Investing in early stage companies has never been so popular in the UK. According to HMRC, c. £170m were invested in 2015 under the Seed Enterprise Investment Scheme (SEIS), the generous tax relief programme encouraging individual investors to purchase shares in very young start-ups. This is more than twice the amount we saw in 2013. This trend is supported by the development of equity crowdfunding platforms and angel networks which have made these investments more accessible.
This increasing popularity of angel investments is of course partly explained by the huge tax incentives offered by the government (investors in startups can receive half of their investment back as an income tax credit), but also shows an important cultural shift. The UK is basically catching up with the US where it is more common to allocate a share of an investment portfolio to early stage ventures. Investors in the UK are now becoming more open and educated about the potential returns offered by those high risk investments.
But angel investments are attractive not only because they offer a high financial upside but also because it is one of the only asset classes offering you the chance to get directly involved in the performance of your investment, as opposed to passively investing in the stock market for example.
Business angels are more than investors: they are essential members of the team that will lead the startup to success. The Enterprise Research Council produced last year the largest survey of angel investors in the UK and assessed that angels indeed play a key role in achieving the successful growth and outcome of their investments by aligning the management team and investors with regard to planning, executing the growth plan and realising an exit.
For an angel, getting involved and helping the development of a startup is also a way of mitigating the risk of the investment and the capacity to help the management team should be seen as one of the key decision factors before investing in an early stage company.
But what does that involvement exactly mean in practice and what sort of support can angels bring to their investee companies?
The most active and experienced angel investors – the “lead angels” – will typically take responsibility for arranging the transaction, liaising between the company, the other investors, the lawyers etc. Once the investment is made, they will usually take a board seat and become a Non-Executive Director of the company. These lead angels regularly meet with the management team, bring their experience to the founders, advise on and challenge strategic decisions and of course make sure that the interests of other investors are preserved. They typically have a specific relevant sector expertise and are able to make introductions to potential clients, partners and fellow entrepreneurs.
Obviously not everyone has enough time or experience to take what is almost a part time job in being an NED of the company. However this does not mean that angel investing isn’t for you: there is an infinity of ways to get involved, depending on your profile, your skill set and your availability: corporate finance executives help founders produce and use financial projections, lawyers help identify legal and intellectual property issues before they materialise, marketing professionals help the company make the most of a small marketing budget, management consultants help the CEO
formulate the company’s strategic plan etc. And of course angel investors are always the first advocates of a startup and act as brand ambassadors to their personal networks – something particularly important in the case of consumer startups which rely on “virality” to make up for their limited marketing budget.
Being an entrepreneur is often a lonely position which comes with intense stress and pressure from customers, investors and staff. Angel investors who are prepared to volunteer a few hours a month to meet informally with a startup CEO can provide that friendly ear that is often so needed, especially when the company is going through a more difficult period. Business angels can act as a sounding board for new ideas, enquire about how the entrepreneur is doing personally, help him or her take a step back and refocus on top priorities. In our experience, these honest conversations between individuals who are on the same boat are one of the main ways business angels add value.
It is important to note that it is a two way street and that business angels can also receive benefits from getting involved in a startup, beyond the potential financial reward: angel investments can indeed boost a career and make a CV stand out by giving you an entrepreneurial edge and a unique experience. In general, helping a startup grow often provides the excitement and enjoyment that is sometimes lacking in the corporate life.
In our experience, good entrepreneurs know their weaknesses and surround themselves with people who will help overcome them but also give them honest – sometimes tough – feedback. The success of a startup depends on the quality of the network that the founders build around the company. Angel investors are essential elements of that circle and the capacity of a startup to keep them close and engaged is a determining success factor.
For angels, bringing support not only means looking after their money and preserving the very high potential financial returns of their investment but also enjoying the opportunity to exercise their skills and knowledge in a different environment and expand their career horizons.
By Joseph Zipfel, Investment Manager at Startup Funding Club