What are the prospects for angel-investing in the current UK economic climate and how can we create more confidence for investors? What should SMEs do to be more successful in attracting investment?
This morning Lord Young and I chaired a panel discussion at Downing Street which brought together angels and entrepreneurs, as well as their representatives and professional advisers, to share views about issues affecting the sector.
The UK government places huge emphasis on business angels. We’ve brought in some generous tax breaks, including:
-increasing the rate of income tax relief for the Enterprise Investment Scheme to 30 percent
-doubling the investor limits to £1 million per year from this April
-bringing in the Seed Enterprise Investment Scheme, providing 50 per cent rate of income tax relief for individuals who invest in qualifying companies
And from April, for one year only, if you re-invest your gains into a seed EIS scheme you will never pay capital gains tax on that investment.
But we’re really keen to gather views on whether there’s anything more that can be done to improve conditions.
Please contribute to this discussion thread and let me know your thoughts and experiences.
Answers (10)
I think that the difficulty is the current focus is on how to help HNW and sophisticated investors who mostly don't need help.
That said the tax relief is an amazing incentive and I am very glad it highlights that the government want to encourage investments rather than just savings.
However there is no doubt in the past it has been abused to create tax efficient structures for investors who are not taking risks on investing in early stage businesses but instead investing collectively through advisors in corporate vehicles that are structured to take on short term invoice finance type risk from established larger firms that had bank credit pulled. This is of course a perfectly valid thing to finance but not the intent of EIS.
At the same time the CVS (corporate venturing scheme) was closed because of apparent lack of interest. I would be interested in how much of the EIS money was tax planning and how much was genuine interest in early stage equity investing for the growth of fledgling companies. It would be nice to see versions of EIS for partnerships, trusts, charities and companies who could all meaningfully contribute to early stage equity investing if encouraged.
I suggested and idea to promote equity investment more widely could be incorporated into the HMRC SA tax returns. In reality it is a cultural shift towards more equity less debt that is needed. With this idea taxpayers completing a self assessment return could be presented with an opportunity to fund either business plans uploaded by entrepreneurs or syndicate requests from lead investors who need more funds to close a round. This could be through a simple to browse crowd funding web site.
Perhaps ideas could be audited by government before being allowed on the portal to check they are from people who are genuinely starting or operating an early stage business which they intend to grow and are of good character. But this function would probably be mostly performed by members of the community much like in the Zopa lending website.
Government could support this by schemes to recognise the need for investment risk more widely instead of the current approach which is to promote investment to a select few HNW or sophisticated investors.
SME's need to learn how to present realistic exciting plans to investors and be confident and persuasive. The trouble is that by the time they can do this they are very rare indeed and almost any investor would want to invest in them. So I think it is important to focus on remembering angels have a job to do if they want the tax relief perhaps I think they should be required to assess plans submitted by entrepreneurs in their region and give comments and support to prepare them for investment if they are not up to scratch.
This would be much better than the current approach of having to register with a central government backed organisation to become a mentor that is convoluted and unappealing. What better validation of a mentor than they want to but their own money into your business and help you plan.
In 2009, the BBAA and NESTA jointly published the first-ever comprehensive report on returns from angel investing, and the data was highly encouraging. Startups, as an asset class, produce excellent returns: -- a 22% IRR with an average 2.2x multiple on a 3.6 year exit. The distribution of returns is, of course, highly skewed: most startups fail, and it is the few big winners that make up the vast majority of the returns; for this reason (as Anthony Clarke mentioned this morning), a portfolio approach is vital. But overall, startups outperform most other asset class, and being an angel investor is a winning proposition.
This is a very important piece of data, but for some reason it has not been very well publicised. There remains a common perception among many people that angel investing is a loss-making hobby, and that while tax reliefs may mitigate the loss, investors cannot expect to see capital appreciation. This misunderstanding, I believe, is the single most important reason we do not have more angel investing in this country, and were it corrected, I am confident that a vast number more investors would allocate a portion of their capital to startups.
My recommendation is therefore to publicise the data underlying the BBAA/NESTA report as much as possible. Let the world know that investing in startups isn't about charity, it isn't (only) about fun, it's about making substantial profits in the long-run. If this data were better-known, I am confident that we would see a substantial increase in angel investing across the country.
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Look after the angels and they will look after the companies. By looking after the angels I mean give them incentives to get involved. So the SEIS and EIS initiatives are a fantastic start.
