Mark Lyttleton: Investing in a Start-Up

Mark Lyttleton is a business mentor and angel investor who operates with a special focus on enterprises that drive positive societal and planetary change. This article will look at business start-ups and the various ways investors can become involved.

Every start-up begins with an idea. At inception, a business rarely has a working product, a revenue stream or an engaged customer base. This period in the life of a start-up is known as the death valley curve: the period between commencing operations and generating revenue. At this stage, the business is often funded via bootstrapping, with founders using their own savings, obtaining loans or bringing in early stage angel investors to help.

The seed stage occurs where further funds are provided, often in return for equity in the business. During this phase, the first employees are hired and prototypes are produced, with founders investing their efforts in developing compelling pitches for potential customers or later investors. Once the company becomes operational, it has progressed from the seed stage to become a bona fide start-up.

Thanks to the boom in crowdfunding over the last 10 years, investing in early-stage businesses is no longer the remit of high-net-worth individuals. In the UK, equity crowdfunding has risen to become a mainstream source of business finance, increasing from less than eight fundraising events in 2011 to almost 535 in the first half of 2024, according to research from Beauhurst.

Crowdfunding has long enticed investors with its potential for producing substantial returns. Alongside providing some impressive returns, start-ups also sometimes have a positive impact on society and contributing to the wider economy.

Nevertheless, from the investor’s perspective, significant risks also attach to investing in early-stage businesses, with almost 50% of start-ups failing to survive their first three years according to the Office for National Statistics.

In addition to crowdfunding, there are two other popular options for investors to get involved with start-up businesses: venture capital funding and as a business angel. Venture capital funds are a form of private equity where the firm pools together funds from multiple investors to invest in start-ups and small businesses. Business angels, on the other hand, are private, high-net-worth individuals who invest directly in start-ups, either alone or with others.

Angel investors put their personal wealth behind start-ups in exchange for an equity stake. In addition, they can be offered a seat on the board, providing a degree of input in business decisions. Angel investors have a vested interest in the company, incentivising them to help it thrive by providing their expertise, as well as mentorship opportunities and access to their professional network. When they believe in the founders and the business model, angel investors are often willing to take risks on good ideas, investing at an early stage of the company’s development, before institutional investors are typically prepared to become involved. Since it is a high-risk form of investment, angel investors tend to limit their exposure to an individual start-up to a maximum of 10% of their total asset portfolio, with the remainder allocated to less risky assets.

Investors seeking out promising start-ups typically examine a variety of different metrics, chief among them:

• The strength of the leadership team
• Profitability of the market
• Uniqueness of the idea
• Unmet market needs
• The business’s competitive edge
• The sustainability of its business model

Typically investing anywhere between £10,000 and £100,000, angel investors need to have a clear strategy, taking into account the investment size, why they want to invest, their risk tolerance and the investment timeline. Different angel investors prefer different levels of involvement, with some stipulating that they require a seat on the board and to be involved in key company decisions.