While many start-ups are turning to new forms of finance like crowdfunding, angel investors still play a critical role in Britain’s economy. Angels plug the funding gap between a few grand from an entrepreneurs’ savings, friends and family and the millions of pounds that can be mobilised by professional venture capital funds.
Without the support of angels, hundreds of successful businesses would never have even made it to market. But investing in start-ups is always risky and has plenty of pitfalls. If you’ve just sold your business or come into some money, here are a few pointers on how to get off on the right foot.
Have you got enough money, time and skills?
While armchair investors can back businesses with a little as £10 through crowdfunding sites like Crowdcube and Seedrs, angels are generally expected to come up with a lot more than that. ‘For a small business to really get going and have some firepower it generally needs about £100,000 to really make those big leaps,’ says Jenny Tooth, CEO of the UK Business Angels Association. If that sounds a bit steep then consider pooling your money in an angel syndicate, where individual investors can go as low as £5,000. Bear in mind that you ought to invest in several companies to spread the risk (more on that later...) so you'll need many times that to have a balanced portfolio.
You don’t just need cash. In most cases the companies you invest in will expect you to contribute time and expertise too – that’s in your interest too, of course, because helping the company succeed means helping your investment succeed. If you don’t have many skills to offer and have simply inherited a tranche of cash or won the lottery then proceed with caution – your cash might be better off in the hands of an asset manager or VC fund instead.
What are the tax benefits?
Keen to encourage angels, the government has made it advantageous for investors to put their cash into small businesses with tweaks to the tax system. There’s the Enterprise Investment Scheme, which offers tax relief of up to 30% the value of the shares, and for companies that are especially new and small there’s the Seed Enterprise Investment Scheme, which offers 50%. ‘It also gives you capital gains tax deferral and you can roll that over so even if a company succeeds and you get a gain, if you invest some of that money back into another small business you'll never pay the capital gains tax on that, as well as inheritance tax in the same way,’ says Tooth.
Before prospective companies can send you their business plans and ask for your cash you need to self-certify as a sophisticated investor or a high net worth individual. This regulation protects people who don’t know what they’re doing from ploughing all of their savings into risky private company shares.
Prepare for a wait
Unlike private equity firms, angel investors don’t usually have the luxury of calling the shots and forcing their portfolio companies to grow rapidly in the hope of securing a quick sale. Even in the companies that do succeed you’re likely to be waiting five years or more for an exit so don’t tie up all of your savings in shares you can’t sell.
Go out and meet people
‘The more people you talk to, the more you can grow your network,’ says entrepreneur and investor Pip Wilson. In 2015 Wilson sold the tech consultancy she founded, Bluefin Solutions, in a deal worth $66m, and has since invested in a handful of small companies as well as launching the divorce start-up amicable.
She started out investing via the accelerator Ignite. ‘That was great in terms of getting a flavour of the market...it’s not a bad starting point to get an idea of doing small investments in a lot of industries because they’ll also give you an opportunity to meet and chat to founders.’ Wilson suggests getting out and speaking to as many people as possible – ‘Even if you don’t want to invest at that point, it’s worth just hearing what people are saying, what kinds of things are happening. Any founders who are looking for investment will happily meet.’
What to look for
A key element of success for an angel is picking the right companies to invest in. ‘You need to look at the entrepreneur...whether they have the real passions, skills and commitment to build a really good business and what kind of background they come from,’ says Tooth. ‘You need to look at the market- have they got the potential to grab a decent piece of it? And you want to be looking at the business model – how are they going to make money, have they got a model that will generate repeat revenues and will it be scalable?’
Spread your risk
No matter how promising an investment seems, there is always a risk. According to the UKBAA, angels lose money on around 60% of their investments, so it’s extremely important not to put all of your eggs in one basket. Tooth says investors should be aiming for a portfolio of 10 companies as a minimum, and ideally more like 15 or 20. And you should be backing a range of companies with different business models in different industries. If you put all you cash in 15 property tech start-ups then you’re unlikely to be in a good situation when the bottom falls out of the housing market.
The potential risks of angel investing are matched by big potential rewards - just remember to be careful in your picks, spread your risk and don't bet the house on your success.