We’re Loving Angel (Investors) Instead
Polish your halo and find out if this heavenly opportunity is for you
You’ve probably heard of angel investing as a way to get involved in new businesses at ground.
Let’s take a look at this exciting form of investing. What exactly is it? Is it right for you? How much money can you invest? What are the tax benefits?
Basically, an angel investor is someone with a bit of spare cash who wants to put money in to a start-up in exchange for shares in that company. This is called equity funding. Angel investors generally invest their own money (unlike venture capitalists, who invest a fund of money belonging to other people) and make their own decisions concerning the businesses. They can work closely with the founders of the start-up, beginning with hearing their pitch, and often going on to give them advice and the benefit of their experience in the business world. Such relationships can be mutually rewarding and fruitful – literally, in the case of Innocent Smoothies, a company that began with angel investment.
Unlike traditional venture capitalists, who need to keep their risk exposure low because they’re dealing with other people’s money and have lots of overheads to cover, angel investors can take a punt on something they believe in, because they’re answerable to nobody but themselves. Having said that, they can choose to work in partnership with other angels to pool their resources and the expertise they offer to young business owners.
New firms sometimes have two or three rounds of angel investment before their venture gets up and running, and there needs to be enough equity to offer round, so there’s a limit on how much equity each angel can get. This is set by the Enterprise Investment Scheme (EIS) and currently stands at 30%.
30% is the magic number for angel investing actually, because that’s also the limit on voting rights an angel has in the start-up, and the amount of the assets she’s entitled to in the case of winding up. But most importantly for the bottom line, it’s the amount of income tax relief you can get on up to £1,000,000 of investment. And in fact you can also carry back the tax relief to the previous year, so this can be a really economical way of investing. The government has set these tax breaks to encourage investment in new business.
Just remember that tax relief depends on your individual circumstances and can change in the future!
But what do you need to know about a business before you invest? And what are the risks?
As with any type of investment, you need to do your homework. Don’t put your money somewhere where you don’t understand the risks, and consider these points when assessing whether a start-up is worthwhile:
1 - Is it competitive? Where does it stand in the market? Who is it competing against?What’s its USP?
2 – How is it actually going to create revenue? If it’s just at the concept stage and hasn’t plotted out a clear revenue stream, it might not be wise to invest yet...
3 – Does this product or service actually solve a problem? All the most successful businesses address something that people lack or need.
4 – Is protected by intellectual copyright or a patent? You don’t want to invest in something that any other upstart could come and rip off
5 – have they done their research? You want to be dealing with a company who have done enough market research to be sure that there’s some interest and eligibility in the marketplace for what they’re selling.
6 – what’s your get-out plan? If things don’t work out, what’s their strategy for getting your money out at the end of the affair?
Remember, startups very often fail. So angel investing is like the wild west – the scrappy border-town – of the investment landscape. It can suddenly explode, in good ways and bad. But there’s no doubt it’s a thrilling place to be, and with a bit of luck and lots of good business sense, you could be in at the start of something really big. This is active investing at its most individualistic and personal, so if you have £5k to £50k (sometimes even less on equity crowdfunding platforms) to use (and potentially lose), and want to do it in a way that feels more valuable and co-operative than just giving it over to a fund manager, angel investing could be right for you.
Do you want to learn more about angel investing, visit the UK Business Angels Association website here.