The UK early-stage investment market is witnessing significant growth from Angel Syndicates and SEIS (Seed Enterprise Investment Scheme) Funds which are increasingly emerging as powerful and efficient alternatives for founders. Access to Finance specialist, Ian Dixon, details his knowledge on the differences and the advantages of each.
Raising early-stage seed capital from individual business angel investors is both challenging and time-consuming for founders and management teams. The process can often take several months with the risk of ‘deal creep’ or loss of interest from investors, resulting in serious setbacks for founders.
This is particularly significant for many first-time founders seeking capital to demonstrate proof of concept, develop a prototype or establish an early MVP (Minimum Viable Product). Despite widespread liquidity or availability of funds in the seed stage marketplace, it remains a significant challenge to convert a first investor. Positively, as the start-up eco-system in the UK matures and develops, more options to raise vital early-stage funding are emerging. A number of factors are driving this changing marketplace.
The removal of traditional barriers to investment is attracting new angel investors to the market. The growth of equity crowdfunding platforms, particularly Crowdcube and Seedrs, and the low costs of participation are attracting a new generation of ‘angels’ and democratising the market.
An increase in digital platforms has allowed for increased co-operation and collaboration between angel groups, coupled with a greater visibility of investment opportunities (access to deal-flow). The result of this is a diversification of risk for individuals across investment portfolios and an increased willingness to invest.
The continued market intervention by Government in the form of beneficial tax advantages (SEIS), and fund support through the work of the British Business Bank, continues to stimulate the raising of capital and supports increasing sector specific focus.
This, along with corporate re-structuring and the need to ‘outsource and accelerate’ innovation, is creating an environment for the development of new business models.
An Angel Syndicate is a group of angels who typically pool individual investment funds and collectively invest a more meaningful amount as a single entity. The Lead Investor of the syndicate is responsible for the evaluation and finalisation of prospective investment opportunities. Individual angel investors who are members of the syndicate then have the option (but not the obligation) to pro-actively participate on a deal-by-deal basis. Syndicates operate in contrast to many traditional angel networks. The latter act as portals or platforms, allowing founders access to many angels who invest individually in opportunities.
In contrast, SEIS Funds are managed by professional fund managers who invest in opportunities as specified in the investment prospectus. Individual investors contribute to the fund but effectively delegate the decision-making process and responsibility for appropriate individual investment. Investment is therefore passive in its nature.
Despite the differences, both Angel Syndicates and SEIS Funds have distinct advantages.
Firstly, both provide access to larger capital raises and can help founders avoid the necessity, complexity, and cost of pitching, negotiating and onboarding individual angels. This can have a significant positive effect on reducing investment timescales. Angel Syndicates and SEIS Funds are agile and experienced entities who can and do make quick decisions.
Founders also have the opportunity to effectively and successfully pitch to a Lead Investor or Fund Investment Director. This can offer instant validation and support for the investment opportunity, providing instant access to all the angels in the syndicate (who can then choose to participate in the deal or not).
Both methods of funding provide a cleaner ‘Capital Table’. If you raise money from individual angels directly, you will have a large number of small, individual shareholders on your ‘cap-table’ (list of shareholders), which is an administrative burden for any start-up. Future decision-making can be complex as documents require the signatures of all the shareholders. Clearly, the longer the list of shareholders, the more complicated the process. Angle Syndicates and SEIS Funds potentially support the process of future fundraising. Certainly, larger VC funds who invest at later stages (Series A and beyond) generally prefer a cleaner ‘cap table’ with only a few shareholders who have meaningful ownership as opposed to many small investors.
When seeking investment, it can be hugely beneficial to partner with investors that add value beyond capital. Whilst a start-up’s primary priority may be to secure the capital required, it is vitally important to work with the right kind of investors at an early stage.
Syndicates with high quality angels, or fund managers with extensive networks, can support founders with essential market knowledge and expertise, referrals for recruitment, and introductions to potential customers and partners. The real value of good investors is so much more than the investment. The combined power of knowledge and networks can be transformational and accelerate the growth trajectory for many start-ups, as access to pooled knowledge makes for reduced timescales both pre and post investment.
Raising future funds via individual angel investors can be a significant challenge and almost certainly extremely time consuming. Early-stage capital from Angel Syndicates and/or SEIS funds has the benefit of allowing for participation in future funding rounds with reduced complication. There is no future signalling risk to larger later stage investors. Prospective Series A investors expect the Angel Syndicate or fund to participate. The issue of dilution of shareholding is both understood and accepted.
Traditional corporate finance or accountancy firms offering fundraising support to start-ups typically charge between 3-5% of the investment amount raised. Alternatively, some angel networks and intermediaries (accelerators) take a 2 -3% equity stake as remuneration in respect of the capital raise.
Angel Syndicates and SEIS Funds have no placement fees or associated upfront costs. Both earn their remuneration from the participating investors as Carry (Profit-share) that the investment may generate in the future.
It is only fair to highlight that, despite the obvious advantages detailed above, there are potential obstacles in the Angel Syndicate model. Specifically, all Angel Syndicates operate on the model that all the investors who are members of the Syndicate can choose to participate deal-by-deal. Unlike SEIS funds who can commit to a firm investment round amount via the Terms Sheet, Angel Syndicates will typically indicate only a range, based on the estimate of the Lead Investor. The final investment amount will only be known to the founders after the investment opportunity has been formally offered to all the investors in the Syndicate and they have indicated their willingness, or not, to participate.
While the Lead can give you an idea of the quality of angels behind a Syndicate and those likely to be interested in participation, there is no guarantee which of those angels will eventually end up investing in your company.
This, however, should not detract from the vast and substantial advantages of both methods of funding. The emergence, availability and growth of such funding options represents a considerable positive development in the UK early-stage investment landscape, providing greater access to finance to an increased number of founders and start-ups.
If you are based in Greater Manchester or Lancashire, you can access fully funded, tailored support through the Access to Finance team which has significant knowledge of the funding landscape and extensive relationships with:
Business Angel networks
Public Sector Funds
Alternative emerging sources such as International Investors (via UK Home Office Innovator Visas)
Ian Dixon, Senior Business Advisor - Access to Finance
Ian is responsible for the management and development of the Hub’s team of A2F specialists. He is a chartered accountant with extensive corporate funding experience and knowledge, developed predominantly within the SME market. Former commercial roles have included financial director, process improvement director and business development director, and he has acquired an in depth knowledge of various forms of finance, including all types of debt and equity, and the processes involved in raising funds.