Business angels and new businesses: a match made in heaven?
Business angels can be a crucial resource for fledgling firms, helping them survive and thrive. For investors, the risks are high, but the rewards can be spectacular, says David Prosser
For entrepreneurs, the plateau effect is an all-too-common phenomenon. They get their business up and running, prove to themselves that their big idea works, and even begin to make some sales. Then they face some harsh realities. How will they turn this early-stage business into a commercially viable enterprise when they lack the funding, the experience and the connections to make such a leap?
Stuck on this plateau, as many as 60% of new UK businesses fail in their first three years. But for a growing number of entrepreneurs, there is now help at hand. The UK is home to 10,000 active business angels seeking to support these early-stage ventures.
“Our business-angel community is the same size as the rest of Europe’s put together,” says Roderick Beer, managing director of the UK Business Angels Association (UKBAA). “We’ve been doing this very successfully for the past 30 years.”
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Business angels are individual investors who take small stakes in immature businesses, either working alone or alongside other angels. Their investment provides valuable funding for the company as it grows, but angels also provide all sorts of additional support: business advice and mentoring; introductions to potential partners; customers and employees, or even just a shoulder to cry on.
“Being a business founder can feel very lonely,” says David Pattison, an angel who has invested in a dozen companies over the past decade or so. “I describe myself as a wingman. I’m here to help in any way that I can.”
Pattison has provided much-needed finance to each of the firms he has backed, but his expertise and experience have arguably been more important. Now in his sixties, he spent most of his career in advertising, launching his own business in 1990 before selling it six years later. After studying at Harvard Business School and stints in agencies around the world, he took over as CEO at a digital media company and sold that too.
Business angels: a blessing in disguise
In other words, he is familiar with most of the challenges and opportunities that entrepreneurs are likely to face, and he enjoys sharing his wisdom. “I have absolutely no desire to be the big dog these days, but I can help CEOs to avoid making all the mistakes I made when I was doing their job,” Pattison adds. “They’re spinning so many plates, so if I can catch one before it falls to the floor and breaks, that’s my contribution.”
This is partly why Pattison has chosen to invest in businesses and industries that he feels he understands well. He points to Gravity Road, a digital communications agency where he invested shortly after its launch in 2011. “We got through some very difficult times, but the business was very successful, and we eventually sold it to [The Brandtech Group],” he says.
More recently, he has invested in Vyde, which is using chatbots in the advertising sector. “Covid hit the business hard, but it has recovered well and it’s got a fantastic board who I love working with,” Pattison adds. “I think I’ve made a real difference.”
Naturally, it’s not an entirely altruistic endeavour. Business angels hope to make some money too, even if some of their investments crash and burn. “The returns can be really attractive,” says the UKBAA’s Beer. “It’s a long-term game, with plenty of risk, but the rewards when it goes well can be outstanding.” It helps that successive governments in the UK have been keen to encourage investment in early stage firms, providing a range of generous tax perks to those prepared to put their money at risk. Most notably, around nine in ten investments made by angels qualify for the enterprise investment scheme (EIS).
This provides upfront income tax relief at 30% on investments of up to £1m a year in qualifying companies, and there is no capital gains tax (CGT) to pay on any profits eventually made on the investment. You can also defer any CGT due on previous investment profit if you invest that money through the EIS.
Companies qualifying for the EIS usually have to be less than seven years old, be worth less than £15m and have fewer than 250 employees. A separate initiative, the seed enterprise investment scheme (SEIS), offers even juicier tax breaks to angels investing in the smallest and most immature businesses.
Newer platforms help find business angels
Such support has undoubtedly attracted more business angels, says James Badgett, founder of the Angel Investment Network (AIN), but technology has also helped. The AIN is an online platform on which businesses looking for funding can tell the world about themselves – it effectively functions as a dating service matching angels and entrepreneurs.
“We see ourselves as democratising access to angel investment,” explains Badgett. “In the past, entrepreneurs looking to connect with an angel had to rely on their own networks and were typically limited to investors operating in their local area or their industry; platforms make it possible for them to appeal to a much broader audience of angels.”
One related impact of the platform approach is that angels are now investing smaller sums. Badgett says that while the average angel on AIN puts £75,000 into a business, this figure is skewed by some much larger investments; a £25,000 investment is typical.
Clearly, this is a big sum, especially as most angels look to make a number of investments to diversify risk. Still, Beer argues: “It’s myth that you have to be hugely wealthy to become an angel investor.”
