Invested Investor Thoughts: My motivation to become an angel investor
This is about what motivates people to become business angels and the pros, cons, joys and heartache.
Some of you will know that I stumbled into angel investing. I was mentoring a few graduates from Cambridge University’s computer science course, some of whom had recently entered the workplace and some had had many years as an employee or entrepreneur.
A memorable entrepreneurial mentee had purchased a water tower. His office was in what had been the water tank and had the best views of anywhere in Eastern Cambridgeshire. Like many, he was trying to pivot from a successful service business into a much more scalable product company. Another memorable aspect was Zebedee, the name of his first child.
However, it was another graduate entrepreneur, Martin Kleppmann, who sealed my fate by asking for an equity investment in order to start a company with his co-founder, a law graduate from the same university. I agreed and joined his board as a non-executive director. Ept Computing’s journey lasted about three years and resulted in a very decent multiple on the acquihire/IP company sale.
Although 15+ times a pretty small number did not lead to a life-changing exit for me. I learnt the term ‘angel’, that there was an ‘angel industry’ providing capital and help to start-ups, and that I really enjoyed it, which I would still have done even if the company had failed.
I have learnt that people invest in early-stage, high-risk start-ups for several reasons, none of which is mutually exclusive, nor in any order of priority:
· The potential for making a significant return.
· Tax reliefs (this applies mostly to the UK) where, with a number of conditions, the UK government subsidises the investment and both the failures and successes. This means that the investor loses no more than half their investment, and on a positive exit does not have to pay capital gains tax (currently 20%). Almost all UK early-stage investors use the tax relief scheme and it is said that a large proportion would not invest without them. For me, tax reliefs are secondary to the quality of the team and opportunity, although, I do use the tax reliefs when they are available.
· Spending time with and helping the entrepreneurs, both before and after investment. Although many investors may wish to help, it is only a small proportion who allocate much of their time doing this, we call these invested investors.
· Learning about new markets, technologies and business models.
· Social aspects and education of belonging to a like-minded group of people, whether organised or not.
· Supporting the local entrepreneurial ecosystem. It is easier to help entrepreneurs face-to-face and this is less time consuming if they are relatively local.
· Supporting entrepreneurial family and friends.
Although there is no agreement on this, I think that the term angel should only apply to investors who provide so-called ‘smart’ capital, i.e. help and connections together with money.
But there is nothing wrong with providing capital alone, which is unfairly called ‘dumb’ money, but more properly called passive capital. All start-ups which have decided to raise equity capital are unlikely to fill an investment round with smart capital then passive capital is essential.
I had a coffee with someone recently who has been helping five early-stage companies with paid advice and we talked through whether he should invest cash in order to be an angel as well as a consultant. It soon became clear to him that the risk appetite of both he and his spouse was too low for him to invest, despite the UK tax reliefs. I suggested he try a small amount of money via a crowd-funding platform to validate that.
So, the first question to ask yourself is “do I mind ‘writing cheques’ for thousands or possibly even hundreds of thousands of pounds before I get an exit, and hence some money back?”
This is where coming from an entrepreneurial background makes the decision easier, as entrepreneurs inherently take risks. And entrepreneurs can generally help another entrepreneur better than those from a corporate background, as they have empathy and experience and will have made many similar mistakes to the new founders.
To conclude, I recommend, like any fairly major decision in life, you research both on and offline before committing to angel investing. Don’t start unless you have the time and financial capacity to build a portfolio of at least 20-25 investments (the statistics show that smaller portfolios are likely to return less than the amount invested), then have patience (good exits generally take many years), help your investments (when you can) and enjoy the experiences.