How To Become A Business Angel. Richard Hargreaves

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      The table shows how EIS can enhance returns by more than 80% after tax.

      Nevertheless, it must be stressed that angel investment is high risk – the research results clearly show that more than 50% of all investments fail to return invested capital. This means an angel must seek a very high return on individual investments to make a satisfactory overall profit. And he must make several investments as he will not know in advance which of them will be the big winners.

      This volatile performance is a fundamental characteristic of early-stage investing.

      2. Characteristics of UK angel investors

      The characteristics of the surveyed angels investments were:

      And as far as the angels themselves were concerned:

      At my firm, Endeavour Ventures Ltd, the profile of our angels is slightly different. We have two primary groups which dominate our client list. Both of these have money and are comfortable with risk.

      The first group consists of financial services industry people (both current and ex) who have money and understand risk due to their day job.

      The second group comprises exited entrepreneurs who understand risk as a result of building a business and have money because they have exited from previous ventures.

      A third, but much smaller, group is well paid big company executives whose business experience has taught them how to balance risk and reward. They have money to spare and often hanker for some taste of the entrepreneurial experience.

      3. Strategies which improve investment outcomes

      There are strategies that can materially improve the chances of success:

      Points 1 and 2 are related. If you know about an industry from experience you will be aware of proven business models, market dynamics, obvious pitfalls and what innovations are likely – which is what due diligence seeks to learn.

      Requirements to be an angel

      When considering whether or not to make angel investments you need to note the above strategies. I have also listed below my own more detailed list of requirements to become a successful angel.

      1. Accept the risks

      You must have cash available that can be locked into highly illiquid investments and which you can afford to lose.

      2. Spread the risks

      You should spread risk and increase the chance of successful investments by planning to make at least ten investments. This important point is discussed in the next section.

      3. Invest systematically

      You should stick to an investment amount consistent with points 1 and 2.

      4. Take advantage of available tax reliefs

      Recent changes to tax legislation have increasingly encouraged investment via the EIS. Not only have the tax reliefs been enhanced, but the amount an individual can invest in a SIPP has been severely restricted.

      As a result of these changes some people who have not previously invested in private companies are being encouraged to do so. This may lead to the development of a new wave of angels.

      5. Invest mostly in things you understand

      Most investment opportunities need a group of angels who invest, say, £500,000 in total. Ideally you should have some experience of the venture’s sector but if not you can take comfort from the presence of those who have.

      6. Do some due diligence

      Intelligent questioning and verification of claims made goes a long way. If one member of an investment syndicate has deep knowledge of the venture’s industrial context he can add value to the due diligence process for the benefit of all.

      7. Only invest when you like and respect the management

      This crucial issue is discussed in Chapter 4.

      8. Plan to offer your experience when and where it may be of value to a venture but don’t impose it

      An angel can provide huge added value to a young company. An early stage venture may need help with sales contacts, recruiting, pricing strategies, financial management and more. If mistakes that are obvious to the experienced angel can be avoided that saves time, money and maybe even failure.

      9. Avoid investing good money after bad when things don’t go to plan

      This is discussed below under ‘How big should a portfolio be?’

      10. Enjoy being an angel

      Whatever their backgrounds and reasons for investing, all angels need to be sceptical and have their eyes open as angel investing can be dangerous. Angel investing is full of stress and disappointment as well as having high points. Only a sense of humour can keep you sane as you ride this roller coaster.

      So you must find it fun or you should not do it. The high points are not just making a lot of money from an investment, nice as that is, but they include the satisfaction of helping others to succeed in their plans.