Many of us have watched Dragons’ Den avidly over fifteen years but how many of us have seriously considered the questions ‘Could I be an angel investor?’ or ‘Is this type of investing just for these well-known businesspeople?’
Not enough of us have asked these questions.
Angel investing for many feels inaccessible, an option for industry bigwigs and multi-millionaires. And so, instead of exploring this exciting asset class, we put our investments into more traditional and safer options like stocks and mutual funds.
But the reality is that if you have capital to invest, angel investing is an option you should consider. Like all investments it does carry risks, but it also offers potentially exciting rewards.
So, to help you look at this let’s start by reviewing the basics and then examine how angel investing can offer potentially higher returns than many more familiar investment options.
What does an angel investor look like?
Angel investors invest their personal capital into unlisted businesses in exchange for shares in that business. More than just cash, angels typically offer wider benefits to investee companies in the way of mentorship, advice, acting as a non-executive director or making vital introductions to their network of contacts.
Most angel investors are classed as ‘High Net Worth Individuals’ (HNWI). It is this terminology that likely conjures up the images of three-piece suits, designer watches and luxury cars – making angel investing feel inaccessible. The reality is that to be considered a HNWI, you need an annual salary of at least £100,000 or net assets, excluding property and pensions, worth £250,000. That’s more people, than you’d think – at least half a million in the UK according to Statista.
The other common type of angel investors is termed ‘Sophisticated Investors.’ To be classed as sophisticated, you must either be a member of an angel network, have invested in another unlisted company in the last two years, have worked in a professional capacity in the private equity sector or be a director of a company with an annual turnover of £1M+.
Business angels will usually put in between £5,000 and £500,000 in a single venture and will aim to build a portfolio of investments over time.
Angel investors average returns
While angel investing is riskier than other asset classes, and is less liquid, it does have the potential to offer greater returns.
Data collected in the US in a 2017 Willamette University study on angel investment returns calculated that the average return for angel investors is 2.5X, which alongside an average investment time span of 4.5 years indicates a gross internal rate of return of 22%.
This compares very favourably with more traditional investment vehicles:
● Mutual funds – Not even the best performing mutual funds of all time will break 20% average annual return, and most of them will not go over 15%;
● Index funds – Industry favorite, the S&P 500 has provided an average annual return of 13.6% since its inception;
● Bonds – During the pandemic, UK interest rates on bonds have been cut to 0.1%;
● Stocks – The average return on a Stocks and Shares ISA in the UK is 5.14% (April 1999 to April 2020).
A more recent study by FounderCatalyst published in January 2021 showed that angel investments yielded an average 2.77 X return. Furthermore, with the additional 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. This fantastic scheme has helped to raise £1.929 Billion for 3,920 companies yet is still surprisingly unknown to many potential investors who could benefit.
It is worth pointing out here again that averages are averages. Any experienced angel will tell you that many companies take much longer than 4.5 years to mature and exit, and more fail than have home runs. But, on average, angel investing appears to perform well in the long run versus other asset classes.
Why should you consider becoming an angel investor?
Yes, it makes financial sense to invest in early-stage companies, as they can provide an unparalleled rate of return on your investment, and you can take advantage of generous tax relief schemes.
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 hard cash, but also in the form of advice and a strategic direction stemming from your experience. Typically, angels are evangelists for the businesses they support – be it the use of big data in medicine, the implementation of AI in charity/corporate matching, or the development of energy saving computers. And everybody loves to hear about the little business you invested in which is about to be merged into a billion-dollar Special Purpose Acquisition Company (SPAC).
An angel 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 your 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. The FounderCatalyst report states that a portfolio of investments in three companies is likely to yield, on average, worse returns than a portfolio of investments in 10 companies.
However, unless you are Dragons Den’s Peter Jones, opportunities may not always come to you. In fact, having enough deal flow to increase and diversify your portfolio can be a challenge.
One solution is to join an angel network. Well-established and properly regulated networks have investment specialists pre-screening 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 which is all intended to help minimise risk.
Investors that join a network:
● Gain access to deal flow;
● Lower their risk by receiving support in the due diligence phase;
● Diversify their portfolio;
● 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 right now are:
In most cases, there is no need for a recommendation in order to gain access to investment networks. Angel investing is available to you from the comfort of your own home, as the most active networks, like Envestors, will use digital platforms to share their opportunities.
I hope this has provided food for thought and you can see that angel investing is something to consider getting involved with. Along with the tax benefits and the potential rewards with this type of investing, you can also enjoy helping young businesses to grow from an entrepreneurial idea to exit.
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.