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The Opportunity in Angel Investing

Posted on June 23, 2021 Written by Administrator

For many of us angel investing may feels inaccessible, an option for the multi-millionaires or industry titans we see on shows like Dragons’ Den. As a result, instead of exploring this exciting asset class, we put our investments into options we are more familiar with – safer options such as stocks and mutual funds.

But the reality is that angel investing is something more people should consider. If you have capital to invest, angel investing is an option you should consider. Like all investments it does carry risks, but it also offers potentially exciting rewards.

Here we will cover the basics and importantly explain how angel investing can offer potentially higher returns than many of the more traditional and familiar investment options.

What is an angel investor?

Angel investors invest their personal capital into unlisted businesses in exchange for shares in that business. More than just cash, angels typically offer wider benefits to investee companies in the way of mentorship, advice, acting as a non-executive director or making vital introductions to their network of contacts.

Most angel investors are classed as ‘High Net Worth Individuals’ (HNWI). It is this terminology that likely conjures up the images of three-piece suits, designer watches and luxury cars – making angel investing feel inaccessible. The reality is that to be considered a HNWI, you need an annual salary of at least £100,000 or net assets, excluding property and pensions, worth £250,000. That’s more people, than you’d think – at least half a million in the UK according to Statista.

The other common type of angel investors is termed ‘Sophisticated Investors.’ To be classed as sophisticated, you must either be a member of an angel network, have invested in another unlisted company in the last two years, have worked in a professional capacity in the private equity sector or be a director of a company with an annual turnover of £1M+.

Business angels will usually put in between £5,000 and £500,000 in a single venture and will aim to build a portfolio of investments over time.

Potential returns

While angel investing is riskier than other asset classes, and is less liquid, it does have the potential to offer greater returns.

Data collected in the US in a 2017 Willamette University study on angel investment returns calculated that the average return for angel investors is 2.5X, which alongside an average investment time span of 4.5 years indicates a gross internal rate of return of 22%.

This compares very favourably with more traditional investment vehicles:

Mutual funds – Not even the best performing mutual funds of all time will break 20% average annual return, and most of them will not go over 15%;
Index funds – Industry favorite, the S&P 500 has provided an average annual return of 13.6% since its inception;
Bonds – During the pandemic, UK interest rates on bonds have been cut to 0.1%;
Stocks – The average return on a Stocks and Shares ISA in the UK is 5.14% (April 1999 to April 2020).

A more recent study by FounderCatalyst published in January 2021 showed that angel investments yielded an average 2.77 X return. Furthermore, with the additional benefit of EIS tax relief that grows to an average 3.19 X return.

Under the HMRC’s Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), angel investors receive income tax relief of 30-50% on funds invested in startups and early-stage businesses. This fantastic scheme has helped to raise £1.929 Billion for 3,920 companies yet is still surprisingly unknown to many potential investors who could benefit.

It is worth pointing out here again that averages are averages. Any experienced angel will tell you that many companies take much longer than 4.5 years to mature and exit, and more fail than have home runs. But, on average, angel investing appears to perform well in the long run versus other asset classes.

Why become an angel investor

Yes, it makes financial sense to invest in early-stage companies, as they can provide an unparalleled rate of return on your investment, and you can take advantage of generous tax relief schemes.

But many do it for more altruistic reasons. As an angel investor you offer value to a young company not just in the form of hard cash, but also in the form of advice and a strategic direction stemming from your experience. Typically, angels are evangelists for the businesses they support – be it the use of big data in medicine, the implementation of AI in charity/corporate matching, or the development of energy saving computers. And everybody loves to hear about the little business you invested in which is about to be merged into a billion-dollar Special Purpose Acquisition Company (SPAC).

Developing a portfolio

According to the Willamette University study, angel investors get positive returns less than half the time they invest in a company. In fact, they register losses on around 70% of investments, and just 10% of their exits generate 85% of all returns. Diversifying your portfolio is key when trying to improve your return rates.

Looking at the rate of return on original investment of 300 exits from 2018/19, the data shows that angels’ odds of significant returns increase with the number of investments. The FounderCatalyst report states that a portfolio of investments in three companies is likely to yield, on average, worse returns than a portfolio of investments in 10 companies.

However, unless you are Dragons Den’s Deborah Meaden or Peter Jones, opportunities may not always come to you. In fact, having enough deal flow to increase and diversify your portfolio can be a challenge.

One solution is to join an angel network. Well-established and properly regulated networks have investment specialists pre-screening deals, ensuring information is clearly and fairly presented and curating opportunities based on your interests. A good network will be listed on the Financial Conduct Authority (FCA) register and will follow FCA guidance which is all intended to help minimise risk.

Investors that join a network:

Gain access to deal flow;
Lower their risk by receiving support in the due diligence phase;
Diversify their portfolio;
Join a community of like-minded investors;
Can make a more meaningful and more sizable investment through syndication.

According to research firm Beauhurst, the most active angel networks in the UK right now are:

In most cases, there is no need for a recommendation in order to gain access to investment networks. Angel investing is available to you from the comfort of your own home, as the most active networks, like Envestors, will use digital platforms to share their opportunities.

I hope you can see that there is opportunity in angel investing for you to consider.

ABOUT THE AUTHOR

Gavin Heys is director of Envestors Private Investment Club where he works closely with investors to help them find the right opportunities for their portfolio. He has raised over £15m for companies including Draper and Dash, Censornet and F45 among many others.

Envestors’ Private Investment Club and digital investment platform bring together entrepreneurs and investors across geographies, communities and sectors – creating the single marketplace for early-stage investment in the UK.

Founded in 2004, Envestors has helped more than 200 high growth businesses raise more than £100m through its own private investment club.

Envestors is authorised and regulated by the Financial Conduct Authority.

Web: https://www.envestors.co.uk/

LinkedIn: https://www.linkedin.com/company/envestors-llp/

Twitter: @EnvestorsLondon

What does the decline of iconic retailers mean for early-stage investing?

Posted on May 7, 2021 Written by Administrator

We’ve recently seem the demise of several iconic high-street retailers. Something that would once have seemed completely unimaginable.

