A better-than-even chance of losing your money

Business angels face tough odds when making an early-stage investment, a new report confirms.

Last Updated: 31 Aug 2010

If there was any doubt that making money by backing early-stage companies is a tough business, new research by the British Business Angels Association and Government science fund NESTA would seem to dispel it: in a survey of 1,080 deals, they found that angels lost money on 56% of their investments. Clearly the Dragons' Den stuff is a bit harder than it looks on TV.

It wasn't all bad news, however. With a successful deal, investors can double their money in 3.6 years, on average - which equates to an annual return of about 22%. That compares favourably with pretty much any form of investment available. And in a happy 9% of cases, investors pocketed a return of more than ten times their money - what's known in the trade as a 'home run'. So statistically, that’s a one-in-ten chance of making serious money – arguably pretty decent odds.

As these figures show, angel investing can be a hit-or-miss business. At best, the returns can be unrivalled, but on the balance of probability, you're actually more likely to end up losing your shirt. For every Google (which made its original backers extremely rich), there’s a thousand bright ideas that never make any money – and it takes a pretty canny investor to get it right more than they get it wrong. This makes it essential for angels to spread their risk as much as possible – by putting money in other asset classes, and backing more mature companies as well as minuscule start-ups.

You may be wondering why people bother, if the odds of success are relatively slim. Tax relief is one reason: the BBAA points out that one in four of these investments was done to take advantage of tax breaks under the Enterprise Investment Scheme (which allows wealthy people to mitigate their tax burden if they invest in small company shares). Currently this relief is for 20% of the cost of the shares (up to a maximum of £100,000) - now the BBAA wants this expanded to 30%, to provide a greater incentive.

So why does it matter? Well, these angels fill an important gap - between the start-up loans offered by banks and family/ friends at one end, and the serious venture capital players higher up the food chain (the average loan in this study was £40,000). If angels aren’t incentivised to keep backing start-ups, this important avenue of financing could dry up altogether. That might be good news for the producers of Dragons’ Den (who’d be guaranteed plenty of supplicants) but probably not for the economy as a whole. We could do with a few more Google-esque success stories, after all.

In today's bulletin:

Marks & Spencer slashes dividend as profits dip
Could we make a killing on our bank stakes?
Deflation worsens as retail prices drop at record rate
A better-than-even chance of losing your money
WolframAlpha, the Google killer?

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