“Angel investing” means investing in companies in their start-up phase in return for equity (shares in the company). Angels invest very early on in the hope that these young ventures will grow and generate a significant return in the future if a larger player acquires them or if they become a publicly traded company.
Investing in start-ups is becoming increasingly popular and accessible in the UK. The attractiveness of that market has come from two main factors: the success of a number UK start-ups built over the past two decades (ASOS, Just Eat, Zoopla, Funding Circle) which are showing the way for many more to come and the supportive policies implemented by the various governments over the same period to encourage investment in ventures.
The policy that has had the biggest impact has been the implementation of the Enterprise Investment Scheme (EIS) in the 1990’s and of the Seed Enterprise Investment Scheme (SEIS) in 2012. Both schemes reward investors in high growth companies with generous income tax reliefs (worth up to 72.5 per cent of the investment under SEIS) as well as an exemption of capital gains tax on returns.
These schemes have proven to be extremely popular with private investors who every year invest over £1.5 billion into high growth ventures under SEIS and EIS. Combine this with a low return environment in “traditional” markets and this explains why we are seeing an increasing number of investors willing to get involved with early stage investments.
But the early stage investment market is still relatively young and obscure to non-initiated investors.
So how do you get started with investing in start-ups if you are new to this market?
Your first option is to invest through online equity crowdfunding platforms (ECF) such as Seedrs, Crowdcube and Syndicate Room, which showcase dozens of investment opportunities from start-ups looking to raise equity funding from the public. The advantage of ECF websites is that they are convenient and accessible to anyone with investment tickets starting at £10. You can therefore build a small portfolio of start-up investments relatively quickly.
However, you should be aware that the risks are extremely high: the number of failures on these platforms is high (possibly higher than reported currently) and despite the tax reliefs you should remember that your capital is at risk. It has been reported that the due diligence conducted by some of these platforms is minimal, and that the reality of some of the businesses raising funds can be very different from the picture presented on the website. Remember too that these platforms act as “brokers” and do not claim to conduct extensive due diligence or to support the businesses after they got funded.
If you consider yourself to be a more sophisticated type of investor looking to build a portfolio of investments with tickets of more than £5,000 per company, then you should probably think about joining an angel syndicate.
Angel networks act as filters for investors: they review dozens of investment opportunities and select the best ones which they then present to their network of investors through pitching events and online platforms. Investors are invited to participate in the funding round and to also take part in the due diligence and governance of the company post investment. Investing alongside experienced angel investors will teach you a lot about the start-up world and give you some reassurance that proper due diligence has been conducted and that post investment support of the company has been put in place.
A third option to get started is to invest through a start-up fund. There are a number of SEIS/EIS funds which gives you exposure to a portfolio of start-ups. The fund manager handles the selection and the management of the investments and you receive the same tax benefits as if you had invested directly in the companies. Fund investing is therefore a good option for beginner angel investors or those looking for tax-efficient diversification.
When looking at start-up funds make sure that the charges are low and transparent as they can vary greatly between providers. You should also look for diversified funds in order to spread your risk across different sectors (technology, life sciences, consumer products). See how open the manager is about its selection process and investment strategy and if they allow investors to be “close” to their portfolio through regular reporting and events.
Joseph Zipfel is investment manager of www.startupfundingclub.co.uk