Investment: Angel delight?

We look at the blessings (and downside) of being a backer for a high-risk business


By Nick Winters, December 13, 2010
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Tempted to take a seat? Angels should limit their managerial involvement

Tempted to take a seat? Angels should limit their managerial involvement

Angel investing is an essential source of finance and support for a large number of early-stage businesses who may have exhausted help from family and friends and may not yet be able to attract funds from venture capitalists. A business angel is a Dragons' Den style individual, who provides funding by way of an equity investment to help businesses grow. This can also be a rewarding business interest for the investor.

Envestors (www.envestors.co.uk) is an award-winning private investor network that matches entrepreneurs with investors. It reports that angel investment activities are on the increase and although such investments are by their very nature high-risk, research has shown that a portfolio approach can lead to decent returns - with tax benefits, too.

A study by NESTA estimated that there are between 4,000 and 6,000 angel investors in the UK, with an average investment size of £42,000 per investment.

Some 35 per cent of investments produced returns of between one and five times the initial investment, while nine per cent produced returns of multiples of 10 times or more. The mean return was 2.2 times investment in 3.6 years, an approximate rate of return of 22 per cent gross. But note, though, that more than half of the time, the money invested was lost.

Angel investments are high-risk, but a portfolio approach can boost returns and there are tax benefits

This same research showed that:

● Angels with entrepreneurial expertise outperformed those without it

● Those who invested in opportunities where they had specific industry expertise fared better

● Those who performed some pre-investment due diligence experienced fewer failed investments

● Some post-investment involvement was related to improved investment outcomes, but this trend reverses where the investor becomes too involved on a managerial level

The attractive tax benefits come in the form of the Enterprise Investment Scheme which, if certain criteria are met, can mean tax relief at 20 per cent on the investment and tax-free gains. Tax relief may also be obtained when the money invested is lost, effectively limiting the overall loss to 40 per cent of the funds invested.

Chargemaster, which has just closed £900,000 in angel funding, says that it is currently the leading European provider of charging points for plug-in electric vehicles. It is a good example of a growing company seeking investment that exhibits the characteristics that set the investable companies apart. They are led by a convincing and successful entrepreneur who has demonstrated commitment by investing his own money; they are in an appealing market and have identified a clear exit route.

In summary, business angels can provide the funds and know how to drive the growth of some of the UK's most exciting dynamic businesses at a crucial stage.

At the same time, their investment and possible involvement may prove to be rewarding both financially and personally.

Nick Winters is a director at RSM Tenon who specialises in advising growing businesses. If you would like to discuss further any of the issued raised, contact him at nick.winters@rsmtenon.com. RSM Tenon is one of the most progressive and entrepreneurial professional services firms in the UK

    Last updated: 12:02pm, December 13 2010