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
2 Characteristics of UK angel investors
3 Strategies which improve investment outcomes
1. Investment outcomes
The investment returns made by angel investors can be attractive. In the sample of investments looked at in the study:
56% of the investments made were either completely lost or failed to return the amount invested
35% of investments realised between one and five times the initial investment
9% realised ten times or more
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
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:
57% of investments made use of EIS
The average investment took three years to fail and six years to succeed
The average investment size was £42,000
And as far as the angels themselves were concerned:
On average six angels invested in each venture
The angels were mostly men with big company experience and many had founded entrepreneurial ventures
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:
An angel should stay close to his entrepreneurial and industry expertise in choosing investments.
Even a relatively small amount of due diligence can help avoid failures.
Post-investment interaction is valuable but close involvement in a managerial role is to be viewed with caution.
Follow-on investments are significantly related to lower returns because of the tendency