And how much money can your really make?
Becoming an angel investor is an enticing prospect for many, as it offers the potential for substantial financial returns and the opportunity to support and mentor innovative startups. However, it's important to remember that angel investing also involves significant risk and requires considerable expertise and due diligence.
Angel investors are individuals who provide capital for startups in exchange for equity or convertible debt. They often step in after the founder's initial investment and before venture capitalists and other larger investment entities, playing a pivotal role in the startup's development.
The process of becoming an angel investor typically involves meeting certain financial requirements, building a network within the startup ecosystem, gaining industry knowledge, conducting careful due diligence, and finally, making the investments. Here's a more detailed step-by-step guide.
In the UK, angel investing is not restricted to a specific group of individuals.
We've listed the most active angel investors in the UK.
Generally, anyone can become an angel investor as long as they meet certain legal and financial requirements. Here are some key points to consider:
To participate in certain types of investment opportunities, including some angel investments, you may need to meet the criteria of a "sophisticated investor." According to the UK Financial Conduct Authority (FCA) guidelines, a sophisticated investor is someone who has sufficient knowledge and experience in financial matters to evaluate the risks and merits of an investment opportunity. This designation is intended to protect investors by ensuring they have the necessary understanding of the risks involved.
Another category that allows participation in certain investment opportunities, including angel investing, is being a "high net worth individual" (HNWI). According to the FCA, to qualify as an HNWI, you need to have an annual income of at least £100,000 or net assets (excluding primary residence and certain other assets) of at least £250,000.
You can also self-certify as a sophisticated investor by confirming that you have sufficient knowledge and experience to understand the risks involved. This self-certification is typically required when joining an angel investment network or platform.
If you are interested in angel investing at a smaller scale, you can explore crowdfunding platforms that allow individuals to invest smaller amounts in startups. Additionally, the UK government offers tax incentives through the Seed Enterprise Investment Scheme (SEIS) for qualifying investments in early-stage companies.
It's important to note that while there are no specific legal barriers to becoming an angel investor, there may be investment opportunities or platforms that have additional criteria or requirements. Therefore, it's recommended to consult with legal and financial professionals familiar with the regulations and guidelines in the UK to ensure compliance and make informed investment decisions.
The specific minimum investment amounts for angel investing can vary widely depending on the factors mentioned earlier. However, here are some rough ranges to give you an idea:
Minimum investment amounts for individual startup investments can range from as low as £1,000 to £25,000 or more. This can depend on factors such as the startup's funding needs, valuation, and the expectations set by the founders.
Participating in syndicate investments can allow for smaller minimum investment amounts, as investments are pooled together. Minimums in syndicates can start as low as £1,000 or £5,000, depending on the syndicate and the specific investment opportunity.
Crowdfunding platforms often provide opportunities for smaller investors to participate in angel investments. On these platforms, minimum investment amounts can range from as low as £100 to a few thousand dollars, making it more accessible to a wider range of individuals.
It's important to note that these numbers are approximate and can vary significantly depending on the specific circumstances and investment opportunities. Some angel investors may prefer to make larger investments, while others may focus on smaller investments to diversify their portfolio. Ultimately, the minimum amount you choose to invest should align with your financial situation, risk tolerance, and investment strategy.
The returns for angel investors can vary significantly. Many investments may result in a loss, but successful ones can yield substantial returns. According to a study by the Kauffman Foundation, angel investors may aim for a return of 20-30% annually, but the actual return can vary greatly depending on the success of the individual investments.
One oft-cited figure is from a report by the Angel Capital Association which suggests an average return of 2.5 times the invested amount over about four to five years. But remember, this is an average across many investments.
To illustrate with an example, let's assume an angel investor invests £100,000 in 20 startups (a total investment of £2 million). Many of these might fail and return nothing. But if one startup is a hit and returns 30 times the original investment, that single £100,000 investment turns into £3 million. In this case, despite many failures, the overall portfolio has produced a substantial return.
However, it's crucial to remember that these are broad averages and each angel investor's actual experience may differ. The risk is high in angel investing and there's a significant possibility of losing the entire invested amount in a startup if it fails. That's why diversification (investing in multiple startups) is a key strategy for angel investors.
The time it takes for angel investors to make money can vary widely, but typically it ranges from several years to over a decade. This is largely dependent on when the company experiences a liquidity event, such as an acquisition or initial public offering (IPO).
Here are some rough estimates based on data:
Early-stage startups (Seed or Series A): It might take between 7-10 years or even longer for a liquidity event to occur.
Later-stage startups (Series B and beyond): The timeline might be somewhat shorter, perhaps 3-5 years, since these companies are often closer to an exit.
Remember, these are averages and there is a high degree of variability. Some startups may be acquired or go public within a few years, while others may take more than a decade, and some may never reach a liquidity event at all. Also, this does not factor in the time it might take for an angel investor to find and vet potential investment opportunities, which can be considerable.
Keep in mind that startup investing is inherently risky and illiquid, meaning you can't quickly sell your investment like you can with publicly traded stocks. For these reasons, it's important that angel investors be prepared to have their capital tied up for a significant period of time.
If you're an angel investor looking for potential start-ups to invest in, there are several places where you can find investment opportunities:
Organisations like Tech Nation or Techstars constantly churn out innovative start-ups. They've collectively funded thousands of startups.
While they usually operate at a stage beyond angel investing, partnering or co-investing with VC firms can be an option. There are thousands of VC firms worldwide, each with their portfolio of startups.
Face-to-face events, while fewer these days, are still important sources for potential investments. There are hundreds of angel investor groups worldwide that one can join.
A leading equity crowdfunding platform that allows investors to invest in vetted startups. Over 250,000 investors are part of Seedrs network and the platform has funded over 150 startups to date.
Crowdfunding websites where startups pitch their business to the general public. It's not strictly an angel investing platform, but you can find interesting early-stage businesses here.
Remember, it's not just about finding any start-up, but the right start-up that fits your investment portfolio and strategy. Also, it's essential to perform due diligence before investing in any start-up to understand the business model, growth prospects, and potential risks.
Becoming a successful angel investor often requires a combination of financial acumen, strategic decision-making, patience, and sometimes a bit of luck. Here are some key steps and strategies often followed by successful angel investors:
The general rule of thumb for angel investors is to invest in a diversified portfolio of startups to spread the risk. It is generally recommended to invest in at least 20-30 different startups, as the failure rate can be high.
The Startup Genome Report Extra on Premature Scaling suggests that up to 90% of startups fail. So, angel investors typically invest only a small portion of their wealth in startups. The exact percentage can vary, but a common figure is around 10% of one's investable assets.
Angel investors often invest in industries where they have personal experience or knowledge. This helps in assessing the viability of a startup's business model and the potential market opportunity. So spend time learning about the industry sectors that interest you.
Spend significant time (often 20-40 hours per company) on due diligence, scrutinising the startup's business model, team, market opportunity, and financial projections.
Building relationships with other angel investors, venture capitalists, startup founders, and attending startup events can provide valuable insights and deal flow. It's suggested that successful angels are members of at least 2-3 networks.
Angel investors often provide mentorship to the founders they invest in, sharing their expertise and connections to help the startup succeed. Active engagement can increase the likelihood of a startup’s success by up to 3.7 times according to a study by the Harvard Business Review.
Be prepared for a long-term commitment. It can take 7-10 years or more to see a return on an investment, if it comes at all.
Staying updated with trends in angel investing and the startup ecosystem can help in making informed investment decisions.
Remember, even with these strategies, angel investing still carries a significant risk and is not suitable for everyone. It's advisable to consult with a financial advisor or professional before getting started.