plan, you may wish to refer to a free extract taken from Jack Lang’s book entitled “The High Tech Entrepreneur’s Handbook”. If you would like an electronic copy of this extract please request one by clicking here.

For a wealth of resources on business angel investing and other related matters, you may wish to browse the Angel Resource Institute's website.

For seed round term sheets and other information, go to the Seedsummit legals docs website.