For example, Debenhams with its two hundred plus years of history, and the younger Top Shop, often described as the jewel of the high street, both found they could no longer compete and fell into administration.

Evidenced by the calls to save the high street, it is well recognised that the way we shop has forever changed. We’re shopping online while in bed, at work and for 20% of us– from the bathroom.[i]

But, what does that mean for early-stage investing?

It’s easy to write this off as consumer behaviour that has nothing to do with investing. However, that would be short sighted.

Purchasing decisions begin online

Whether you’re a B2B buyer or a consumer, the buying process begins with online research. A Google study confirmed that 92% of people begin their buying journey online. That leaves only 8% wholly reliant on other means to investigate purchasing decisions.

Do angel investors fall into the missing 8%?

A PWC study found that 98% of them use the internet daily^[ii] and for up to three hours. Beyond this, a second study by Accenture Consulting^[iii] confirmed 83% use digital for financial services. Both of these studies are several years old, and it is reasonable to assume that the use rates of digital have increased since then.

So, if you’re a network promoting investment opportunities and you’re not using the online channel, you are missing out on a key phase of the investors’ journey.

Forget customer loyalty

Networks which don’t offer the convenience of an online channel to their investors may believe that it doesn’t matter; your investors have been with you for years and are loyal.

Another look at retail proves that there is no such thing as customer loyalty.

The loyal customer base that Debenhams and Top Shop built up, slowly trickled away as new digital-first players came in and offered a better, more tailored experience.

It’s easy to blame the pandemic. But the truth is that Covid-19 was but the last nail in the coffin for these iconic retailers. Both were struggling before Jan 2020. The reason: they weren’t giving their customers what they wanted.

Generations grew up, times changed, new savvier players like Asos, came into the market – and their once-loyal customers left.

Customers are only loyal for as long as it suits them. If something better comes along, they will move on.

What we’re seeing in the early-stage investment market is a number of new digital-first investment clubs like the Envestors Private Investment Club, Angels Den, or Chorus. These next-generation investment networks are the Asos of the investment space. They understand that investors want always-on, self-service access to deals and they are ready to deliver.

Building relationships on shared interests, experiences and data

The retail giant Amazon, for example, knows more about its customers than they’d probably be comfortable with. They collect data from every interaction, and use it alongside trend data from other customers, in order to help users make buying decisions.

Can angel networks say the same thing?

Do you really know what your investors are interested in without taking advantage of all the options digital has to offer?

Investment networks are reliant on face-to-face interaction and personal relationships. Now, relationships are crucial to early-stage investing. But data can be used to empower your existing relationships.

With online platforms you can collect data on investor interests – both those they state explicitly and those you can infer based on their online behaviour. This data, at both the individual and macro level, can be invaluable to you in catering to their needs.

Another application is in deal selection. With data on which deals are getting the most engagement you can start to look for similar deals to bring to your investors.

A changing market

The early-stage investment space is a traditional one – for now. But as we saw in the retail example, traditions can be supplanted as quickly as a Prime delivery.

Many factors drive an industry to change. In the case of early-stage investing it will be the core players in the market. That is the investors and the companies raising finance. They are getting more and more used to a digital first experience and the investment clubs that serve them need to stay one step ahead of their needs. When this doesn’t happen, heritage organisations fall, and new giants emerge.

Needs have undoubtedly changed. We are at a point where people expect an always-on, personalised service. They like to be empowered to do their own research and to drive their own agenda and without a digital offering they have to wait. Today, no one expects to wait.

Traditional networks need to take action or find themselves falling behind their newer rivals who have digital offering catering to the needs of today’s investors.

ABOUT THE AUTHOR

Envestors partners with accelerators, incubators and angel networks to provide a white-label platform empowering them to promote deals, engage investors and connect to other networks.

Founded in 2004, Envestors has helped more than 200 high growth businesses raise more than £100m through its own private investment club.

Envestors is authorised and regulated by the Financial Conduct Authority.

Web: https://www.envestors.co.uk/

LinkedIn: https://www.linkedin.com/company/envestors-llp/

Twitter: @EnvestorsLondon

[i] https://kinsta.com/blog/ecommerce-statistics/

[ii] https://www.pwc.com/sg/en/publications/assets/wealth-20-sink-or-swim-gx.pdf

[iii] https://www.accenture.com/t20150703T033306__w__/_acnmedia/Accenture/Conversion-Assets/DotCom/Documents/Global/PDF/Dualpub_17/Accenture-High-Net-Worth-Investors-Gen-D-Europe.pdf

Time to get off the buy-to-let bus

Posted on May 1, 2021 Written by Administrator

There was a time when being a landlord was a sure-fire way to make a good return on your money. Not only did you get reliable equity growth over the long term, you also had the benefit of rental income from your tenants while you waited for the value of your bricks and mortar to increase.

In recent years, the wheels have started to fall off the rent-to-buy bus. The first screech indicating trouble came from George Osborne back in 2016. He saw landlords as a soft target for beefing up the treasury’s coffers, and over the next four years, landlords’ buy-to-let mortgage interest and fees ceased to be tax-deductible. This made a significant number of portfolios unprofitable and forced thousands of landlords to leave the market altogether.

As if this wasn’t enough, the government also introduced a 3% additional stamp duty penalty for all second home purchases, including landlords purchasing buy to let properties. This significantly increased the cost of entry into property investment and dissuaded many people from entering the fray.

But not all of the bad news has come from the taxman. The rental sector has seen a significant increase in the amount of regulation directed at landlords. Rogue landlords—those failing to provide decent and safe accommodation for their tenants—have been rightly criticized in the media. Consequently, the regulatory requirement now imposed on landlords has stepped up significantly, and this has added substantially to the cost of maintaining a rental portfolio.

So, where does this leave existing and prospective landlords today? Is property investment still a good long-term strategy, or has the taxation and regulatory reforms over the past five years made the prospect of property investment unviable for the investor looking to generate long-term capital growth and income?

