I’ve been involved in business angel investing as an individual investor – or by joining/starting a club or syndicate of individual investors with the wish to provide equity risk capital to start-up or new companies – since 2001. The basic aim is to provide funding for high growth young companies, enabling them to grow quickly and attract further investment from larger private equity firms. This should then lead to an eventual trade sale or floatation – usually a magical 3-5 years in the future – where investors recoup their investment with a handsome reward for taking a high-risk investment. The business plans usually show 1-3 years of low sales and high expenditure and then in years 4, 5 or 6 the magic happens and a “hockey stick-like” graph appears in the business plan showing strong revenue growth and providing impressive profits. The opportunities are often presented as tax efficient for a high net worth investor, with EIS qualification and other HMRC compliant schemes for reducing exposure to capital gains. The ‘HNW investor’ is a term that an investor needs to prove by completing some forms – often before joining a numerous angel-investing syndicate around Scotland and the UK. There is the opportunity to become involved as a director or advisor in one or a number of portfolio companies as the years pass and also to create a network of fellow investors – or as I hoped… a “Band of Brothers” – to share and overcome difficulties as they arise.
In reality, this is how I imagine it has happened for some, but certainly not me. My naïve hopes and aspirations have been kicked around the block and back again! My best guess is that I may have recouped my losses with the few gains through trade sales and initial public offerings on the London Stock Exchange or its junior Alternative Investment Market. Only two of those have ever been successfully floated, whilst another two IPO’s termed nil-premium flotations went bust later. Successful trade sales are talked about for years (even if they aren’t that successful) whilst any failure is generally an orphan left to be discovered at the pub or dinner chat through a friend or fellow investor in my recent experience. What is more disappointing than the failure itself is not even hearing from the company or angel syndicate when something has gone wrong. I have managed to meet some people over the years yet the hope for my “Band of Brothers” has turned out more like a rag-tag crew of the dispirited. There is, of course, an inside track of people who make their fees regardless of the companies’ individual successes – namely commercial lawyers, accountants, PR consultants and people who are adept at networking and securing NXD seat (Non-Execs). The public sector is more involved – than many taxpayers may realise, or possibly wish – with hefty subsidies, loans and co-investment funds available for those entrepreneurs and their teams to access if they can jump through the hoops (investment criteria).
Clearly some investments do work but many, in fact most, do not and this is always carries the highest possible risk in investing – it is simply unquantifiable. Naked short trading is for the sophisticated trader and venture capital is most suited for the very rich who, quite simply, can afford to lose a few thousand or even hundreds of thousands of pounds, dollars or currency for wherever you live and try this.
I have plenty more to say on this and will revert to this most disappointing aspect of my work and life as a private investor to date on another occasion. However, I think that part of the answer to this situation, except for becoming very rich and having little need of your portfolio ever providing a return, may lie in the fact that every well intentioned angel-syndicate – apart from one that I am aware of – turns its fellow investors into clients once it becomes a certain size. They tend to concentrate on the fee and career advancement element of their job rather than the deal itself and the prospects of the companies being offered to their investors.
In my opinion… it is time for a rethink of this type of investment because the successful exits are not there anything like the exciting opportunities.
LDC