Getting started with Angel Investing
We have put together a brief guide on what angel investment is, who can be an angel investor and how to get started. Please note, however, that this guide does not constitute financial advice and you should seek professional advice before making any investments.
CONTENTS
Can anyone be an angel investor?
Is angel investing risky?
How much do angels usually invest?
What are the tax benefits when investing in startups?
Finding startups to invest in
Evaluating startups Further resources
Can anyone be an angel investor?
An angel investor is simply a High Net Worth individual who invests their own money directly in early-stage companies in exchange for equity in the business. Angels tend to back startups in companies at very early-stages (which can be a very risky investment) before a bank would as well as sometimes providing them with guidance and expertise, hence the term 'angel'.
Whilst anyone with money to spare can essentially act as an angel, if you’re receiving promotional investing opportunities you often have to declare yourself as a High Net Worth Individual or a Professional Investor which, as the names suggest, showcases that you have the capacity for loss and/or understanding of the risks associated with investing.
Is angel investing risky?
Yes. Investing in early-stage companies is an inherently risky way to invest. As an angel investor, you need to be aware of the key risks of your investment. If you understand the risks associated with a particular investment, you have a way to monitor the progress of the company and can perhaps utilise your expertise and provide assistance in the areas of the business that will affect the long-term success of the company.
How much do angels usually invest?
On average, angels tend to invest somewhere between £10k to £500k, although this is not a set rule. The amount an angel will invest will depend on the size of their portfolio but can also vary in each situation depending on how much they like an idea, how much they are planning to be involved in supporting the business, or how much of a risk they perceive it is.
These days, It is possible to invest smaller amounts (from as little as £10) in companies via platforms like Seedrs however you would be classed as an ‘retail investor’ rather than an angel investor as you are not investing directly in the company or providing expertise or advise as such.
What are the tax benefits when investing?
The UK government have some brilliant schemes in place to make investing in early-stage companies a more attractive and rewarding opportunity. Here are the two schemes you need to be aware of:
1. SEIS (Seed Enterprise Investment Scheme) relates to companies that are very early stage and have only been trading for up to 3 years. This scheme provides the investor with 50% of their investment amount in a company back in tax-relief, as long as you have paid it. For example, if you invest £100,000 in an SEIS eligible company you can claim to get 50% of that investment back in tax-relief (in this case that’s £50,000). This means that even if your investment was to fall in value by 50% you have broken even.
2. EIS (Enterprise Investment Scheme) relates to companies that are early stage and have only been trading for up to 7 years. This scheme provides the investor with 30% of their investment amount in a company back in income tax, as long as you have paid it. For example, if you invest £100,000 in an EIS eligible company you can claim to get 30% of that investment back in tax-relief (£30,000). This means that even if your investment was to fall in value by 30% you have broken even.
A few additional benefits of investing under these schemes:
You are exempt from capital gains tax (CGT) on any gains on these investments.
And in the event that a company doesn’t work out, you also receive loss relief for up to 50% of your investment amount (the actual percentafe depends on your income tax bracket).
Visit gov.uk for more guidance on tax relief for investors.
Finding startups to invest in
There are plenty of startups raising funding, and you can find opportunities everywhere! However, the challenge is identifying the good investment opportunities that suit your objectives and finding the founders you would back. Here are some things you can do to expose yourself to new startups:
Research: Keep tabs on local startup news via social media and press. Stay connected with your local business community.
Mentoring: If you have the time, mentoring is a really great way to support a business and really get to know them from the inside. You can then make a judgement on whether you want to invest in them and propose the idea for investment when the timing is right.
Networking: Spend time at local coworking spaces and incubators, and attend their events. You will often meet a variety of startups in these places and even get the opportunity to listen to them pitch.
Angel groups: Groups like SEA work with 100s of investment-ready startups and can connect you with companies based on your preferences, as well as providing you with a community of other angel investors to invest alongside with so you don't have to go it alone.
Evaluating startups
Every angel investor will have their own way of evaluating a startup investment opportunity, and you will create your own as you get started and learn from others. Here are a few things to consider:
At a glance:
- Do I like the team, do they sell the idea/ vision well?
- Do I like the business? (business model, market size, unit economics)
- Are the deal terms reasonable?
- Does this meet my investment thesis/ objectives?
Doing your Due Diligence:
- Look them up on companies house
- Read their business plan
- Analyse their financial forecasts
- Look through any historical accounts
- Check all is in order with shareholder agreements, contracts etc.
- Check for any ongoing litigations, statement of affairs with HMRC, debts etc.
READ OUR DUE DILIGENCE GUIDE
Whilst you can outsource some of the technical stuff to a solicitor or accountant, there is no substitute for doing your own due diligence. Talk to people they work with, talk to their customers - do your homework. It's also a good idea to meet the founders in a relaxed setting and get to know them as individuals. If you like the idea but you don’t like the people - walk away.
Tried and tested resources / Useful Links
Books: Business Angel Investing, Venture Deals, Angel Investing, Innovation Blind Spot
Tax-relief guidance: Gov.uk Guide
