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Oct 22

How to make money as an angel investor

Reading Time: 7 mins

People who enjoy watching Dragon’s Den often ask themselves “how can I become an angel investor?’.Do I need to be a multi-millionaire like these guys?

No, you don’t have to be that rich although you do need a decent amount of spare cash outside of your property and basic investments.

If that is your situation then you can become a dragon, or angel, who invests in companies in return for some equity. Ideally, with some of your investments at least, you will make a lot of money as the companies grow and make impressive profits.

Of course these new companies don’t always grow and become successful. Sometimes they fold or just jog along making very little. So angel investing can be risky, but that’s how you get the good returns!

Could angel investing be good for you? Find out here.

 

What is an angel investor?

Angel investors are individuals who invest their personal money into small, unlisted companies in return for equity (owning a share of the business).

Generally, the companies they support are early-stage ventures often called start-ups.

Dragon’s Den has popularised the idea of angel investing, which is great, but in many ways, it has also made it seem inaccessible.

Described as the ‘titans of industry’ the dragons are ultra-wealthy investors, but the reality is that most angel investors are regular people – like accountants, lawyers, small business owners.

Angels get into investing because they love finding the next ‘Deliveroo’ or ‘Airbnb’ and helping them grow from a fledgling start-up into a powerhouse.

Angel investing is also incredibly social and a great way to meet like-minded people.

Of course, potentially impressive returns are another key reason to consider angel investing.

Gavin Heys, director of Envestors Private Investment Club which brings together entrepreneurs and investors together, explains “Most angels are classed as High Net Worth Individuals which means you have an annual salary of at least £100,000 or net assets, excluding property and pensions, worth £250,000 – criteria which cover over ½ million people in the UK. More important is their desire to help early-stage ventures succeed, not just with vital cash, but also with often more valuable advice, access to networks and new ideas.”

So it’s certainly not for everyone.

It’s best only to think about angel investing if you already have some solid investments elsewhere and you’re looking to make some good money with the rest.

If that is you, though, don’t be put off the idea of angel investing by its risky nature.

Anyone who invests knows that in order to get good returns long-term you have to take risks. In fact, on the whole, the higher the risk the higher the potential returns.

This is an important point for women particularly as women generally are still more risk-averse than they need to be when it comes to investing.

  • According to the Centre for Economics and Business Research women own about 48% of the UK’s wealth and this is forecast to grow to 60% by 2025.
  • Despite this, and despite their skills, experience and expertise, only 13% of angel investors are women.

Heys says “many women who could be excellent angel investors have yet to consider it. And, as is the case with most HNWs, it is highly likely that many don’t know about the fabulous benefits of the EIS tax incentive scheme either.”

 

How much do angel investors usually invest?

“In terms of investment into a single company, the average investment made in the Envestors network is £42,000,” says Heys, “but this hides a massive range from £5,000 up to £500,000. At Envestors Private Investment Club we set a minimum investment per individual per company at £25,000. There is not really a minimum sensible amount, but whatever the amount, it needs to be something that you can afford to lose.”

Given the inherent risks of investing in early-stage businesses, it’s important to build up a portfolio of investments – in other words to ‘spread your bets’ across a variety of businesses – because it’s likely that at least half are going to fail.

In general, it’s much better to invest £25,000 into each of ten companies than £250,000 into one.

 

EIS and angel investing

Angel investors tend to put their money into businesses through EIS (the Enterprise Investment Scheme).

EIS can be a really important benefit for investors because it offers generous income tax, Capital Gains Tax (CGT) and Inheritance Tax benefits.

If you currently pay a hefty amount of tax you will be very interested in this scheme.

eis conditions

The main condition is that the scheme has to be limited to

  • unquoted companies (in other words their shares are not listed on the stock exchange)
  • with gross assets of less than £15 million immediately before and no more than £16 million immediately after, the investment.
  • there are also time limits on how long a company can trade before getting the investment
  • and certain trades are excluded (such as banking and property development).

eis benefits

The scheme is generous, in the sense that it provides real incentives to investors to offset the inherent risks.

