How To Become A Business Angel. Richard Hargreaves

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      Most of these characteristics make angels a very attractive source of capital.

      The combination of quick decisions and the ability to bring directly relevant experience to the table is particularly appealing to entrepreneurs. So is the relative simplicity of the investment documentation.

      Angels are also good at following on with further money when the business needs it. The only major negative is that it can be difficult to pull a syndicate of angel investors together which is the reason the government launched the Angel CoFund referred to above (and discussed in Chapter 3).

      Increasing numbers of entrepreneurs recognise these very positive features of angel investment. And that puts the angel in a strong position when it comes to negotiating investment terms.

      Case Study

      This case study is an extreme illustration of the slowness of VCs compared to angels.

      I began negotiating with one such VC firm on behalf of a young technology company for a £500,000 investment in February and it completed in August. However, it was August the following year – a total of 20 months. It even took until December to have an agreed terms sheet.

      In the meantime a number of angels looked at the opportunity and invested, taking on average six weeks to do so.

      As you might expect given the take time taken, the documentation was as complicated and onerous as it gets. I don’t believe for a second that this protected the fund investor better in any meaningful way. It was, though, a sure way to start the relationship between entrepreneur and investor badly.

      Learning point

      As an angel you need to be concerned with whether all the expected money will be available and when. The lesson of this story is never take any potential funder’s comments about timescale at face value. Sometimes you can check with others who have previously worked with prospective investors how fast (or slow) they are. Always be prepared for a much slower process than you would like.

      Summary

      This chapter has discussed the importance of angels to the UK economy in the development of innovative early-stage companies. The angel is a growing presence amongst the providers of long-term capital and is vital when ventures need £2m or less of equity capital.

      The angel is often the most welcome of all investors in a company because of decision-making speed, simplicity of investment structure and the ability to add value. And angels are friendly and supportive, which is regrettably not true of all VCs.

      Chapter 2: Deciding Whether to be an Angel

      Introduction

      This chapter considers the issues you should address when deciding whether to either become an angel or to expand your angel investing.

      I describe some research evidence on the investment returns that can be made by angels, the positive effect on these returns of available tax reliefs, strategies that can enhance investment returns and the characteristics that I believe angels need.

      Also discussed is the need for portfolio diversification to offset the large risks involved in any one investment.

      Finally, the chapter discusses other ways of investing in the early-stage growth company sector without the level of involvement required of an angel. This will suit some people better than angel investing would and it can appeal to the angel who wants further diversification of some of their risks.

      Are angel investments for you?

      Published research on UK angels

      Whilst venture capital and angel investing are similar in many ways, much less is known about angel investing. This is because venture capital is largely financed by major institutions who have demanded full reporting. That, in turn, has led to systematic published research. On the other hand, the private nature of angel investing means it is harder to research.

      There is, though, some published UK research which offers useful insights into why others have chosen to make angel investments. This may prove a helpful guide to making your own decision. This research includes the report ‘Siding with the Angels’ I have already referred to in Chapter 1. It is well worth reading and can be downloaded free from the NESTA website (www.nesta.org.uk/assets/documents/siding_with_the_angels).

      The report’s findings can be summarised under three main headings:

      1. Investment outcomes

      The investment returns made by angel investors can be attractive. In the sample of investments looked at in the study:

      The mean return was a 2.2 multiple of investment in 3.6 years and an approximate internal rate of return (IRR) of 22% before tax.

      Enhancing the returns using EIS

      It is interesting to look at the impact EIS reliefs would have had on the NESTA research results described above. I have used a simple model to illustrate this. In the table the NESTA numbers are in bold. The model uses a four-year period. It assumes 50% of money is lost and so is broadly in line with the NESTA results.

      A model to illustrate the effect of EIS reliefs on angel investing

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