Lord Flight is Chairman of Flight & Partners Recovery Fund and is a former Shadow Chief Secretary to the Treasury.
The UK needs business angels and has been fortunate in producing them. Much of our economic growth and job creation comes from innovation and most of that takes place with early stage, entrepreneurial businesses. New ventures have never been well served by banks – it is not their job. The importance of angel finance and involvement has been recognised by the Government, who so far, have seen the wisdom of keeping our tax incentives for angel investment.
The term Angel Investor has been around for over 40 years. Business angel investors are simply wealthy individuals who invest their money in early stage companies. Venture capitalists provide similar funding but more typically on a corporate basis. The two economies which have grown large teams of business angels are the USA and the UK. It is estimated that there are some 300,000 angel investors in the USA. Venture capitalists typically do not invest below $1-2m, angels are needed to fill the equity gap this creates.
In 2012, in the USA, angel financing provided $23 billion to 67,000 companies creating 274,800 new jobs – compared to $29 billion of venture capital funding for 3,752 companies. Technology was the predominant venture-backed start-up industry and Silicon Valley businesses accounted for 40 per cent of angel investment.
The technical boom that has exploded in the last few years led to United States venture capital investment mushrooming to $130bn in 10,777 deals in 2019.
In the UK, angels make a significant contribution to the economy as in the USA. It is estimated there are some 15,000 angel-backed businesses in the UK with a combined turnover of £9bn and which have created some 70,000 full-time equivalent jobs.
The best study of UK angel investing is the 2018 British Business Bank Study – the UK Business Angel Market.
The study’s central message is that angels play a vital role in the economy bringing patient capital, business experience, and skills to support growth of smaller businesses. Its main conclusions are that the UK business angel market is maturing; angels now invest patient capital. Angels can help entrepreneurs with business and fund raising and over half of the angels and the businesses they support are in London and the South East. The tax advantages afforded to new companies have been a major factor in their growth.
Investment by angels is a vital bridge between start-up finance from friends and family – and growth finance from venture capital. Almost all aspiring entrepreneurs need money from others. In recent times, venture capital investment and funds have been driven by the success of technology investment. Venture capital funding figures here have been extraordinary. UK early stage companies raised more than £10bn in 2019 – an increase year on year of 44 per cent, and where approximately half the funds came from the US and Asia. The amount invested in the UK was a third of total European investment. UK Governments have recognised the importance of angel funding to the success of new companies which bring economic growth. Here the Enterprise Investment Scheme (EIS) and its sister small cap Seed Enterprise Investment Scheme have provided highly successful incentives to creating angel Investors.
Angels and venture capital differ but provide successfully the range of funding support. Angels invest their own money whereas venture capitals invest other people’s money, usually structured as a fund. Venture capital funds have time scales determined by their Fund structure. Angels have no such restrictions. Angels are quick decision makers. Angel syndicates can be difficult to pull together because they make decisions independently of each other. Angels usually opt for a simple investment structure. Typically, angel investors are older than venture capital investors. They are normally less punitive if things don’t go to plan.
Angels have been extremely important in the UK to the development of innovative young companies. They are a vital presence amongst the providers of long-term capital and essential for ventures needing £2m or less of equity capital.
An interesting picture of business angel investors emerged from the 2018 British Business Bank survey. They are mostly male, white, and live in the South East: the average age is 52 but 61 per cent are over 65: angels typically have 8 years investment experience with 56 per cent having more than 5 years. 65 per cent of angels have made over 10 investments. The most experienced angels invest 22 per cent of their investable wealth while the less experienced invest 14 per cent. The median first investment is £25,000. 79 per cent of angel investment is done as part of a syndicate. Angel investors typically spend one and a half days a week on angel activities. They hold investments for 6 years on average and make use of EIS and SEIS schemes. Typically, angels invest across the commercial sectors but in recent years this has been dominated by technology.
53 per cent of angels thought their portfolio met expectations and 16 per cent of their portfolio exceeded them. 58 per cent of angels over 55 thought their portfolio met expectations and 19 per cent said it exceeded their expectations. The numbers were lower here for this under 55. The two principle reasons for expectations not being met were poor management and a need for more money than anticipated.
All this amazing data comes from Richard Hargreaves’ new book ‘How to be a Business Angel’. I end with his comments on the requirements to be an angel. Angel investing is a risky venture which needs a detailed strategy. Only invest when you like and respect the management and when you accept the risks. Spread the risks and invest systematically. Take advantage of the available tax reliefs. Invest mostly in things which you understand. Do due diligence on the target company and check their claims are true. Avoid investing good money after bad when things don’t go to plan. Above all, enjoy being an angel. If you don’t find it fun, you should not do it.
For civil servants, note that it has been the rising flow of venture capital and angel financed investment which has created the growth and successful new areas of our economy. It has been the EU which has sought, so far unsuccessfully, to constrain the tax incentives which have made these new areas of investment in the UK blossom.