enture capital is becoming a misnomer. A critical bottleneck in entrepreneurial finance is that traditional venture capitalists are increasingly abandoning “venture” or seed/early-stage investment to focus more and more on late-stage investment.
For example, in 2020, $100 billion or two-thirds of total US VC deal value was allocated to late-stage companies. Early-stage companies are increasingly starved for capital and are therefore being forced to explore alternative financing mechanisms. Angel investors are filling this void in the entrepreneurial finance market with both capital and valuable skills honed through real-world experience in actually building companies.
This is of particular importance in European countries like the United Kingdom that have not been at the epicenter of the global entrepreneurial finance ecosystem. It is all too often forgotten that venture capitalists finance a minuscule percentage—1%--of small businesses while angel investors will invest in as many as 30% of the opportunities presented to them.
That discrepancy will become even more significant in a post-Brexit world as UK entrepreneurs lose access to pan-European venture capital support programs and financing regimes. The price of going it alone is that UK entrepreneurs must at a minimum look inward to domestic sources of angel investment or seek linkages with financing sources in the US and other English-speaking countries. Angel investing matters more and more to UK entrepreneurs.
Why Angel Investing
Angel investors tend to invest smaller but non-trivial amounts of their own money that are critical to the launch of the company: 80% of individual angel deals are less than $250K and 2/3 of angel groups invest $2.5 million or less. However, angel investors typically have an advantage over traditional venture capitalists: experience.
The background of angel investors is often not in consulting or investment banking but in being a successful entrepreneur. The motives of an angel investor are usually a desire to not just earn a robust return as many are already wealthy but to earn a deep sense of personal satisfaction by mentoring entrepreneurs and learning about new technologies that may serve as the intellectual foundation for another endeavor that they eventually venture into. For example, in “Life After Exit,” a study by Coutts found that 74% of UK entrepreneurs will try advising another business after exiting their own firm while 65% are willing to invest in another company.
This personal commitment and patience is incredibly valuable to entrepreneurs. Ironically, since the angel investor invests his own money while the venture capitalist invests money that was raised on behalf of a fund that must be profitable and make a targeted rate of return for the investors along with administrative fees, it is the venture capitalist who is more risk averse and less patient.
This is why VCs increasingly avoid smaller seed capital investments in favor of larger late-stage investments that provide the huge returns more immediately that their funds require. But angel investors do not have that constraint and are not averse to smaller investments in riskier projects that allow entrepreneurs to engage in the consistent, organic growth that is often in the long-term best interests of the company.
The UK Context
Great innovations flow from great science. But the bridge between scientific innovation and commercialization is entrepreneurial finance. The absence of a robust entrepreneurial finance ecosystem has been a major constraint in Europe generally and in the UK specifically. The classic example is in the immense opportunity cost of the failure by the UK to successfully commercialize biotechnology even though the industry was born at Cambridge University.
The underlying science of the biotechnology industry was invented by Dr. James Watson and Mr. Francis Crick of Cambridge University when they discovered the double helix structure of DNA. This along with the realization via experimentation that genetic instructions could be inserted into the DNA of a living cell so as to manufacture a desirable protein is the foundation of the modern biotechnology industry.
However, this lucrative technology has been overwhelmingly commercialized in the United States by scientists enabled by a dynamic entrepreneurial finance ecosystem comprised of a combination of government-led efforts to license government-funded research and development from universities, venture capital, and angel investing.
Angel investors can help with the commercialization of UK science, particularly innovations that are based at universities. Because angel investors often have university affiliations that enable them to act as a bridge to entrepreneurs and to offer more flexible terms along with valuable advice that entrepreneurs crave. Leveraging angel investors is a great way for UK universities to avoid alienating entrepreneurs that originate from their campuses.
For example, in the United States, well-orchestrated organizations of affiliated angel investors are rapidly emerging such as the Brown Angel Group, Columbia Angels, Wharton Alumni Angels and MIT Alumni Angels—to name a few. The most famous of these is the PayPal Mafia comprised of former PayPal employees who share a university affiliation with Stanford University or the University of Illinois at Urbana-Champaign.
This highlights the increasingly prominent role of educational and corporate networks in angel investing and their real value in terms of financial and social capital. Oftentimes these angel investors have strong institutional support such as the MIT Alumni Angels which is a part of a university-wide innovation initiative designed to maintain the school’s status as an “entrepreneurial university.”
American universities understand that a powerful way to magnify their influence is to support entrepreneurship amongst their alumni by connecting them with angel investing opportunities from alumni who are predisposed to help them to succeed. British universities would be wise to emulate this model so as to reap the benefits of satisfied alumni-entrepreneurs who are happy to give back.
Angel Networks in the UK
Angel investing in the UK is often done through networks of investors who collaborate to share information, make introductions to early-stage investment opportunities, mitigate risk by collectively investing and hone their strategic approach. As of the end of 2018, over 57% of angel investors were based in the Capital and South East regions of the UK. Outside of these two regions, the highest proportion of angel investors were in Scotland (8%), the South West (6%), the North West (5%), the East (5%), Wales (4%) and Northern Ireland (1%).
