9 August 2021|Investing
By Chantelle Arneaud, Envestors. Capital at Risk. Please see full risk warning
We have seen a huge interest in Non Fungible Tokens (NFT) and for example, money has been poured into assets such as a digital house which sold for $500,000, a digital perfume, and the world’s first tweet which cost the purchaser the princely sum of two point nine million dollars.
Non-fungible tokens or NFTs are cryptographic assets, whose ownership is recorded on blockchain with unique identification codes and metadata that distinguish them from each other. A person can’t exchange one NFT for another as they would with dollars or other assets. Each NFT is unique and acts as a collector’s item that can’t be duplicated, making them rare by design.
This differs from fungible tokens like cryptocurrencies, which are identical to each other and, therefore, can be used as a medium for commercial transactions.
Clearly, there are a lot of new trendy things you could invest your money in. But how long will this craze last, and will there be buyers on the other side? Who’s to say. What I can say is that if you’re looking to invest your money into something exciting (and slightly more predictable) you should consider angel investing.
Angel investors not only provide much-needed capital, the lifeblood for early stage businesses, they provide invaluable advice, contacts and support.
With angel investing you have the opportunity to identify and help grow the UK’s most promising businesses – and if you’re savvy there is the potential for making a good financial return.
If the idea of becoming an angel investor is new to you, let me share some excellent reasons for looking into it further.
a) Making a difference
When you invest in property or publicly traded stocks it’s only your cold hard cash that makes an impact, and so the only time you’ll feel pride is when you get a return. With start-ups, it’s a different story. Cash is important, but it is not the only thing these businesses need. They need advice, support and your black book. When you invest in a start-up you join them on a journey, one in which you can directly impact their growth trajectory – whether that’s by making a vital introduction to a marquee customer, helping them get their pricing model right or ensuring they avoid getting themselves into legal hot water.
You may also be the difference between a business growing into a future giant or not existing at all. By providing support early on, you have the ability to help shape which companies get off the ground. So, if there is a cause you feel passionate about, like sustainable fashion or social care for the aging population, you can support seed businesses in those areas which can help affect a broader social impact.
b) Available tax schemes
The UK government runs two lucrative and important tax schemes that a shocking number of people have never heard of – the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). Both of these schemes are designed to encourage investment into early-stage businesses. So far, the scheme has helped raise £22bn for over thirty-thousand companies.
It’s that successful because the tax incentives are that good.
The EIS scheme, which is for slightly more established, companies offers:
- Income tax relief of 30% of the amount invested
- Exemption from Capital Gains Tax (CGT) on any gains from selling your EIS shares
- Further income tax relief at top rate of income tax (40% or 45%) for any losses made on the disposal of EIS shares
- Unlimited deferral of capital gains
Its earlier stage counterpart, the SEIS scheme offers:
- Income tax relief of 50% of the amount invested
- Exemption from Capital Gains Tax (CGT) on any gains from selling your EIS shares
- Further income tax relief at top rate of income tax (40% or 45%) for any losses made on the disposal of EIS shares
- Unlimited deferral of capital gains
All of this is designed to encourage investing into early-stage businesses, while off-setting the risk, because investing in early stage businesses is risky.
c) Potential returns
Yes, one day you might wake up and read the news, and drop your phone in excitement when you learn one of your businesses has just been sold for big money. (Conversely, I do need to mention that one day you might wake up and read the news and drop your phone in utter disappointment when you learn one of your businesses has gone under.)
Joking aside, angel investing, while it carries risk, can be very lucrative. Data collected in the US in a 2017 Willamette University study on angel investment returns calculated an average return for angel investors of 2.5X. With an average investment period of 4.5 years, this indicates a gross internal rate of return of 22%.
Compare this to other investment vehicles:
● Mutual funds – Not even the best performing mutual funds of all time will break 20% average annual return, and most do not go over 15%
● Bonds – Over the last year, 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 just 5.14% (April 1999 to April 2020)
● Index funds – The S&P 500 has provided an average annual return of 13.6% since its inception
● NFTS – No one knows
A more recent study published in January 2021 by FounderCatalyst showed that angel investments yielded an average 2.77 X return. With the additional benefit the EIS scheme that grows to an average 3.19 X return.
It is worth pointing out here that averages are averages. Any experienced angel will tell you that many companies take much longer than 4.5 years to mature and exit. Some companies fail quickly while others fail slowly, never growing and never exiting— locking up your assets indefinitely.
d) Networking opportunities
While investing in ISAs or stocks will leave you solitary, leafing through the financial section with ink-stained fingers or spending quality time with your investment app, angel investing is social. You will meet new people, clever people like you.
A huge part of angel investing is networking. As you start to investigate opportunities you will meet passionate founders and like-minded investors with whom you can discuss said passionate founders. You’ll be invited to pitching events where entrepreneurs will present their investment opportunity to you while you sip wine and contemplate the potential returns.
You can also join an investment club (which I recommend for all new investors). You can opt for a sector specific club that aligns to your interest and expertise or for a sector- agnostic one. There are plenty to choose from and research agency Beauhurst has helpfully listed out the most active ones here(including Envestors PrivateInvestment Club – which is at the top of the list!)
e) The stories you’ll be sharing
Whether you make a fortune or whether you don’t, your angel investing will provide some great stories. Perhaps you’ll have spotted a seed stage business that has become the new brand everyone wants…Whatever happens, and however much you make or don’t make you’ll have made a difference to the entrepreneurs and businesses you’ve invested in.
ABOUT THE AUTHOR
Chantelle Arneaud is from Envestors. Envestors’ digital investment platform brings together entrepreneurs and investors across geographies, communities and sectors – creating the single marketplace for early-stage investment in the UK.
Envestors partners with accelerators, incubators and angel networks to provide a white-label platform empowering them to promote deals, engage investors and connect to other networks.
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.
Web: https://www.envestors.co.uk/
LinkedIn: https://www.linkedin.com/company/envestors-llp/
Twitter: @EnvestorsLondon
