The early stages of a business’s lifecycle can be challenging. After a business owner has used their own capital and money from family and friends, they’ll often need other external finance. But in these early stages they’re less likely to get funding from more risk-averse sources.
This is where angel investment comes in. A key source of risk capital, angel investors usually invest at an early stage, when other finance providers won’t. Many of the successful companies we know today wouldn’t have got off the ground without angel investment.
The funding angels provide, combined with their business expertise, is vital to supporting small business growth. Through backing entrepreneurs and fostering innovation, angel investment is playing a significant role in the UK economy.
Just how large is the economic impact? A study by Oxford Economics gives us an idea. This estimated that angel-backed businesses from 2010 - 2015 had a turnover of over £9 billion, contributed £4.5 billion to GDP, and created 69,700 full-time equivalent jobs in the UK economy.
The latest UKBAA report also shows that private investors in the UK invested £1.7bn in 3,700 entrepreneurs in 2017.
This article explains what angel investing is in more detail and why individuals choose to do it. It also explains syndication and the benefits this offers, and the government incentives available for angel investors.
Finally, it discusses the angel community in Wales and what Angels Invest Wales are doing to support it. 65% of angel investing took place in the London-Oxford-Cambridge Golden Triangle in 2017, while only 5% focused on Wales. Angels Invest Wales is helping to change this, encouraging more angel investment and supporting economic growth in Wales.
What is angel investment and who are angel investors?
Angel investment is a form of equity finance. Angel investors, also known as business angels, provide funds to companies that they consider to have strong growth potential. In return, they will usually take shares in the business.
As high net worth individuals, angels typically use their own money to invest, and their own judgement in making the investment.
They can invest on their own or as part of a group of angels, known as a syndicate. They might make a one-time investment in a business or provide multiple rounds of investment.
It’s common for angels to co-invest alongside other funding sources, including grants, loans, other types of equity finance, other angel syndicates, and angel co-investment funds.
Angel investors tend to be less focused on seeing a rapid return on their investment. They support a business through its growth journey and generally exit over a longer timescale. That’s why their funding is often considered to be ‘patient capital’.
But the value of angel investment goes far beyond the money. Many angel investors are or have been successful entrepreneurs themselves. They often bring their experience, know-how and networks to help a company develop. This non-financial contribution is referred to as ‘smart capital’.
Why do business angels invest?
We’ve already mentioned that angels most often fund early-stage businesses. This can come with a high level of risk. So, why do they do it?
Ultimately the motivation for investing varies from individual to individual. But it’s often a combination of some of these reasons:
1. There’s potential for high financial returns
Business angels will often expect a higher rate of return on their investment. Compared to other forms of finance, it’s a high-risk, high-reward opportunity.
2. They can diversify their investment portfolio
If an investor puts all their money into one asset category (such as stocks, bonds, or property), they’re more likely to be negatively impacted by market volatility. Spreading their money across various assets helps investors to reduce the risk, as each type will respond differently to market changes.
Adding start-ups (an asset category in itself) to a portfolio of investments can be a good way of diversifying. Investors can also invest in start-ups in various sectors to further mitigate the risk.
3. It’s fun
Being a part of a start-up’s growth journey can be both exciting and rewarding. Angels can take a hands-on role and apply their skills and knowledge to guide businesses to success. They also get to meet and work with interesting people along the way.
4. They’re able to support what they care about
Knowing that their money is helping to bring about positive changes is important to many investors. Called ‘impact investing’, angels back companies that are tackling the world’s social and environmental challenges.
5. It’s a way of giving back
Lots of investors have a desire to ‘put something back in’. By investing their money into local businesses they help to promote entrepreneurship and economic growth.
For many of the angels we work with, a passion for Wales and helping to foster innovation and prosperity here is a key motivation.
What tax incentives are there for angel investors?
The UK government recognises the importance of angel investment as a source of capital for early-stage start-ups, and the risk that angels take on.
That’s why they highly incentivise start-up investment for angels who pay tax in the UK through very attractive tax relief schemes and benefits. The two main schemes are:
- Enterprise Investment Scheme (EIS)
This encourages investment in early-stage, higher-risk businesses. Investors can claim income tax relief of 30% on up to £1 million of investment per tax year. They can invest up to £2 million a year if anything over £1 million of the total is invested in ‘knowledge-intensive’ companies.
- Seed Enterprise Investment Scheme (SEIS)
This is designed for investment in very early seed or start-up stage businesses. It offers income tax relief of 50% on up to £100,000 across all investments per tax year.
Read this article by the UK Business Angels Association for more information on tax reliefs.
What is syndication and what are the benefits?
Syndication is considered the current best practice model of angel investing. A survey commissioned by the British Business Bank found that almost four out of five business angels invested as part of a syndicate.
Syndication is where a group of business angels come together to make an investment. There are various reasons why angels choose to join forces with others, including:
- Pooling of finance. This allows angels to invest in more than one business or in larger deals
- Spreads the financial risk
- Sharing of due diligence and workload
- More expertise, knowledge and business experience at hand
- More time to grow a diverse portfolio of investments
- More interesting. Investors get to work with like-minded individuals, and have fun
One angel in the syndicate will often be identified as the ‘lead investor’. This individual plays a more active role than the other co-investors - before, during and after the funding round. They typically act as the representative of the syndicate by taking a board position in the company.
Angels Invest Wales
Launched in May 2018, Angels Invest Wales is helping to grow the angel community in Wales. In our first year, we facilitated £3.27 million of angel investment across 20 client deals into businesses, and over 60 new investors were registered to expand the network.
We connect experienced investors with Welsh businesses seeking private investment through our digital platform. Investors have easy access to a range of carefully selected and ‘quality controlled’ investment opportunities.
Through regular social events and investment masterclasses, we enable like-minded potential investors to connect, share their experiences and develop their knowledge and skillset.
Business angels can come together through syndication and make an impact, regardless of the figure they individually invest. By investing small amounts in each deal, angels can de-risk and diversify by having several investments. It also means that they don’t need to be ultra high net worth to participate.
We have a high-quality investor network of over 150 business angels, supported and enhanced by being an integral part of the Development Bank of Wales.
Syndicates of investors (managed by a pre-approved lead investor) can apply for co-investment from our £8 million Wales Angel Co-investment Fund. As co-investor we can contribute up to 50% of the total deal.
Visit Angels Invest Wales to learn more about joining the biggest angel network in Wales.