During the period 2011-2021, there were approximately 2,045 fundraisings into UK companies that involved participation from angel networks and these rounds involved 2.3 billion pounds or $2.7 billion dollars.
The top angel networks in the UK in terms of activity during the 2011-2021 period are:
- Minerva Business Angel Network
- Cambridge Angels
- Equity Gap
- Newable Ventures
- TRI Capital
- Kelvin Capital
- Dragon’s Den
- Angel’s Den
- GC Angels
- Ascension Syndicate Club
- Cambridge Capital Group
- Bristol Private Equity Club
- Gabriel Investment Syndicate
- London & Scottish Investment Partners
- Green Angel Syndicate
- Highland Venture Capital
- Eos Advisory
- Angels Invest Wales
- Angel Academe
Envestors consists of over 4,000 angel investors who usually invest between 250,000 and 2 million pounds. Over the last 10 years, it has invested 170 rounds of financing in 122 companies, most especially in online platforms and SAAS firms.
Minerva Business Angel Network was founded in 1994 and is managed by the University of Warwick Science Park. It typically invests between 25,000 and 500,000 pounds with a focus on high-growth tech companies. Funding is limited to firms that are based in the West Midlands or provide persuasive evidence of their intent to locate there. It has completed 162 rounds in 91 firms.
Cambridge Angels invests throughout the UK but gives greater consideration to investment opportunities in the Cambridge area. It has made 142 investment rounds in 99 companies with a focus on cleantech and biotech. These investments range from 50,000 pounds and 500,000 pounds with an exit horizon of seven years.
Uniquely, Archangels, which is headquartered in Edinburgh and formed in 1992, is the world’s oldest continuously-operating business angel syndicate investing between 50,000 and 2 million pounds. The group invests exclusively in Scottish companies and focuses on the technology, clean energy, and life sciences sectors. To date it has completed 135 funding rounds in 30 companies over the last 10 years.
Equity Gap, which is also based in Edinburgh, invests between 100,000 and 500,000 pounds. It is not exclusively tech-focused but invests in a broader range of industries with the exception of real estate and traditional retail. It has completed 132 funding rounds in 40 companies over the last decade. Its approach is to be a one-stop shop that provides not only capital but guidance and technical support to entrepreneurs throughout the investment lifecycle including pitch coaching, mentoring, board-level input, and exit planning.
The impact of these angel networks in the UK has been profound as the number of investments has more than doubled from 94 in 2011 to 228 in 2021.
UK Government Support for Angel Investing
Angel networks in the UK do not operate in isolation. Oftentimes they leverage government incentives that are designed to catalyze the angel investing community in the UK. One of the most important of these is the Enterprise Investment Scheme (EIS). EIS rewards investments in small, high-risk startups by offering income tax relief of 30% of the cost of the stake in the startup up to 300,000 pounds worth of tax relief.
This is a powerful incentive for angel investors. An important tax benefit offered through EIS eligible companies is Capital Gain Tax deferral whereby investors who made a capital gain in the 2021/2022 tax year can invest in an EIS eligible company and defer this gain until the shares are sold, taking advantage of the capital gains tax liability in that year.
As a consequence, investors can use the potential tax free gains made from the investment to settle their tax liability while also benefiting from any changes in capital gains allowance changes. Also, once the shares from an EIS investment have been held for two years, they can be passed onto future generations free of inheritance tax thereby saving 40% for that holding.
The two-year time frame is much shorter than the seven-year limit usually applied when making a gift. Finally, to incentivize high-tech investments with EIS, investments into knowledge-intensive companies under EIS allow an angel investor to invest up to 2 million pounds in a single year, thereby allowing 600,000 pounds to be claimed back in income tax relief. This program has proven to be immensely effective in catalyzing investment as 4,215 EIS investments were made in 2020.
There are additional government supports for angel investing in the UK. Another program known as the Seed Enterprise Investment Scheme (SEIS) incentives support for early-stage businesses by providing income tax relief of 50% of the cost of shares for investments up to 100,000 pounds if shares are held for at least three years. Also, under SEIS, capital gains are exempt from taxation if held for at least three years.
An investor who has disposed of a chargeable asset that would normally be liable to capital gains tax can treat up to 50% of the gain as capital gains tax exempt if they reinvest it into SEIS qualifying shares. Should a loss be realized on an SEIS investment, SEIS loss relief allows investors to offset the value of their loss against their income tax bill or capital gains tax bill. Since it was introduced in 2012, SEIS has raised over 1.5 billion pounds for 15,000 UK startups.
These are tumultuous times. The impact of the war in Ukraine is leading to a severe energy and food crisis across Europe that will impact a post-Brexit UK. The recent global boom in tech investing is cooling while inflation is rising. Yet, crisis tends to produce opportunity. There are always strong entrepreneurs with intelligent solutions to complex problems and the UK is a global center for technological innovation and finance. Angel investors will play a salient role in commercializing those innovations as the people of the UK have many problems to solve.
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