By Gavin Heys, Envestors Private Investment Club
Popular TV shows such as Dragons’ Den might leave you with the impression that angel investing is just for fat cats. However, if you have capital to invest, angel investing could be for you. Like all investments it carries risks, but it also offers the potential of exciting returns.
Angel investors are…
Angel investors invest their personal capital in an unlisted business in exchange for shares in that business. Angels typically offer wider benefits to investee companies: advice, introductions etc.
Most angels are classed as ‘High Net Worth Individuals’ (HNWI). This requires an annual salary of at least £100,000 or net assets, excluding property and pensions, worth £250,000. That’s at least half a million people in the UK (Statista).
Others are classed as ‘Sophisticated Investors’. This requires membership of an angel network, having invested in another unlisted company in the last two years, having worked in a professional capacity in the private equity sector or being a director of a company with an annual turnover of £1M+.
Business angels usually invest £5,000-£500,000 in a single venture, aiming to build a portfolio gradually.
Scope for returns
While angel investing is riskier than other asset classes, and is less liquid, it offers greater returns.
A 2017 Willamette University study calculated that the average return for angel investors is 2.5X. With an average investment lasting 4.5 years this indicates a gross internal rate of return of 22%.
How does this compare with more traditional investment vehicles?
- Index funds – The S&P 500 has provided an average annual return of 13.6% since its inception;
- Mutual funds – Not even the best performing mutual funds of all time will break 20% average annual return. Most will not go over 15%;
- Stocks – The average return on a Stocks and Shares ISA in the UK is 5.14% (April 1999 to April 2020)
- Bonds – UK interest rates on bonds are now 0.1%.
A study by FounderCatalyst (published January 2021) showed that angel investments yielded an average 2.77 X return. With the benefit of EIS tax relief that grows to an average 3.19 X return.
Under the HMRC’s Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), angel investors receive income tax relief of 30-50% on funds invested in startups and early-stage businesses.
Experienced angels will tell you that many companies take much longer than 4.5 years to mature and exit, and more fail than succeed. But, on average, angel investing appears to perform well in the long run versus other asset classes.
Reasons for becoming an angel
It makes financial sense to invest in early-stage companies, but many do it for more altruistic reasons. As an angel investor you offer value to a young company not just in the form of cash, but also in advice and a strategic direction using your experience.
Building a portfolio
According to the Willamette University study, angel investors get positive returns less than half the time they invest in a company. In fact, they register losses on around 70% of investments, and just 10% of their exits generate 85% of all returns. Diversifying your portfolio is key when trying to improve return rates.
Looking at the rate of return on original investment of 300 exits from 2018/19, the data shows that angels’ odds of significant returns increase with the number of investments (see the FounderCatalyst report).
The challenge is having enough deal flow to increase and diversify your portfolio.
One solution is joining an angel network. Well-established and properly regulated networks pre-screen deals, ensuring information is clearly and fairly presented and curating opportunities based on your interests. A good network will be listed on the Financial Conduct Authority (FCA) register and will follow FCA guidance, all intended to help minimise risk.
Investors joining a network:
- Gain access to deal flow;
- Lower their risk by receiving support in the due diligence phase;
- Diversify their portfolios;
- Join a community of like-minded investors;
- Can make a more meaningful and more sizable investment through syndication.
According to research firm Beauhurst, the most active angel networks in the UK today are:
In most cases, there’s no need for a recommendation to gain access to investment networks. Angel investing is available from home, as the most active networks, like Envestors, use digital platforms to share opportunities.
Angel investing is worth considering. With the potential rewards, tax benefits and the warm glow from helping a business grow, you’ll find yourself investing and being on an exciting adventure.
ABOUT THE AUTHOR
Gavin Heys is director of Envestors Private Investment Club where he works closely with investors to help them find the right opportunities for their portfolio. He has raised over £15m for companies including Draper and Dash, Censornet and F45 among many others.
Envestors’ Private Investment Club and digital investment platform bring together entrepreneurs and investors across geographies, communities and sectors – creating the single marketplace for early-stage investment in the UK.
Founded in 2004, Envestors has helped more than 200 high growth businesses raise more than £100m through its own private investment club.
Envestors is authorised and regulated by the Financial Conduct Authority.