  • The current rules allow for income tax relief on 30% of a qualifying investment, exemption from Capital Gains Tax on sale of shares after three years,
  • and further income tax relief at top rate for any losses made on disposal of shares.
  • So for example, a 45% taxpayer investing £10,000 under EIS would be able to claim back £3,000 against income tax immediately. And in the event of the company failing, would be able to claim back a further £3,150 (being 45% of the ‘real’ investment of £7,000) – meaning a maximum exposure of £3,850 for a £10,000 investment.

To date over £20bn has been invested into early stage business since the tax benefit was introduced in 1994.

 

how much can angel investors make?

If you’re willing to take the risk and, importantly, spread your investments across a number of companies, you can make double-digit returns on angel investing.

“As to be expected,” says Hays “individual portfolio returns (IPR) have delivered significantly differing returns, ranging from -10% to +27%. However, taken as a whole, the weighted average Internal Rate of Return of all the investments was 14%.”

These figures do not take account of the tax breaks that angel investors get from the HMRC under the Enterprise Investment Scheme (EIS).

Returns are at the higher end of the range, though you need to be aware that these investments are typically ‘illiquid’.

This means that you cannot sell your shares whenever you like.

The angel is in there for the long-term, until there is an exit event – which means the business is sold or lists on an exchange.

 

What are the risks of angel investing?

dragon

Basically you could lose all your money!

Yes, the biggest potential risk is financial in that the companies you invest in fail so you lose the money you invested in them

Of course, those who promote angel investing will say that even in this situation, there is great learning to be had, and experience to use in the next investment opportunity. But you’ve still lost your money!

If you have invested in a range of businesses, though, rather than put all your eggs in one basket then you will be able to take the losses with some equanimity!

Do new companies tend to fail?

Overall, about five out of every nine early-stage companies will fail, delivering zero return at best, or total capital write-off at worst.

However, if investing under the EIS scheme there is the ability to write-off some of this loss against tax.

 

How do you develop an angel portfolio?

Finding the right opportunities as a solo investor can be tricky. There are a lot of pitching events out there and high-volume deal marketplaces.

However, if you’re new to angel investing it can be a good idea to join a reputable investor network.

These networks are ideally regulated by the Financial Conduct Authority (FCA) and typically pre-screen deals and ensure that the right information on any deal is being presented in a way which is clear. Inherently, this helps to minimise your risk.

 

aditya nAgarsheth – angel investor

Aditya Nagarsheth has been an angel investor for six years. In that time he has invested in 150 companies.

“I like to invest in tech, bio-tech and crypto companies,” he says. “I look for a good team in a new company. The founders are all-important. Do they have the right skills to do what they’re trying to do? If it’s a software start-up I would like to see at least one founder being a software engineer. I want to know that they themselves can build it – not just outsource to another country.”

He says that while at the beginning it’s the team that he’s concerned about, he’s also interested in the idea that they have.

“For an angel, the typical ticket size [investment] can be as low as £5,000 if you invest through platforms like Crowdcube that allow you to invest smaller sums. But if you’re investing directly in the company I would say £25,000 is standard . Typically we get equity for that investment, but it could be in the form of a convertible note that will convert into equity at some future point in time.”

The kind of companies he invests in could be valued from £5m-£15m, in the beginning. “Because you don’t want to put everything into one company” he says, “around £25,000 is the right amount to put in at the start. If you get more conviction later then you could add another amount then.

“It’s hard to calculate the average returns I get. A lot of my portfolio are still illiquid so I don’t know how much I will get for them. The ones that have returned, though, tend to have returned well. Some have returned multiple times what I put in, but others have simply failed.”

He adds that it’s important to diversify your investments. “It’s a numbers game. Your portfolio should have at least twenty to thirty start-ups. While the valuation might go up after your initial investment, later on you could get more conviction about the prospects for the company and put more money in at a later-stage. The returns are likely to be lower then but you’re  more assured of the company’s success.”

 

This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.

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