Interestingly, the government has recently gone out of its way to create some significant property-related opportunities. These opportunities lie not in acquiring buy-to-let properties but in building the new homes that will help the government reach its 300,000-a-year target. They have done this by creating a raft of permitted development rights that allow non-residential buildings to be converted into residential homes without the need for planning permission. The answer, says the government, is to convert the ever-increasing number of brownfield sites that are well-suited to redevelopment as housing instead of building on our highly prized green belt.

But surely the major homebuilders have got this market sewn up? As it turns out, they haven’t. The significant majority of brownfield opportunities sit way below the scale necessary to interest the likes of Messrs Barrett, Persimmon, and Taylor Wimpey. The government has recognised this and is instead targeting small-scale developers, many of whom will be undertaking development projects for the first time.

This repository of buildings that are ripe for residential conversion has been increasing of late – look at the number of redundant stores in the wake of the recent collapse of Arcadia, Debenhams, et al. As our shopping habits have changed, so many High Streets have become ghettos. As these primary brands depart our town centres, the secondary retail around them is also affected. There is likely more to follow; when the furlough scheme ends, we will see a significant number of businesses collapse, and their properties, whether retail, commercial or industrial, will become vacant. One struggles to envisage there will be a sea of buyers waiting to snap them up.

So what’s the government’s plan? Well, they would like to convert many of the empty properties in our town centres into residential homes. And with people living once more in the centre of our towns, this will fuel demand for the ancillary services and facilities that the local population will require. This will include entertainment, dining venues, and boutique-style shops, where town centres once more become a destination for shopping and entertainment.

Where does this leave the humble landlord? Surely property development is more complex than snapping up a couple of buy-to-lets? Interestingly, the strategies are not as diverse as you might think. Some landlords undertake a renovation or a conversion of their buy-to-let properties before they rent them out, and many small-scale development projects are not much more complex than that. It is a highly leveraged business. The small-scale property developer has an army of professionals on their team, including a project manager, all of whom have a significant amount of experience in development. The developer’s key actions are identifying the opportunity, appointing the team, and ensuring the finance is obtained.

Ah yes, the finance. Don’t property developers need to have a small fortune in the bank to develop their projects? The answer in most cases is ‘no’. Whereas landlords typically fund their buy-to-let deposits personally, developers often secure a significant part of their deposits from private investors. The remainder of the asset capital and the development funding is obtained from a single commercial lender.

What are the skills that this new small-scale developer might need? Interestingly, very similar skills to those of a landlord, senior manager, or business owner. There has to be an overarching understanding of what’s involved in development, but most of the heavy lifting and technical issues are delegated to the professional team.

So, what are the advantages of development over buy-to-let investments? Well, one major difference is the speed with which capital is created. You can expect a small-scale development project that would typically return a six-figure profit to be completed within 12 to 24 months. For a buy to let investment, the pay-back period is usually a lot longer.

Arthur and Martha are a case in point. Both have £50k to invest in property, and each quite likes the idea of buy-to-lets. Arthur is a traditional sort, and he uses his £50k as a deposit on a £200k three-bed semi and then rents it out to a nice family. He clears around £300 per month in profit, but it will be several years before his equity growth enables him to remortgage and raise a deposit for buy-to-let number two.

Martha, on the other hand, uses her £50k as the deposit on a small development project, a retail building that can be converted into flats using permitted development rights. She obtains the remainder of the financing she needs through a commercial lender, and she expects to receive her profit of £150k within 18-24 months. She can also make up any deposit shortfall by tapping into private investment.

And while Arthur is still waiting for equity growth (and occasionally dealing with tenant issues and broken boilers), Martha has made enough profit in 18 months to buy three of Arthur’s buy-to-let houses AND has £50k left over to start her second development project.

Project things forward and, given that it’s possible to run multiple development projects at once, you can see how Martha’s portfolio growth could be stratospheric compared to Arthur’s. Or she could simply opt for a six-figure income and spend the money on whatever she wants.

Not surprisingly, this hybrid landlord-developer role is starting to become popular, as existing landlords discover that small-scale development is well within their capabilities. Plus, many are currently more than a little frustrated with their lot as a landlord. Now could be the perfect time to try something different.

ABOUT THE AUTHOR

Ritchie Clapson CEng MIStructE is co-founder of propertyCEO, a nationwide property development and training company that helps people create a successful property development business in their spare time. It makes use of students’ existing life skills while teaching them the property, business, and mindset knowledge they need to undertake small scale developments successfully, with the emphasis on utilising existing permitted development rights to minimize risk and maximize returns.

https://www.facebook.com/propertyceotraining/

https://www.instagram.com/propertyceotraining/

Tweets by Property_CEO

https://www.linkedin.com/company/propertyceo

How to Choose an Incubator for your Business

Posted on February 8, 2021 Written by Administrator

We are witnessing a marked proliferation of business accelerators and incubators, marked by the idea that programmes of this kind are the best way to embed entrepreneurial skills and mindsets, discover the brightest talents, and bring business propositions to life.

Broadly speaking, accelerators tend to last for a few months and will equip their participants with business skills and knowledge via mentorship, workshops and networking. Business incubators usually operate on a flexible time frame, ending when the business in question has a proposition to pitch to investors or potential customers.

Incubation programmes generally adopt a more flexible approach to their participants’ needs, reacting to and addressing them on a case-by-case basis.

There is plenty of choice as you can see in Entrepreneur Handbook. This lists 153 accelerators and start-ups in the UK alone. (https://entrepreneurhandbook.co.uk/incubation-centres/)

Given the wide choice what do you need to take into consideration when looking for an incubator?

Identify the best fit

Some business incubators are sector agnostic, others are very sector-specific. Some require you to have a solid business idea and a plan, others want growth-stage businesses. With some you don’t even need an idea to begin with – they will give you a proposition to develop and hone. The first step is to look for an incubator that suits the current stage your business.

Look for one that works specifically in your sector. A tailored, sector-specific package of support and expertise will bring your idea forward in leaps and bounds. Working with experts who are well-versed in the emerging trends within a particular industry and networked with the big players in that space could provide a real fillip to your fledgling business.

