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

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

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 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

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[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

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:

1. 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.

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