LBA Ready 2 Invest Workshop: the Risks and rewards of Angel Investing
Business Angel investing is increasingly in the spotlight in the current economic climate and especially with the Government’s new focus on private sector-led growth. Yet angel investing in early stage businesses still remains a little understood asset class, whilst offering the potential for significant returns.
With this in mind, the London Region ICAEW was host to a special workshop organised by London Business Angels on 22 February 2011 to enable ICAEW members to find out more about the art of angel investing and to understand how to maximise success from making angel deals.
Jenny Tooth, Director of Angel Capital Group and London Business Angels, introduced the topic and gave an overview of the Business Angel market in the UK. Drawing on statistics from recent research of the British Business Angels Association, LBA and from Enterprise Investment scheme returns to Treasury, Jenny demonstrated how Angel investing has grown in significance with over £500m being invested through the EIS scheme in 2009-10 and with a further estimated £200m being invested outside the scheme. This revealed that Angel investing remains year on year at least twice as significant as VC finance as a source of equity for early stage businesses. She also identified that the face of angel investing is changing with Angels no longer operating as lone rangers, and a growing trend towards Angels investing in syndicates to pool their resources, sharing deals, expertise and due diligence. This means that Angel investing is “not a minority sport”, explained Jenny, business angel investing is not just for extremely wealthy individuals, but is open to a very wide range of individuals with some spare additional financial capacity. Through syndication, investments as low as £5,000 can be made in an individual deal, with potentially 10-15 angels joining together to create the level of finance needed, generally with one Angel taking the lead in ongoing relations with the investee business.
Having made over 30 investments himself in small businesses, Anthony Clarke, Managing Director of LBA and a chartered accountant and ICAEW member himself, went on to confirm the importance of drawing on his own professional business finance knowledge as an angel investor. Accountants and finance professionals such as ICAEW members are ideally placed to make the most of angel investments, he affirmed. You are in a position to bring your business acumen and knowledge to both carry out effective due diligence in making the deal, especially on the financials and business model which are often the areas of weakness in early stage businesses. You are also able to bring your experiences well as your extensive contacts and knowledge to follow your deals and ensure successful growth of your portfolio businesses.
Angel investing remains a risk and this should not be ignored explained Anthony, but he was also able to show through recent research carried out by BBAA and NESTA National Endowment for Science Technology and the Arts ( “Siding with the Angels” May 2009) that significant returns of up to 22% IRR can be obtained across an angel investment portfolio. Whilst this also showed that potentially 50% of investments can fail,there are however strategies that can be taken which have been shown to be effective in mitigating risks and improving likelihood of success. This includes making a number of investments across a mixed portfolio to spread your risk, carrying out at least 20 hours due diligence on the business before making an investment, also through investing in sectors or business areas where you have had some experience or have knowledge, and finally through regularly following up your investments, putting in relevant strategic advice.
Charles Frank , Speechly Bircham LLP, took the participants through the legal processes involved in a typical angel deal, focusing on the Term Sheet looking at specific areas where angel investors need to be attentive in order to avoid ongoing problems and maximise success. Charles pointed out that valuation is a key consideration when agreeing the equity stakes and which can frequently be a sticking point between the entrepreneur and the investor. Among other issues, he identified intellectual property rights and identifying IP ownership as an important area to gain assurance . Ensuring that relevant protections are built into the term sheet was recommended both in terms of warranties and undertakings and ensuring systems for ongoing control and board representation are in place. Provisions to support Exits are also essential since this is often an area where relationships can break down.
Taking advantage of tax breaks to maximise your investments was emphasised by Mike Hayes of Kingston Smith Chartered Accountants. Whilst there was extensive knowledge of the tax system among the participants, Mike was keen to ensure that investors fully utilised the opportunities available under the Enterpise Investment Scheme to offset their risks. Whilst many areas of tax are being increased the EIS scheme remains an important instrument, ring-fenced so far, to promote angel investing, offering both 20% tax relief on all qualifying angel investments, as well as relief on capital gains Tax and Inheritance Tax deferral. The importance of using other tax reliefs throughout the ongoing investment process was also pointed out, including Entrepreneurs Relief now at £5m lifetime operating gains and use of earn-outs at Exit. Whilst for angel investments that fail the opportunity to gain loss relief was an important cushion not to be ignored.
Key tips for investing included what to look for in a deal and the importance of confidence in the entrepreneur and the management team to execute the business plan was paramount in doing angel deals where there was not an established business to asses. A lively discussion followed and it was concluded that whilst you can bring professional knowledge and experience to fully review the business plan and forensically check the financials, there is still an element of “following your instincts” which has to come into play. This underlines the importance of investing as part of a syndicate along side others who may have more experience of the specific sector or market , especially when doing your first angel deals, Anthony Clarke emphasises.
The Ready2Invest programme is being operated by London Business Angels and further workshops are being organised throughout 2011. LBA holds regular company pitching events presenting 6 businesses every 6 weeks to a group of angel investors and individuals looking to become an angel investor are welcome to attend as a guest. If you or your clients are interested in any of these opportunities or would like to have more information about LBA from an investor's perspective, please contact us at firstname.lastname@example.org; 020 7321 5672 or visit www.lbangels.co.uk to find out more.
This article was featured in the March 2011 issue of the London Accountant. Please visit www.iceaw.com for more information.