If your business is less technical, or there aren’t any suitable incubators for your sector or niche, then a sector agnostic incubator can be a good choice as it will give you access to experts across a range of businesses areas. If choosing one of these incubators, the next few points become even more important when making your final decision.

The Cardiff Medicentre is a business incubator focussing on health, wellbeing and the life sciences, while BioAccelerate at AberInnovation is designed to bring innovations in biotechnology, agri-tech and food and drink to life.

For a more generalist incubator, London-based Seedcloud support all ideas in the B2B space while the long-established YCombinator is sector agnostic and has two intakes per year.

University affiliations

As you might expect, universities are a hotbed of ideas and innovation. They bring together pre-eminent scholars, world-leading facilities and significant tranches of funding in an attempt to solve some of the world’s most pressing challenges and to create new knowledge and understanding for the benefit of society as a whole.

Done right, university-affiliated business incubators can greatly enhance this knowledge exchange mission and allow startups to capitalise on new findings and insights coming from the academic base emergent at universities. In other words, you want to be as close as possible to where research, development and innovation are thriving.

This is particularly important if your business is tech, sciences, health, or climate-related. Where access to experts, research, or testing facilities is important, linking with a University can be a major benefit.

Facilities can be state-of-the-art

Innovation does not come cheap, and machinery and specialist kit costing millions are often required. Fortunately, for innovative companies, universities are often happy to collaborate and allow use of such equipment via specific R&D projects.

Some of the better business incubators will have easy access to the requisite equipment and will actively encourage their cohorts to make the most of the facilities to develop their propositions. Also, they can provide training, technicians, and academic expertise to help you make the most of the services available.

So, think about the technology you may need, or the testing facilities that will help take you from beta to launch. And then look for an incubator that offers access to these.

For example, AberInnovation has a newly-built pilot scale biorefinery connected to its Future Food Centre. Having both capabilities under one roof makes it unique in the UK and a perfect site for circular economy innovations. In a similar vein, incubation programmes offered by the European Marine Science Park in Scotland have all the equipment and facilities (not to mention the ocean environments!) needed for marine science companies.

Connect

Having developed and refined your idea, you are very likely to need to bring in others at some stage. A good incubator will be networked with key professional services that you can access over the course of the programme, such as intellectual property attorneys, human resources experts, finance support and so on. What’s more, you’ll want a programme that has strong links to the venture capital community.

Most incubators offer pitching opportunities, but be mindful of the make up of those panels. Are you going to be in front of the right people? Having worked on your idea tirelessly, you’re going to want your efforts to be rewarded with a chance to impress those groups or individuals possessing the wherewithal to help you make your next step.

Funding

It’s also worth drilling down into exactly what’s on offer at these pitching events. What are you pitching for? Some panels might boast the right organisations, but they may be there in more of a feedback-giving role. You’ll want to know whether there’s actual ‘money on the table’ at the end of the programme. Moreover, what are the stipulations attached to spending or drawing down this money? Some terms and conditions will be stringent and rather onerous, while some programmes are happy to take a more hands-off approach to how you spend it – within reason of course!

Location. Location, location

The age of dashing around the country to meet prospective collaborators, clients and stakeholders may be behind us. It’s fair to say that recent events have shown us what a credible job video-conferencing programmes can do in lieu of actual face-to-face meetings. With that said, it would be unwise to disregard location completely when it comes to choosing an incubator.

A good programme should be hands-on and for that there is no substitute for working with people in-person. By the time you get to the incubation stage, you’ll want to begin prototyping or iterating designs of your product/service as well. This will using the expertise, facilities and equipment on offer. That’s why it makes sense to find a incubator close to where you are based, if possible.

ABOUT THE AUTHOR

Ben Jones is from AberInnovation. Aberystwyth Innovation and Enterprise Campus (AberInnovation) provides world-leading facilities and expertise within the biotechnology, agri-tech, and food and drink sectors. Set in stunning scenery between the Cambrian Mountains and the Irish Sea, the £40.5m Campus offers an ideal environment for business and academic collaboration to flourish.https://aberinnovation.com/

https://www.facebook.com/AberInnovation

https://www.linkedin.com/company/aberystwyth-innovation-and-enterprise-campus-ltd

For more information about BioAccelerate: https://aberinnovation.com/en/our-community/bioaccelerate/

Is Angel Investing the Way Forward for HNWs in a Negative Interest Rate Environment?

Posted on December 16, 2020 Written by Administrator

Are we heading for negative interest rates? Bank of England policymakers have reported this as a possibility.

If negative interest rates become a reality account holders would likely be asked to pay to hold money in a savings account.

Between negative returns on savings accounts, lower yield on bond holdings, a volatile stock market and a projected dip in property prices, investors have few options to diversify their portfolio.

However, for HNW investors who are comfortable with risk, early-stage/angel investing may provide opportunities for greater returns.

What is angel investing and why is it attractive?

An angel investor (aka a private investor, seed investor or angel funder) supports early-stage enterprises by providing funding and getting actively involved in the business. Typically, the amount invested is £5,000-£50,000 per investment.

Early-stage investments are high risk as the number of early-stage businesses that grow through to an exit is low. Previous research suggested that 56% of investments in early-stage companies went bust. This is why experienced angels aim to build a diverse portfolio of 20+ investments.

Although deemed precarious, early stage investments have the advantage that investors can buy company shares, in a business that has identified an addressable market, yet to be exploited, at a much lower price.

While angels usually have to wait years before recovering their initial investment, returns can be considerable. The high risk nature of angel investing means that HNW individuals usually look for a 2.5x Return of Investment (RoI).

Angels are often highly experienced in business and can support companies with know-how, introductions, and strategic direction. If investors have an appropriate tolerance for risk, and a track record, angel investing may be the best fit for both parties.

When starting, investors should look for a well put together business plan with a defined exit strategy. Initially many angels choose to join an angel network where investors can pool investment capital and invest alongside like-minded, experienced investors.

Tax relief through EIS and SEIS

To encourage investment in start-up companies the UK government has launched several tax relief programmes, including the Enterprise Investment Scheme (EIS). This scheme, which makes investing in early stage enterprises tax-efficient, has encouraged £22bn in investment in 31,365 companies.

