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November 9, 2012updated 09 May 2016 2:22pm

A beginner’s guide to angel investing

By Spear's


Why is angel investing becoming so popular, and what are the pitfalls? Spear’s decided to pick the brains of three such investors at London restaurant Lutyens 

George Whitehead of Octopus Investments, which has £250 million funds under management for venture capital investing and an angel group that invests alongside it, is also chairman of the government’s new £50 million Angel Co-Investment Fund.

Richard Hargreaves of Endeavour Ventures made his career in venture capital, starting with 3i. He has been chairman of the British Venture Capital Association and now works as a business angel, forming syndicates. He has just written a book on angel investing, How to Become a Business Angel.

Bill Morrow founded Angels Den nearly six years ago. His venture allows entrepreneurs to put their vetted deals online and its 5,600 angels around the world to invest in them.

Spear’s: Why don’t we start by outlining what angel investing is and how one can get involved in the UK?

GW: Angel investing is individually choosing to invest directly into private (ie unquoted) companies. Many angels are part of formal syndicated angel groups and business angel networks. However, there’s a great deal of angel investing going on that’s completely under the radar, with a group of friends or business colleagues getting together to do individual deals.

Spear’s: Richard, how did you get involved?

RH: I was involved in investing other people’s money. I gradually moved to putting my own money into things, then moved across to saying, ‘Hey, if you want to come into this deal I’m working on, I want you to make your own decision. I’ll present you with information to help you make the decision, but it’s your decision.’

An angel makes his own decisions: he’s quicker, he can be very specific in terms of his sector wishes or he might be more agnostic; to my surprise, he’s a very loyal investor, too, so if he’s invested in a company and it’s not quite achieving its plans, I find angels very loyal in terms of coming into further rounds [of funding].

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Pictured above: Angel investing can help new business lift off

Spear’s: Bill, do you find that through Angels Den you end up with lots of solo investors rather than people who are going in as an acknowledged syndicate?

BM: We very much specialise in that, so our average ticket size is £203,000 and that will normally be from one angel. Often that won’t be enough to cater for the needs of the business but we can then find somebody along the way. What we tend to find is that £200,000 is more than enough to take it to the next stage. We specialise in funding some companies for a fifth and a sixth time. We’re not a great fan although we do run syndicates — they’re just a pain in the butt because they’re difficult to corral.

Read more: Angel CoFund unites government and angel investors

RH: We are typically doing bigger than that — we’re typically raising £500,000, not often as low as that, to £2 million. Many have got twenty shareholders — I don’t find a problem with that, it’s all down to getting the structure right.

GW: One of my biggest concerns for a lot of new angel investors is that they go into deals not realising how much cash is needed to make a company really successful. It varies massively from sector to sector but it is important that angels are prepared to follow their investments beyond the first round. As a rule of thumb they should keep at least what they invested in their first round in reserve to participate in future funding rounds.

Spear’s: Richard has argued that angel investing is enjoyable for those who do it — it gives them a sense of enjoyment and responsibility. Do you think your clients get that, or is it much more of an impersonal investment?

BM: For the angels we’ve got it really does come back to motivation. For nineteen months, we got it completely wrong at Angels Den: we presumed that angels were investing to make money. We asked the angels why they invested and making money came in at number three. Number two was about altruism — it was about ego, about giving something back, about helping people not make the mistakes they had made. But the biggest factor by far and away was enjoyment and fun.

Spear’s: Do people overestimate their abilities when it comes to angel investing?

RH: I’m sure they do. Certainly I did.

Spear’s: What was the main mistake you made?

RH: You come along, you’ve got a whole pile of experience that seems relevant and you think that therefore you can help people avoid mistakes. Well, of course, you can, but only up to a point. You need to approach the whole thing with a bit of humility, and the VC world is not characterised by humility.

Spear’s: George, if you had to tell someone who wanted to be an angel investor, ‘These are the things you really need to know,’ could you outline a few of them?

GW: The first thing I’d say is start small and co-invest with other people to begin with. Genuinely see this as learning the ropes. You don’t have to rush in and do hundreds of thousands of pounds for your first investment. If you can join syndicates or get to know people doing it, that’s a really sensible way of improving your chances of making a decent return.

Read more: Angel investors need to beware flying solo

Spear’s: What are some changes you think might be coming for angel investing, good or bad?

GW: There’s a cultural change coming in the perception of angel investing. In the US there’s the assumption that if you’ve made a lot of money, you should be investing in other businesses to help them on their way. This same cultural view of actively participating in interesting businesses is starting to blossom here. In my experience, the sort of people who’ve made a lot of money are the sort of people who do stuff, who don’t settle down.

The cultural change in angel investing is partly an awareness that you can get involved in early-stage companies, add a huge amount of value, have fun but also make potentially a very decent return on investment. Dragons Den, the poor performance of many fund managers and the willingness to give something back to society are adding to people’s awareness of angel investing almost as an investment class that they were completely unaware of before.

Spear’s: So are we seeing the development of an entrepreneurial noblesse oblige, where people realise it’s their responsibility to help the next generation?

GW: It’s more to do with a change of attitude. When I started, people would ask, ‘Why are you an angel investor?’ Now they’re beginning to ask, ‘You’ve just exited your business — why aren’t you doing angel investing?’ There’s a real tipping point.

Spear’s: Final thoughts: one message to Spear’s readers.

RH: My message would be that they do need to do some homework. They need to get some education in the area.

GW: I think that now’s a pretty good time to be investing in angel investing. The EIS tax breaks are exceptionally good and well worth investors getting more familiar with. The new tax rules for non-doms have made angel investing better than ever before and the increase in the number of syndicates around make it very easy to get started.

BM: I agree with Richard, who was talking about education. It’s opening their eyes. Just because you happen to be rich doesn’t mean you know what the implications of a convertible loan note are, including writing away your EIS and SEIS rights. You also need to get the legals absolutely right. It sets up the bedrock for getting it right further down the line.

Illustration by Phil Wong

Read more on angel investing

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