Business angels invest their own money into businesses, usually in the start-up or early stages.
The UK Business Angel Association (UKBAA), in its 2018 report, The UK Business Angel Market, says angels offer entrepreneurs two key assets. First, ‘smart capital’. They invest their money and bring experience and personal networks. Second, ‘patient capital’. Angels can take a very long-term view of their investments and have no pressures to return capital to their own investors.
The most prominent sectors for angel investment are fairly consistent. As Rod Beer of the UKBAA says: “Angels often invest in sectors where they have made their money. So in the UK, sectors like financial services will obviously attract investment. But we also have a strong manufacturing sector, particularly outside of London, and interest in these non-digital businesses is also strong.”
Below are the sectors currently attracting the most investment but any well-prepared business can pique the interest of a business angel. Angel investor Nelson Gray, who has made over 45 UK and US investments, explains: “We will continue to ignore fashion, hot sectors, recessions and Brexit, and just get on with investing in interesting companies.”
1. Life sciences
The UK Business Angel Market report contained the results of a survey of 650 angels and found the top two sectors for investment to be healthcare and digital health; followed by biotech and pharma.
Rod says these sectors have always attracted angel investment, and this trend is likely to continue. He says the start-up pipeline is underpinned by the UK having some of the top universities in the world.
After the life sciences comes fintech (technology used to support or enable banking and financial services). But in London and the South East, it’s top of the list.
This is no surprise, according to Rod. London is one of the most prominent financial centres in the world, is one of the most popular locations worldwide for digital start-ups, and has many angel investors who have made their money in financial services. He says: “This combination creates a very strong ecosystem for fintech.”
The next most common angel investments are the digital sectors of software-as-a-service, e-commerce, and digital media and content, followed by energy, enrvironment, and clean-tech.
3. Manufacturing and engineering technologies
Then comes the first predominantly ‘non-digital’ sector. Rod says there’s a definite non-London bias towards investments in manufacturing and engineering. It actually makes the top five list for the UK if London and the South East are excluded.
He continues: “As you go out into the regions, you’ll find ‘traditional’ businesses make up a bigger proportion of angel investments. Again, it’s got to do with the characteristics of the investor base. More people have made money out of manufacturing and engineering in these areas. Those are the business they understand and will invest in.”
4. Artificial intelligence (AI)
The UK Business Angel Market report does not break AI investments out as a separate sector, because it’s a technology being applied across many sectors. However, Rod points out that it’s attracting a lot of interest amongst angels, particularly because AI applications are starting to be adopted by more larger corporates, with the commercial potential of the technology becoming clearer.
This is confirmed in the study conducted by MMC Ventures, The State of AI: 2019, which investigated 1,600 AI start-ups across Europe, and says: “AI has numerous, tangible use cases today that are enabling corporate revenue growth and cost savings in existing sectors… Applications will be most numerous in sectors in which a large proportion of time is spent collecting and synthesising data: financial services, retail and trade, professional services, manufacturing and healthcare.”
MMC also describes the UK as: “The powerhouse of European AI’, with nearly 500 AI startups – a third of Europe’s total and twice as many as any other country.”
5. Impact investing
Impact investing – investments in businsses with a strong societal or environmental purpose – is also not measured as a separate sector, but Rod says it’s worth mentioning its growing profile. He says to keep a look out for specialist angel syndicates like Green Angel Syndicate, and Mustard Seed Investors which is a small VC fund linked to a group of angel investors.
Rod also emphasises that most angel investing has a degree of altruism anyway. Angels do it partly for the money, but also to ‘give back’ by helping others succeed. So it ties in neatly with impact investing.
Please note that this is unlikely to be the first option for raising finance, as there will be conditions attached to any agreement reached, which by their nature will be more onerous than those imposed by a mainstream lender.
The opinions expressed by third parties are their own are not necessarily shared by St. James’s Place Wealth Management.