By investing in an EIS eligible company, angels receive income tax relief of 30% of the amount subscribed for eligible shares. Investors can put in up to £1m per tax year in EIS qualifying companies for the tax relief; this cap rises to £2m if investing in knowledge-intensive EIS companies.

To qualify, companies have to be trading for less than seven years and can raise a maximum of £12m.

Through EIS, angels receive a Capital Gains Tax (CGT) exemption, carry back and loss relief which can be offset against CGT or Income Tax.

Here’s a practical example: Say an angel invests £10,000 and the company fails, their actual loss would only be £7,000, given the 30% income tax relief. However, a top rate income taxpayer paying tax at 45% will be able to claim loss relief on their tax liability at the 45% level. In this example, they’re eligible for further relief of £3,150, making their actual loss £3,850.

The success of EIS led to the introduction of the Seed Enterprise Investment Scheme (SEIS), promoting investments in riskier, earlier stage companies.

SEIS allows HNWIs to invest up to £100,000 and receive 50% tax relief on their investment. In order for companies to be eligible for SEIS, they have to have been trading for less than two years and cannot have more than £150,000 in previous investment.

Hot investment sectors

Reports from the British Business Bank and the UK Business Angels Association reveal that many investors are still seeing positive returns during the pandemic.

While angels are battling economic uncertainty, around three quarters are optimistic about the market bouncing back within the next 12 months.

Healthcare, Digital Health and MedTech, BioTech, Life Sciences and Pharmaceuticals are the leading sectors in terms of investor engagement during the COVID-19 crisis.

Software as a Service and FinTech have fared well throughout the pandemic and are still attracting a large number of investors.

Getting started with angel investing is now easier than ever, with an array of angel networks that can provide advice and support.. Industry-association, the UKBAA, offers an Angel Investment Accelerator which is designed for those new to early-stage investing.

To choose the right angel network, HNWIs should look for the most active networks; Research body Beauhurst recently published a list of the most active networks in the UK.

Active networks will present a greater array of screened opportunities and connect new investors to more experienced ones.

The best networks cover a variety of regions, sectors, and investment sizes, and they’re forthcoming with examples of previous investments, thus helping first-time angels make the right choices while growing their portfolio.

ABOUT THE AUTHOR

Envestors Pic shows: Oliver Woolley, CEO and Co-Founder Envestors Photo by Tony Larkin

Oliver Woolley is CEO and co-founder of Envestors. Envestors’ digital investment platform brings together entrepreneurs and investors across geographies, communities and sectors – creating the single marketplace for early stage investment in the UK.

Envestors partners with accelerators, incubators and angel networks to provide a white-label platform empowering them to promote deals, engage investors and connect to other networks.

Founded in 2004, Envestors has helped more than 200 high growth businesses raise more than £100m through its own private investment club.

Envestors is authorised and regulated by the Financial Conduct Authority.

Web: https://www.envestors.co.uk/

LinkedIn: https://www.linkedin.com/company/envestors-llp/

Twitter: @EnvestorsLondon

The many shades of grey – taking off the blindfold when it comes to FCA regulation

Posted on October 17, 2020 Written by Administrator

Why incubators, accelerators and networks matching investors and start-ups need to be regulated

Financial services regulation is a hugely complicated area. The handbook written to help distil the regulation itself makes the five-part Fifty Shades series look like a novella, with the glossary alone taking up 583 pages.

This complexity has created grey areas and led to wide-spread issues in the early-stage investment space with many unauthorised organisations conducting regulated activities, either unaware they are doing so or under the belief that they are somehow exempt.

Here we expose the truth regarding the most common grey areas surrounding financial services regulation in early stage investing.

Area #1: I am not regulated, so I don’t need to worry about it.

This is a bit like saying, ‘I don’t have a license to drive, so the highway code doesn’t apply to me,’ and yet it is a real misconception in the market.

If you are an unregulated network or introducer you can be reported to the FCA. If you are found to be undertaking regulatory activity, e.g. “arranging” deals in investments, without the required FCA permissions, it is a criminal offence and the individuals responsible for operating the unregulated network won’t just get a gentle slap on the wrist, they might find themselves in handcuffs. If that isn’t bad enough, any transactions could also be unwound, and you could have to pay damages.

Area #2: I am not giving advice to investors, so I don’t’ need to be regulated.

This is a common interpretation we hear from angel networks and other organisations who help match start-ups and investors. The grey area here is around the word ‘advice’ and how you’re actually interacting with both investors and start-up companies.

Let’s have a look at the term ‘advising’ and what it means from a regulatory perspective. When we’re talking about equity investment, ‘advising’ falls into two categories:

Advising companies about raising investment i.e. providing corporate finance advice to start-ups with regards to matters such as valuation and deal structuring and
- Advising investors about investing i.e. providing recommendations in respect of making investments.

The definition of investment advice is quite broad, so if you’re running an investment network and you’re not saying to investors, ‘put your money in this deal’ you’re in the clear, right?

Wrong.

While you may not be carrying on the regulated activity of providing investment advice to investors, you may be carrying on a different regulated activity: arranging deals in investments.

Arranging is defined by the FCA as bringing about deals in investments, making arrangements, with a view to transactions in investments, or agreeing to carry on either of those regulated activities.

Here you can see an organisation that brings together investors and start-ups for the purposes of showcasing or discussing investment opportunities that will lead to transaction, is very likely carrying on the regulated activity of ‘arranging’.

However, there are certain exclusions and exemptions which could apply, so you should obtain advice to confirm your exact regulatory position.

Area #3: Anyone can run a pitching event to help start-ups

Yes, anyone can arrange a pitching event. But. But. But. . .

There are several caveats here that you need to be aware of before you start sending out invites.

You must ensure that the investors you invite are at the right kind of investors. The right kind of investors are the kind with money, right?

