Posted on Friday 16 September 2011 by Ulster Business
It looks really great when you see the Dragons on Dragon’s Den sit in those plush chairs, surrounded by piles of cash and knowing all of the answers as the pitching companies come before them. The reality, as you might guess, is slightly different and actually a lot more fun!
So how does your typical UK business angel investor see the world? Let’s start with some statistics and indeed the bad news. 56 per cent of UK angel investments don’t return their stake. And the average time to invest your money in a start-up and to make money is six years, while the average time to lose it is three years. On the face of it, not very appealing! However the same authoritative report, Siding With the Angels (British Business Angels Association and NESTA) claims the average return on UK angel investing is the equivalent of 22 per cent IRR. And that’s before some very generous tax reliefs, most notably the Enterprise Investment Scheme.
So the statistics show that it is possible to make good money in angel investing, but when you talk to business angels it’s equally clear that many don’t. Many people come into angel investing, make one or two investments ‘to see how it goes’ and then either lose money or lose interest with the longer time spans involved. The ones who make money by and large are the ones who spread their money over a larger number of companies and in fact treat angel investing as an asset class in its own right.
Michael Blakey is a successful Halo angel investor, based in England. He says: “It’s important, given the high risks involved, to take a portfolio approach, and not just put all your funds into one or two investments.” Angels like Michael have a portfolio of over 10 companies and know that only a few will do well – but they will do so well that they will more than pay for all the others that don’t.
A portfolio can be built up by working with others in syndicates or by using one of the various EIS funds. Halo runs a fund for example that invests in four companies per year making is easier to achieve a good spread. And in 2010 Scottish angels invested 30 per cent of the £60m UK total angel investment, but with only 8 per cent of the UK population. The reason for this startling performance is their early and widespread adoption of a structure of angel syndicates. Their angels invest together, spread their risks and are very successful.
Michael has another rule. When he invests £1 in a company, he sets aside £4 for later investments in that same company. He knows that growing companies normally need further funding rounds and that if the angel doesn’t take part in these rounds he or she will be diluted.
This point about following on is often not understood by inexperienced angels. Instead they tend to just ‘leave their money in until I see how it goes’. And if the company is successful, they end up with a much smaller share of the profit than they should. So potentially high returns, albeit at very high risk, which are supported by excellent tax relief. EIS for example can give around 50 per cent relief on losses with potentially no capital gains tax on the successes.
While angels will tell you they do it to make money, there are other equally compelling reasons.
Michael Blakey again: “It’s fascinating being involved in companies in so many different industries; you are constantly learning and taking lessons from one company any applying them to others.” Others have admitted that, after the cut and thrust of growing their own business, they’ve got a bit bored with golf and sailing. Angel investing and getting involved with young companies provides that ‘rush’ that they’ve lost.
Paul Larmor is another business angel with a number of investments under his belt. He says: “An angel now has an opportunity to invest not only capital but bring personal experience and influence into a new start-up company. This way he or she has some control and say to how that investment will develop.”
And one of the nicest things about investing through a business angel network is, well, the network. Here is a really great group of people who’ve enjoyed big success just like you and who want to do it again. This is a group who share a common interest where you can meet and learn from others and discover who you’d like to work with on deals.
Something else which adds to the fun factor is the sheer variety of companies and ideas. There’s always at least one company that causes your jaw to drop. Halo angels have backed a film and a graveyard system as well as many high technology ideas. However they’ve also been presented with a sports team, chocolate and a photographic visit to the wreck of the Titanic. It’s never boring.
Angel investing is interesting, worthwhile and you can even make money doing it.
Or as Paul Larmor puts it: “In a blend of knowhow, experience, business acumen and marketing skills, angels are the glue that binds these building blocks together. They contribute to developing the DNA of a new company and help determine the same principles that Darwin found in evolution.”