How to build your Angel Investment portfolio and where to start.
Please note: Capital at risk. For professional investors only. Investment in early-stage companies involves risks such as illiquidity, lack of dividends, loss of investment and dilution. Investment in SEIS/EIS funds and startup companies are higher risk and should be considered as part of a diversified portfolio. The availability of tax relief depends on individual circumstances and may change in the future.
“Angel investing” means investing in startups in their early days in return for equity (shares in the company). Business angels invest very early on in the hope that these young ventures will grow and generate a significant return in the future if a larger company acquires them in what is called a trade sale, or if the startup becomes publicly listed on a stock exchange (which remains a rare event in the UK).
Investing in startups is becoming increasingly popular and accessible in the UK. The attractiveness of that market has come from two main factors: the success of a number of UK startups built over the past two decades (Farfetch, Just Eat, Zoopla, Revolut, Wise, etc.) forging a path for many to follow suit, and the supportive policies implemented by the various government bodies over the same period to encourage investment in ventures.
The policy that has had the biggest impact has been the implementation of the Enterprise Investment Scheme (EIS) in the 1990s and the Seed Enterprise Investment Scheme (SEIS) in 2012. Both schemes reward investors in high-growth companies with generous income tax reliefs as well as an exemption of capital gains tax on returns.
Recently, the UK government announced a major extension of the SEIS scheme, which will now allow investors to invest up to £200,000 per year and receive a 50% upfront income tax relief, among other benefits. This makes SEIS probably the most generous tax incentive in the world to invest in startup companies.
These schemes have proven to be extremely popular with private investors who have been investing just under £2bn under SEIS and EIS every year since 2014/2015 (Enterprise Investment Scheme Seed Enterprise Investment Scheme and Social Investment Tax Relief, May 2022). Combining this with a volatile return environment in “traditional” markets explains why we are seeing an increasing number of investors willing to get involved with early-stage investments.
But the early-stage investment market is still relatively young and obscure to non-initiated investors.
So how do you get started?
Crowdfunding platforms
Your first option is to invest through online equity crowdfunding platforms (ECF) such as Seedrs or Crowdcube, which showcase dozens of investment opportunities from startups to scale-ups looking to raise equity funding from the public. The advantage of ECF websites is that they are convenient and accessible to anyone with investment tickets starting at £10. You can therefore build a small portfolio of startup investments relatively quickly.
These platforms are particularly good if you want to invest in emerging brands that you know and love as a consumer and want to support. Crowdfunding's biggest successes include well-known brands such as Brewdog, Monzo or Revolut.
However, these platforms are less suited for investing in very early-stage startups, at an SEIS stage for example, where further due diligence and active involvement are often required to make the investment successful.
Angel Syndicates
If you consider yourself to be a more sophisticated type of investor looking to build a portfolio of investments with tickets of more than £10,000 per company, then you should probably think about joining an angel syndicate.
Syndicates act as filters for investors: they review dozens of investment opportunities and select the best ones, which they then present to their network of investors through physical or virtual pitching sessions.
Investors are invited to participate in the funding round, and also participate in the due diligence and governance of the company post investment. Joining a syndicate and investing alongside experienced angel investors will teach you a lot about the startup world. It will also give you some reassurance that proper due diligence has been conducted and that post-investment support of the company has been put in place.
SEIS/EIS funds
A third option to get started is to invest in SEIS and EIS funds that will give you exposure to a portfolio of startups instead of individual deals. The fund manager handles the selection of the companies and the management of the investments, and you receive the same tax benefits that you get from investing directly in the companies. Investing via a fund is therefore a good option for beginner investors or those looking for tax-efficient diversification.
When looking at SEIS and EIS funds, make sure that the charges are low and transparent as they can vary greatly between providers. You should also look for diversified funds in order to spread your risk across different sectors (technology, life sciences, consumer products, etc.). Various studies have shown that portfolio diversification is a key driver of returns for startup investments, due to the high risk/return profile and over time you should aim to have dozens of companies in your portfolio. Funds help you achieve this more quickly.
Take notice of how open the manager is about its selection process, investment strategy and whether fund investors can remain “close” to their portfolio through regular reporting, events, etc.
At SFC Capital, we have taken this a step further and give the opportunity to investors in our SFC Angel Fund to selectively invest in some of the portfolio companies that they find the most interesting and even take a board seat and become investor directors if they feel like they can actively help.
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