Not exactly, because, any marketing which is capable of having an effect in the UK, which involves an invitation or inducement to engage in investment activity, would fall within the scope of the UK financial promotion regime. Similar to regulated activities, breach of financial promotion is a criminal offence, transactions could be unwound, and you could have to pay damages.

To avoid getting yourself in a bind, ensure any financial promotions are:

(a) issued by an FCA-authorised person;

(b) approved by an FCA-authorised person; or

Area #4: I am only targeting high net worth individuals, so I don’t need to be regulated

There are exemptions that apply to certain classifications of investors and rules around how you can market and interact with each.

One such a class of investors is called ‘Certified High Net Worth Individuals (HNWI),’ who have signed a HNWI statement within the last 12 months. If you request a copy of the HNWI certificate for each person, then you know that your audience is HNWIs and falls within this exemption. However, you still have to be extremely cautious not to move beyond making a financial promotion, into the regulated activity of arranging either before or after your event. The exemptions that apply to the financial promotion regime do not generally apply to regulated arranging.

It is not uncommon for networks, post marketing, to help seal the deal by facilitating communication between the start-up and the investor. This is exactly the kind of behaviour that is likely to amount to the regulated activity of arranging and arouse the interest of the FCA.

Area #5: I can promote my equity investment opportunity on social media

Posting your investment opportunity on your website, via your social media or targeting investors via LinkedIn is likely to fall within the financial promotion regime and will leave you open to scrutiny by the FCA. Breach of the financial promotion regime is a criminal offence and transactions could be unwound and you could have to pay damages.

As stated above, under Section 21 of Financial Services and Markets Act 2000 (“FSMA” – a tortuous but important bit of legislation protecting investors), any communication which invites someone to buy shares in their company is a financial promotion and, unless you are confident the communication is exempt or has been approved by a FCA registered firm, it is a criminal offence to make such a communication.

If that hasn’t turned you off, section 755 of the Companies Act 2006 prohibits private companies offering shares to the public, unless various conditions are met, such as making the offer to fewer than 150 people or to qualified professional investors.

To be sure you are not breaching any of these regulations, you may wish to consider two things:

1. In relation to the financial promotion regime, ensuring any financial promotions fall within an exemption or have been signed off by a FCA authorised firm and

2. In relation to arranging, ensuring that all investment transactions are arranged through an investment platform which is managed by an FCA authorised firm with permission for arranging, which will also ensure investors go through a proper investor classification and risk awareness process.

These are just a handful of the most common misconceptions that we see. If you feel like you’re groping in the dark when it comes to regulation, there are firms out there that can help. In addition to consulting with a specialist lawyer, regulated firms like Envestors are able to offer Introducer and Appointed Representative status —giving you more than ample cover without having to swallow the cost of becoming regulated in your own right.

It is time for networks working in the exciting world of matching start-ups with investors to take off their blindfolds and submit to regulatory requirements. When this happens and all the players have confidence that investors are fully aware of risks, and importantly that opportunities are ‘clear, fair and not misleading,’ it will mean more start-ups will benefit. This will be excellent to see in the current, challenging environment.

ABOUT THE AUTHOR

Oliver Woolley, CEO of Envestors. Envestors’ digital investment platform brings together entrepreneurs and investors across geographies, communities and sectors – creating the single marketplace for early stage investment in the UK.

Envestors partners with accelerators, incubators and angel networks to provide a white-label platform empowering them to promote deals, engage investors and connect to other networks.

Founded in 2004, Envestors has helped more than 200 high growth businesses raise more than £100m through our own private investment club.

Envestors is authorised and regulated by the Financial Conduct Authority.

Web: https://www.envestors.co.uk/

LinkedIn: https://www.linkedin.com/company/envestors-llp/

Twitter: @EnvestorsLondon

Why the era of passive investing is waning

Posted on October 15, 2020 Written by Administrator

When discussing Fintech with bankers in the City of London it is not unusual to hear them say: “Normal folk should not be trading.” This fits a narrative that has become widely accepted: ‘normal’ people are simply not up to making money by investing. They should play safe by putting their funds into a so-called robo-advisor like Wealthify or Nutmeg which will put their hard-earned cash into index-tracking passive investment funds.

This type of investing is often referred to as ‘black box’ investing is a very bad idea. Black box investing involves a computer using complicated formulas to achieve returns in the desired way. However, because an investor may not understand the model (and may not be able to do so), it can lead to unforeseen problems that the investor is unable to react to or even mitigate against. This investment approach also goes against the Fintech trends that are beginning to unfold. It looks backwards to a time when investing was for the elite. However, this is no longer the case.

How can the everyday, non-professional investor get the most out of the markets? Here are some thoughts:

Robo-advisors

Robo-advisors are a class of financial advisers. They provide financial advice or investment management online with moderate to minimal intervention from a human being. They provide digital financial advice based on mathematical rules or algorithms only. Robo-advisors, despite their automated nature, still charge a management fee, often as much as 1% of your funds. That’s £500 on a £50,000 portfolio, per year.

But that’s not all. The ‘passive-investing is great’ mantra has been sung repeatedly over the past 10 years. And it’s worked – as all the markets have been going up. Everyone’s a genius in a bull market. But this won’t go on forever. Remember Michael Burry? The ultra-nerd Hedge Fund manager in “The Big Short” had predicted the Subprime Mortgage crisis that led to the financial crisis of 2008/09. He is now warning that Index Funds are the next massive bubble.

Action step:

With just a little bit of research, anyone can create their own long-term, low-cost multi-asset fund held via a platform, with total costs of below 0.5%. Explore platforms like eToro or IG Index to either buy an index fund that holds a range of stocks directly or create your own.

In order to spread your risk, pick a range of stocks from different industries and decide what percentage of your portfolio you want to allocate. If that percentage becomes higher or lower over time, you can buy or sell respectively to balance it out. Do it once per month and save on the fees of robo-advisors.

The trend-of-the-day

When the dotcom Bubble of 2000 collapsed, it took the market over 17 years to recover. Who had been left holding worthless stocks? Mostly the retail investors who had been lured into buying the ‘trend-of-the-day’. The trend-of-the-day today is passive investing into index funds.

