An Introduction to Angel Investing

Business Angels are high net worth individuals who invest on their own, or as part of a syndicate, in high growth businesses. In addition to money, Business Angels often make their own skills, experience and contacts available to the company.

Business Angels rarely have a connection with the company before they invest but often have experience of its industry or sector. The commitment of Business Angels to their investments is often very strong.

The majority of Business Angels make investments for financial reasons. However, there are also other motives for investment, for example, taking an active part in the entrepreneurial process, and the enjoyment from being part of the success of a good investment and the sense of putting something back in.

Angel investors are an important but still under-utilised source of money for new and growing businesses. A typical Business Angel makes one or two investments per year in a three-year period, either individually or by linking up with others to form a syndicate. Some Business Angels invest more frequently. Around £800m is invested by Angels in the UK on an annual basis.
 

Is Business Angel Investing For You?

It is often thought that you have to be very wealthy to be an Angel Investor, but in fact many individuals invest from around £10,000 in any one company, although some Angels invest much more. However, your money is tied up for several years so it must be money outside your normal finance needs.

Business Angels would generally invest between £10,000 and £750,000 in any one investment. Investments are made in return for an equity share in the business. Most Angel investors will take a portfolio approach and invest in more than one company to give a spread of opportunities to diversify their risks.

Angels often invest as part of a group called a 'syndicate'. One investor will generally act as a Lead Investor, sometimes referred to as the 'archangel', and will act on behalf of the syndicate. The vast majority of investments made through London Business Angels are made up of syndicates of investors.

As well as investing money, Business Angels can also bring valuable know-how, contacts and experience to the businesses in which they invest.

Business Angels invest across most industry sectors and stages of business development, but especially in early and expansion-stage businesses.
 

What should you consider before becoming a Business Angel?

• The British Business Angels Association have recently published a useful guide to some of the legal, technical and regulatory issues involved with angel investing.
• It is highly recommended that you obtain legal advice for assessing documentation, structuring the deal and drawing up agreements.
• If you are new to angel investing, it is worthwhile obtaining help from an accountant or corporate financier experienced in assessing business plans and conducting diligence, as well as providing tax advice on the Enterprise Investment Scheme (EIS – see below). You should also discuss certification either as a High Net Worth or Sophisticated Investor, as defined by the Financial Services Authority (FSA) under the Financial Services and Markets Act 2000 (FSMA).
• Plan how you intend to achieve a return on your investment, for example from dividends, fees and capital gains.
• Find out about the entrepreneur and management team's background and track record. Establish whether the entrepreneur, fellow directors or any of the management team have been bankrupt or been a director of an insolvent company.
• If you are new to angel investing, you can learn a great deal investing alongside more experienced investors, of which we have many at LBA.
• Be patient. It takes more time than many investors anticipate to find the right company.
• Finally, do not invest without considering how to exit.

Can you get Tax Relief?

The Enterprise Investment Scheme (EIS) is a most valuable incentive for angel investors. For an investment over £500 in eligible shares, tax relief is given at 30% up to a maximum investment of £500,000 in any tax year, for those individuals and companies eligible for EIS. EIS investments are exempt from capital gains tax if held for three years. In addition it is possible to defer payment of tax on an existing capital gain by setting it against an EIS investment.

EIS is very complex and you are strongly advised to seek help from a tax expert. Please visit www.hmrc.gov.uk/eis for more information.
 

How does London Business Angels help?  

At London Business Angels we take the leg work out of looking for exciting companies, and are a quality, rather than quantity network. We provide our investors with expertly screened EIS eligible deal flow, selecting the 42 most innovative businesses from the 1,000 business plans we review each year.

We have a diverse membership base of both highly experienced (some of our members have been with us for over 10 years) and relatively new investors. This offers the ideal environment for newer members to invest alongside and learn from our more experienced investor members.

We also actively support the professional development of our investors, with a regular programme of Ready 2 Invest workshops and Investor Club Nights focusing on important topics that investors must consider when investing in early stage businesses.

Please click here to find out more about LBA membership benefits.