Back

Becoming an Angel

Becoming an Angel Investors

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). 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 player acquires them or if they become a publicly-traded company.

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 UK startups built over the past two decades (ASOS, Just Eat, Zoopla, Funding Circle, 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.

These schemes have proven to be extremely popular with private investors, investing c. £2bn into high-growth ventures under SEIS and EIS every year since 2014/2015 (Enterprise Investment Scheme Seed Enterprise Investment Scheme and Social Investment Tax Relief, May 2020). Combining this with a low 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, Crowdcube and Syndicate Room, which showcase dozens of investment opportunities from startups 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.

However, you should be aware that the risks are extremely high: the number of failures on these platforms is high (possibly higher than reported currently) and, despite the tax relief, you should remember that your capital is at risk. It has been reported that the due diligence conducted by some of these platforms is minimal, and that the reality of some of the businesses raising funds can be very different from the picture presented on the website. Remember that these platforms act as “brokers” and do not claim to conduct extensive due diligence or to support the businesses after they get funded.

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 £5,000 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 pitching events and online platforms. Investors are invited to participate in the funding round, and also participate in the due diligence and governance of the company post investment. Investing alongside experienced angel investors will teach you a lot about the startup world, it will 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 through a startup fund. There are a number of “SEIS/EIS funds” that give you exposure to a portfolio of startups. The fund manager handles the selection and the management of the investments and you receive the same tax benefits 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 startup 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.). Advisably, observe how open the manager is about its selection process, investment strategy and whether they allow investors to be “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.

 

By Joseph Zipfel – Chief Investment Officer at SFC Capital

Joseph Zipfel
Chief Investment Officer