For too long, normal people have been pushed into seemingly ‘risk-free’ investments that end up destroying their financial wealth in a crisis but which lack the potential for huge gains.

Action step:

A modern-day investor does not have to run complex strategies to beat the ‘trend of the day’. I personally keep most of my funds in safe, liquid assets but I have about 20% of my portfolio invested in high-risk high-reward assets, like certain tech stocks or cryptocurrencies. This is called a ‘Barbell strategy’ and has become better known in the mainstream thanks to famous author, professor and trader Nassib Taleb, author of ‘Black Swan’.

Most of us panic if our funds are sitting in cash on a 0.1% rate savings account. But having the majority of your money in cash, gold or bonds, means that you are well protected from risk. And you can buy when everyone else is panic-selling during a market crash because you have cash available. The famous mantra “buy when there is blood on the streets” has allowed many famous investors, such as Warren Buffet, to build a top-class stock portfolio at a great price.

Advanced trading tools

In normal times robo-advisors give you average annual returns. But when all hell breaks loose, as it inevitably will, sooner or later, I would not want to be sitting in an index fund when everybody is trying exit through the door simultaneously.

Those who went ‘through the door’ before others won’t be the ones suffering. The smart Hedge Fund manager who long ago secured his investment position by buying insurance or setting up stop losses that will sell down his holdings in the event of a crash is able to react to market changes quickly. John Paulson, the famous investor, posted profits of over $2bn during the 2008 Financial Crisis.

Action step:

Small time amateur investors tend to avoid anything more complex than simply buying and selling. By doing so they miss out on major market opportunities. A simple ‘Put’ option can act as an insurance that allows the trader to sell a certain financial asset at a predetermined price: perfect when you want to protect yourself against a market crash.

Moreover, automated trading rules allow hobby investors to trade like professionals with algorithms. Platforms like Coinrule give normal people the tools to build strategies that protect against losses and help to catch market opportunities. By designing and then automating the strategy you don’t need to sit in front of the computer all day or constantly watch the markets. Innovation is starting to provide access to the markets for more and more people. And the professionals are hating it.

Do-It-Yourself Traders need to keep learning

Trading and investing are tough to do. There is no doubt about that. For someone with less time and experience it certainly makes sense to act conservatively in the markets. However, that does not mean that regular people are too dumb to learn to make their own investment decisions. Today, professional traders can make money whether markets are up or down. Non-professionals can do the same.

There is no good reason why today’s markets must remain esoteric to those outside the industry. Behind scary, technical language are actually some simple concepts. Don’t listen to the bankers-in-suits claiming that ‘this is not for regular people’ but only for the ‘Masters of the Universe’.

Most of the problems holding normal people back are related to access. Access to the right trading instruments, the right knowledge and the necessary experience. If you just put your money into a passive fund, you never learn and are forever victim to whatever crisis may hit the market.

Action step:

Read and study the markets. Books like “The Intelligent Investor” by Benjamin Graham, “What I Learned Losing a Million Dollars” by Paul and Moynihan and many others provide great introductions to the topic. Tools like TradingView make chart reading accessible for everyone. Free resources and communities allow normal people to get up to speed and learn quicker than ever. Other new entrants into this sphere are beginning to offer products that allow non-professionals to trade on easy-to-use platforms with a wide range of assets available. The days when you needed to navigate complex, confusing interfaces are truly over.

Make up your own mind

Platforms like Robinhood, Revolut or Freetrade have been making an impact in the retail online investing market by offering a smooth user experience, modern interfaces and great accessibility. But when it comes to financial inclusion they don’t go far enough. Famously, Robinhood sells on its user’s trading orders to be executed by high-frequency trading firms like Virtu or Citadel Securities. This puts these firms in a position to place their own trades in such a way that regular people will often end up overpaying. This is a win for the trading firms, but most definitely a loss for you.

On the other hand, despite years of talking about the ‘end’ of cryptocurrencies and the ‘scams’ in the market, everyday people are trading these products more than ever. The need for a market that, at least has the potential for full transparency, fast learning and large opportunities, is there. And it is being made a reality by new tech.

Action step:

Spend time doing your own research and learn to make your own judgements. Just because a new platform is hyped or a market is attacked in mainstream perception does not make it more or less right. Use the platforms and tools that offer full transparency, have the ethics in place that you value and are accessible for normal people.

And finally

Of course, trading and investing involves risk. Rather than ignoring this fact take time to learn about trading and also take personal responsibility for your finances. It looks like normal people are starting to buy into this vision in ever larger numbers. And, I for one, think that’s wonderful.

ABOUT THE AUTHOR

Oleg Giberstein is co-founder of Coinrule, a beginner-friendly and safe trading platform enabling you to automate your crypto investments across multiple platforms, helping you protect your funds and catch the next great market opportunity.

Coinrule gives investors, from beginner to pro, access to algorithmic trading without having to learn a single line of code.

Coinrule is both educational and gamified helping deliver financial inclusion for all by giving everyone the tools to compete in a new world of trading.

https://coinrule.io/

https://www.linkedin.com/company/coinrule

https://www.facebook.com/CoinruleHQ/

Tweets by CoinRuleHQ

https://www.instagram.com/coinrulehq

https://www.seedrs.com/coinrule/coming-soon

A startup’s guide to wooing investors online and cementing a relationship

Posted on September 12, 2020 Written by Administrator

If you had tried internet dating when it was new your friend might have raised an eyebrow. ‘How can you find the chemistry with another person online?’ would have been the question.

It was thought that the click (no pun intended) when you meet someone, couldn’t possibly be replicated online. The experience seemed too functional, assessing potential partners in the same way you might choose a new refrigerator – cold and entirely bereft of romance.

Then in 2012 all those raised eyebrows fell. If you weren’t dating online, you were the odd one out. The growth of smart phones, social media and the explosive success of apps like Tinder knocked ‘meeting through friends’ out of the top spot for ways to meet someone special for the first time in sixty years. Suddenly, looking for love online was fun, engaging and the way to find that special someone.

Online dating becomes the #1 way for couples to meet

Source: Rosenfeld. Disintermediating Friends.

