Angel investing is fast becoming the go-to source of funding for start-up owners looking to take their businesses to the next level. In 2015, a record £1.8bn was invested in 3,265 ventures through the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). Unlike venture capitalists, angel investors generally take a longer-term approach, providing “patient capital” and investing on the basis that they may not see a return for up to a decade, or indeed any return. Furthermore, they bring the benefit of their experience to the businesses in which they invest.
“One of the most important things about angel investing is it’s not just about the money you’re bringing to the business,” says Jenny Tooth, CEO of the UK Business Angels Association. “It’s a very personal thing, identifying the businesses you want to invest in and knowing that you’ll be able to help them post-investment, bringing advice, support, contacts and customers – all the things that will really make a difference.”
From the point of view of the entrepreneur, this is all good news. But what’s in it for the angels themselves? For many, a wish to help and support others while keeping their hands in, so to speak, underlies the decision to provide funding. But there can be sound financial benefits, too. Although angel investing is regarded as high-risk, with some 58% of deals not returning the original investment, many businesses supported by angels do go on to enjoy significant success. And valuable tax breaks are available for investors under the EIS and SEIS.
Spreading your wings
So how do you go about becoming an angel investor? It’s not as simple as just finding a promising business and getting out your chequebook: regulations are in place to protect both investors and business owners. First, you will need to self-certify as a high net worth or sophisticated investor, which entitles you to receive business plans and make investments through your own decision.
Typically, angel investors will provide between £5,000 and £150,000 in funding to single ventures, in return for a shareholding of no more than 25%, in order to ensure that business owners can hand over additional stakes in future rounds of fundraising. In order to mitigate risk, you will need to diversify your portfolio and invest in multiple start-ups. To make this possible, as well as sharing risk and reducing the burden of due diligence, many investors join together in syndicates, either formally or on an ad-hoc basis.
“I think it’s very important to invest alongside others, especially in the early stages of becoming an investor,” says Tooth. “To work with and learn from people who have already been through the due diligence process will help you with your own decision-making. You might also have the skills and experience to become a lead angel – someone who has more involvement in the company and really brings hands-on help on behalf of your fellow angels.
“The beauty of the syndicate model is you’re spreading the time you spend. You’re sharing risk, sharing decision-making. Companies will also need further rounds of finance, and as a syndicate you’re more likely to be able to pull that together and have the firepower to follow those deals through. You’ve also got more muscle in terms of negotiations when you’re investing alongside others such as VCs.”
Where to invest
With a host of promising start-ups out there competing for funding, from property developers to app developers, pharmaceutical companies to caviar farms, there is no shortage of investment opportunities. Most would-be angels invest in an industry in which they have experience, so they can bring expertise as well as cash to the table. Look for a management team that has the right blend of skills, experience and attitude to build not only the business but a long-term working relationship with you, the investor.
Beyond that, investors should ask themselves whether the business has the potential to address a real gap in the market, to be disruptive, and to change their industry or society more widely. Assess the market in which the business operates: what competition is out there, does the entrepreneur hold a defensible position in the market, and how scaleable is their business model?
Finally, look at the nuts and bolts of the deal: the valuation of the business, the proposed shareholding, the potential for growth and exit, and the extent of your role within the business.
By working alongside other investors, you can greatly enhance the benefit you bring not only to the business you’re supporting, but to yourself as an angel, says Tooth. “The best investing happens when investors know each other and each other’s skills and can build trust and a relationship through the due diligence process and post-investment, drawing on one another’s skills and knowledge.”
Please note that this is unlikely to be a suitable investment option for many investors. It will only be suitable for sophisticated investors willing to take a high risk with their capital as there is a risk an investor may lose some or all of their capital if the company invested in fails. Also, due to the nature of the shares they are fairly illiquid and as such investors must be aware they may have difficulty, or be unable to realise their shares at levels close to that which reflect the value of the underlying assets.
All EISs and SEISs must invest in unquoted UK smaller companies and such companies, by their nature, involve a higher degree of risk than investment in larger companies. As such there is a risk that any of the investments may not perform as hoped and in some circumstances may fail completely. Therefore this type of investment should not be considered unless you are willing to accept a higher level of risk. The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.