When watching Dragons’ Den you might assume that angel investing is just for industry titans. However, if you have capital to invest, angel investing is something to consider. Like all investments it carries risks, but also offers exciting rewards.

What is an angel investor?

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: mentoring, introductions etc.

Most angel investors 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 according to Statista.

Others are classed as ‘Sophisticated Investors’. For this you’ll need membership in 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 usually invest £5,000-£500,000 in a single venture, aiming to build a portfolio of investments over time.

Returns on Angel investment

While angel investing is riskier than other asset classes, and is less liquid, it does offer greater returns.

A 2017 Willamette University study 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 favourably with more traditional investment vehicles:

• Mutual funds - Not even the best performing mutual funds of all time will break 20% average annual return. Most of them will not go over 15%;
• Index funds - The S&P 500 has provided an average annual return of 13.6% since its inception;
• Bonds - UK interest rates on bonds are currently 0.1%;
• Stocks - The average return on a Stocks and Shares ISA in the UK is 5.14% (April 1999 to April 2020).
  
  

A study by FounderCatalyst published in January 2021 showed that angel investments yielded an average 2.77 X return. 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.

Averages are averages. Experienced angels 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.

Creating 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. (see FounderCatalyst report).

The challenge is having enough deal flow to increase and diversify your portfolio.

One solution is to join 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 who join 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.

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.

The potential rewards from angel investing together with the tax benefits and the positive feeling from helping a business grow make for an exciting journey as well as an investment.

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.

Envestors is authorised and regulated by the Financial Conduct Authority.

https://www.envestors.co.uk/