If you are wondering what this has to do with raising capital let’s look at the reasons why.

Facilitated by the lockdown, the once slow adoption of digital by the industry has been spurred on at a rapid pace. And just like online dating, online investing will be the new normal.

The investment industry is now having its ‘Tinder’ moment.

And it’s is a good thing. Online dating took off because technology made it easier to find that special someone. It meant no more going to a club and shouting in the ear of someone in hopes you’d make a match or going to a BBQ and hoping there will be a friend of a friend there that might catch your eye. Through tech, searching singles could access the dating pool from their phone, vastly increasing the chances of making that special connection.

The same is true for online investing. Invite-only pitching events, closed networks and a reliance on personal connections all mean a limited exposure to investors, who have to work really hard to find out about deals. Now, with technology, they too can have access to the entire pool of investment opportunities from their phone. For entrepreneurs, that means a greater chance that you’ll catch their eye, get that first date and, if all goes well, seal the deal.

Tinder for early-stage investing

Like Tinder, online investment platforms, like Envestors, allow fundraising companies to have a deal profile. Not dissimilar to a dating profile, this is the place where you tell potential investors all about your investment opportunity. Unlike Tinder, the balance here is on words over photos. A good profile will include a deal summary with videos, team profiles and market information – effectively everything an investor will need to decide if you’re the one.

The market-leading platforms also include a chat feature where investors can break the ice by asking you about yourself. No softball questions here, you’re most likely to get asked to justify your sales forecast or explain how you’ve sized the market. If your profile piques their interest, but doesn’t win them over straight away, investors can follow you and receive automatic updates on your progress, so if they don’t swipe right the first time, you just might get a second chance.

Those lucky enough to find a match will be able to track their progress towards their investment target automatically, as platforms allow investors to pledge and invest online. And once you’ve got that commitment, you can keep in touch with in-built investor relations tools.

If Tinder for investment sounds like your best bet, you won’t be alone. There’s plenty of competition out there. So, to give you a chance to shine, here are our top tips for finding that special someone(s).

How to find your perfect match

A vibrant, informative profile

A top tip for your dating profile is to describe yourself in a way that provokes a question. But for your investment profile, you ideally want to leave no questions unanswered. Having a robust profile is key. If you want a potential investor move things to the next stage, full disclosure is an imperative.

Use video to capture attention. A succinct video overview of your investment opportunity (not your business and definitely not your life story!) will do wonders for arousing interest. Beyond that, ensure you have all your assets on display. At a minimum, you’ll need:

A market overview: What problem are you solving and how big is the addressable market?
- Explanation of your product or service
- Revenue model: how do you make money?
- Traction: How many clients do you have, what shape is your pipeline in?
- Introduction to the management team: track record, sector knowledge & previous exits
- Competition: How are you different (and better!) to your competitors
- Financial projections: How much money are you going to make over what time period?
- Investment Offer: How much investment are you seeking? What is your valuation? What will the money be used for?
- Exit strategy: What is it and what are some examples of recent exits in your market.

Even all that detail isn’t enough. Like a box of chocolates on a first date, you need all your documents wrapped up and ready to hand over. A good investment platform will allow you to control access to your documents so you can share your most intimate secrets with select suitors whilst keeping your details out of the hands of your competitors.

Keeping current

In the same way that a savvy online dater will ensure their photos are current, you need to keep your profile up to date and fresh as investors may be keeping an eye on you from a distance. Add regular (weekly is a good idea) updates on new customer wins, new hires, new partnerships, and sales results. Keep giving investors reasons to come back and take another look. Maybe they weren’t sure the first time, so keep showing them you deserve a second look.

A close encounter

Once you’ve that first date in the diary, get ready to wow them. First meetings are as crucial as first dates. Chemistry is always at play, so you need to ensure you’re prepared so you can relax and be yourself when you finally meet.

We always recommending researching your ‘date’ before you meet them.Find out what else they’ve invested in or what boards they sit on. Ensure you can show them you’ve taken the time to learn a bit about them.

This will make it easier to break the ice and also to find out why they decided to make previous investments, so that you can tailor your pitch to them.

Dress to impress

You also need to dress the part – we’re all getting so comfortable with video calls that it’s becoming the norm to be at least half clad in your pjs, but some studies show that your clothing choice can affect your performance, so take a bit of time to put on your Sunday best – it might just be the difference between a good pitch and a great pitch.

Charm is not enough

The final preparation point is to know your numbers. Don’t just rely on your charm, make sure you know your numbers because you’re very likely to be asked about them and, in many cases, to justify them. It’s worth ensuring they roll off the tip of your tongue and are justifiable.

The investor’s perspective

Our last tip is to try on your date’s shoes! The point is to consider the investor’s perspective. Your business might be the greatest thing in the world – to you, but they are still deciding. Keep in mind their goal is to get their money back, so they need to believe you are capable of delivering the growth you are promising and that your exit strategy — the bit where they get their money back — sound. Like savvy singles who have friends at the ready to make an ‘emergency get out of date phone call’ investors walk into a room backwards, they are looking for reasons not to invest but if you listen well to what they ask you and say, and respond clearly and transparently, you just might get that second date.

The move to online investing is a positive step. It helps investors to find and vet deals and for entrepreneurs easily. For founders of startups it means you’ll have more people looking at your profile. Yes, you will have to change your approach to seeking investment. However, get it right and you can find an ideal match with your investor.

ABOUT THE AUTHOR

Chantelle Arneaud is from Envestors. Envestors’ digital investment platform brings together entrepreneurs and investors across geographies, communities and sectors – creating the single marketplace for early stage investment in the UK. Envestors partners with accelerators, incubators and angel networks to provide a white-label platform empowering them to promote deals, engage investors and connect to other networks. Founded in 2004, Envestors has helped more than 200 high growth businesses raise more than £100m through our own private investment club. Envestors is authorised and regulated by the Financial Conduct Authority.

Web: https://www.envestors.co.uk/

LinkedIn: https://www.linkedin.com/company/envestors-llp/

Twitter: @EnvestorsLondon