Getting started with Angel Investing

18 Feb

We have put together a short guide on how to get started with angel investing: what it is, who can be an angel investor, and how it all works. Please note, however, that this guide does not constitute financial advice and you should seek professional advice before making any investments.

Can anyone be an angel investor?
Is angel investing risky?
How much do angels usually invest?
What are the tax benefits when investing in startups?
Finding startups to invest in
Evaluating startups Further resources

Can anyone be an angel investor?

An angel investor is simply a High Net Worth individual who invests their own money directly in early-stage companies in exchange for equity in the business. Angels tend to back startups in companies at very early-stages (which can be a very risky investment) before a bank would as well as sometimes providing them with guidance and expertise, hence the term 'angel'.

Anyone with money to invest can essentially act as an angel, you do not need to be qualified. However, if you wish to access angel investment opportunities from angel group, platforms, or similar organisations/ individuals, you will have to declare yourself as either a High Net Worth Individual or a Professional Investor, which, as the names suggest, showcases that either you have the capacity for loss and/or understanding of the risks associated with investing.

Is angel investing risky?

Yes. Investing in early-stage companies is an inherently risky way to invest. So, why do people do it? Well, investing in startups has potential for very high returns, if done right (spreading risk, building a portfolio, investing under good deal terms etc.), which can offset any losses.

With angel investing, you won’t often have a lot of data to go off, this is why it’s recommended to invest in things you understand, where your ‘gut feel’ is actually based on the experience you can apply to an idea that has not yet been proven. You can also lower the risk by adding value to the company yourself, utilising your expertise and providing assistance in the areas of the business that will affect the long-term success of the company - something you cannot do with any other kind of investment.

How much do angels usually invest?

On average, angels tend to invest somewhere between £10k to £1M in a company, although this is not a set rule. The amount an angel will invest will depend on the size of their portfolio but can also vary in each situation depending on how much they like an idea, how much they are planning to be involved in supporting the business, or how much of a risk they perceive it is.

These days, It is possible to invest smaller amounts (from as little as £10) in companies via platforms like Seedrs however you would be classed as a ‘retail investor’ or a ‘micro investor’ rather than an angel investor as you are not investing directly in the company or providing expertise or advise as such.

What are the tax benefits when investing?

The UK government have some brilliant tax schemes in place to make investing in early-stage companies a more attractive and rewarding opportunity. Here are the two schemes you need to be aware of:

1. SEIS (Seed Enterprise Investment Scheme) relates to companies that are very early stage and have only been trading for up to 3 years. This scheme provides the investor with 50% of their investment amount in a company back in tax-relief, as long as you have paid it. For example, if you invest £100,000 in an SEIS eligible company you can claim to get 50% of that investment back in tax-relief (in this case that’s £50,000). This means that even if your investment was to fall in value by 50% you have broken even.

2. EIS (Enterprise Investment Scheme) relates to companies that are early stage and have only been trading for up to 7 years. This scheme provides the investor with 30% of their investment amount in a company back in income tax, as long as you have paid it. For example, if you invest £100,000 in an EIS eligible company you can claim to get 30% of that investment back in tax-relief (£30,000). This means that even if your investment was to fall in value by 30% you have broken even.

A few additional benefits of investing under these schemes:

You are exempt from capital gains tax (CGT) on any gains on these investments.
And in the event that a company doesn’t work out, you receive loss relief for up to 50% of your investment amount (the actual percentage depends on your income tax bracket).

Read our full guide on investing under S/EIS
And visit gov.uk for more guidance on tax relief for investors.

Finding startups to invest in

There are plenty of startups raising funding, you can find opportunities literally anywhere. However, the challenge is identifying which ones are the good opportunities, which ones are best suited for you, and getting access to the top opportunities. Here are some things you can do to expose yourself to new startups:

Research: Keep tabs on local startup news via social media and press. Stay connected with your local business community.

Mentoring: If you have the time, mentoring is a really great way to support a business and really get to know them from the inside. You can then make a judgement on whether you want to invest in them and propose the idea for investment when the timing is right.

Networking: Spend time at local coworking spaces and incubators, and attend their events. You will often meet a variety of startups in these places and even get the opportunity to listen to them pitch.

Angel groups: Groups like SEA review 100s of investment-ready startups every month and can connect you with companies based on your preferences, as well as providing you with a community of other angel investors to invest alongside with so you don't have to go it alone.

Evaluating startups

Every angel investor will have their own way of evaluating a startup investment opportunity, and you will create your own as you get started and learn from others. Here are a few things to consider:

At a glance:
- Do I like the team, do they sell the idea/ vision well?

- Do I like the business? (business model, market size, unit economics)

- Are the deal terms reasonable?

- Does this meet my investment thesis/ objectives?

Doing your Due Diligence:

- Look them up on companies house

- Read their business plan

- Analyse their financial forecasts

- Look through any historical accounts

- Check all is in order with shareholder agreements, contracts etc.

- Check for any ongoing litigations, statement of affairs with HMRC, debts etc.

Talk to people they work with, talk to their customers - do your homework. It's also a good idea to meet the founders in a relaxed setting and get to know them as individuals. If you like the idea but you don’t like the people - walk away.

Check out our full due diligence checklist