Rather, in some cases angels are simply well-off individuals who have made full use of other tax-efficient investment opportunities (individual savings accounts, private pensions, venture capital trusts and so on) and are now looking further afield. Some of these angels may not be well placed to offer broader practical support, but not every company is looking for that.
In practice, some entrepreneurs want more engagement than others, says Stephen Castle, an angel who has backed 50 companies over the past five years. “Some are so good that you just leave them to it, while others need much more hand-holding.” Still, for Castle, whose career spanned a series of senior finance roles in insurance, working with entrepreneurs is a big part of the appeal of angel investment.
“Someone like me never really retires and when I left the corporate world, I knew I wanted to find a new group of people who would stimulate and challenge me,” he explains. “Most of the people I invest in are in their twenties and thirties; they’re incredibly smart and full of energy, and they have huge amounts of expertise. What they lack is the experience, the contacts and the money.” In this case, the contribution of someone such as Castle can be the difference between business failure and stellar success. However, that also makes it important that a wide range of entrepreneurs can benefit. And one concern about the business-angel movement is its lack of diversity. As one seasoned angel puts it, “all our events are far too pale, male and stale”.
Indeed. Women account for just 14% of business angels in the UK, with predictable consequences. Data from market research group Beauhurst suggests that 74% of angel investment over the past two years went to businesses run by all-male teams. Female angels, by contrast, invest an average of close to 30% of their money in women founders.
Some efforts are being made to address this gap. The Women Backing Women campaign, for example, hopes a third of angels will be women by 2030, thanks to increased education, mentoring and knowledge sharing. Networks such as Mint Ventures, a women-led angel investment group, are leading the way.
Improving diversity among business angels
Still, there is a lot of work to do, says Triin Linamagi, a founding partner of Sie Ventures, which runs an angel syndicate consisting of 130 angels, 70% of whom are women. Naturally, she notes, middle-aged white men invest in businesses run by other middle-aged white men. “That means many women entrepreneurs are struggling to secure the funding and support they need,” she says. “It also means investors are missing out on some incredible opportunities.”
She points to Jude, a firm she has backed personally, where CEO and founder Peony Li and her team have developed a range of innovative new products aimed at women struggling with bladder control. “Incontinence problems affect huge numbers of women, often at a relatively young age, but it’s an issue no-one ever talks about,” says Linamagi. “It’s therefore an industry that has been dominated by incumbent providers offering old-fashioned products. There is a massive opportunity for a disruptive new entrant such as Jude.”
The sustainability sector is another exciting area where female founders are often leading the way, Linamagi believes. She has invested in Shellworks, co-founded by CEO Insiya Jafferjee; it has developed a new bio-degradable material that can be used instead of plastic packaging. “Angel investors have a huge role to play in supporting female entrepreneurs,” argues Linamagi. “They’re even less likely than their male counterparts to have access to the sort of networks that entrepreneurs need in order to take their businesses to the next level.”
Like many other business angels, Linamagi began investing after a successful career as an entrepreneur in her own right, building and selling three firms in the financial technology sector. Her first investment, in the travel business Mr & Mrs Smith – sold to the international hotels business Hyatt last year – inspired her to continue backing early stage companies and more recently to launch the angel syndicate she now runs. It has made 13 investments in the past 18 months.
“When you’ve seen that you can genuinely add value to a business, you want to go on that same journey with other companies,” Linamagi adds. “Especially where you really believe in the business and its founders.”
It’s the sort of testimonial that gives the UKBAA’s Beer confidence that the sector can build on the 7,000 deals or so it is currently completing each year. “What people don’t understand about business angels is that we are very often the only source of capital for these early stage companies,” he says.
“There’s a tiny amount of venture capital on offer to these businesses, and while agencies such as Innovate UK provide important support, it’s often only available where the money is matched by private investors.”
For that reason, the UKBAA is particularly pleased that the government has dropped plans to change its definition of high-net-worth investors. At present, investors with an income of at least £100,000 or assets of at least £250,000 count as high-net-worths for the purpose of financial regulation.
This exempts organisations such as angel platforms from more onerous rules about communications and promotions. Ministers had announced plans to raise the thresholds to £170,000 and £430,000 respectively, which angels warned would damage their community, but ministers then U-turned on the proposal last year.
“What we need to encourage is a cycle of funding,” says Beer. “We want to see angels investing in businesses, improving them, and then selling successfully so they can recycle the proceeds into the next business and start all over again.” Get it right and both angels and entrepreneurs will share in the spoils, Beer says, with plenty of personal fulfilment along the way.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Join more than 165,000 subscribers and keep yourself informed with the latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.