Remember many angels sit outside the visible market, so it would be worth government connecting with the many groups outside the BBAA which represents only a small subset of the entire market. Many angels sit alongside VC funds etc but are not in angel networks.
Prospects? very low.
Confidence for investors? Make long term success, wealth and job creation so rewarding that they can’t resist. Bring in real experienced practical qualified engineers to build & prove new ideas and inventions.
What can SMEs do? Nothing. Most VCs, bankers, accountants, dragons, ministers don’t have the knowledge and experience to grasp the significance of a technology innovation.
Anything more that can be done? Check how the giant British successful companies started and succeeded.
How did Rolls & Royce start?
How about Tesco, Marks & Spencer, William Lyons of Jaguar, Herbert Austin & William Morris cars, JCB diggers?
How did the huge engineering companies start & succeed, Parsons, Reyrolle, English Electric, Clyde Shipbuilders, Harland & Wolff, employing millions of skilled engineers & tradesmen?
Conclusion ….They never, ever started with a Technology Strategy Board that promoted collaboration between university academics & SMEs. History shows that this approach has never worked.
They all started with a hard working practical skilled engineers, mechanics or self taught traders & shop owners.
Thoughts and experiences? As a lone inventor I am blocked from any progress via the Technology Strategy Board or Nesta or Enterprise Boards. With my 50 years of industrial engineering experience my ideas have been eagerly grasped by a dozen different UK universities for proof of concept experiments, but the system is so slow and laborious, with academics busy teaching, so that very little progress is possible.
My case studies are available, great ideas in oil & gas, solutions from years of personal experience, two very positive academics at Aberdeen University want to apply for funding to ITF. I feel we have a 90% chance of a world headline innovation. It could take years if ever with the system in place at present.
Nick W.
IP Consultant and Patent Attorney -Tangible IP
Best Answers in: Intellectual Property (2), Auditing (1), Mergers and Acquisitions (1), Starting Up (1)
We have a large pool of potential Angel investment in the UK but low levels of Angel investment. I would suggest reading the Nabarro 2011 Entrepreneurs Survey presented at Yorkshire Venturefest http://bit.ly/xIeJJq. A lot of interesting info here but for this answer the key metric is that indicated under Funding and Priorities, where only 1% of finance came from Angels.
In the present climate Angels (and VCs) have fled from high risk start-ups to more secure established opportunities that have presented themselves. An increasing number of SMEs are seeking Angel funding simply because they cannot get a bank loan. This is presenting serious difficulties for the traditional seekers of Angel funding.
Another report worth reading in this context is an exploratory study undertaken by an MBA student from Imperial College Business School. http://bit.ly/zAeqpQ. This is not peer reviewed but I feel is spot on in many of its observations and conclusions and lists many useful resources to inform your discussion.
You will always find investors looking for more financial incentives to invest; it’s the nature of the beast. If you put the money to one side and look at barriers to investment I think there are two key areas certainly at the low end of the SME scale and with start-ups.
a) As a patent attorney I know that ideas are two-a-penny; but quality investable entrepreneurs or management teams are not. If I had a £1 for every Angel who backed off for that reason I would be a very rich man.
b) Exits. The ability to achieve an exit is paramount. All the tax incentives in the world are worthless if you cannot realise the fruits of your investments. In the UK we have a major structural problem as many find it difficult to secure exits within the UK and have to sell out to the US or Japan or elsewhere. This ultimately ensures that the long term benefit of Angel investment is not realized within the UK economy.
What can Govt. do? To my mind the following would help.
i) Don’t focus on more tax incentives for Angels.
ii) Invest in the development of entrepreneurial skills. If enterprise and entrepreneurial skills are so vital to the UK economy and so lacking in investment opportunities for Angels then the Govt. should look to develop this potential within our young (and not so young!). The entrepreneur loan (like a student loan) idea is a good one. It strikes me as a missed opportunity in Business Angel Networks (BANs) not to invest in this area. These networks are awash with expertise both from the Angels and service providers and Govt. should encourage and assist BANs to set up and run mentoring/training opportunities for would be entrepreneurs. At present BANs are highly focused on the needs of Angels and are closed to outsiders in many respects.
iii) If you talk to many who consider Angel investment there is some negativity about this route. I think one problem is that all of the incentives to bring together the Angels and SMEs are directed at the Angels. That misses the reality that most of the costs associated with building these relationships are born directly or indirectly by individual/company seeking investment and are higher than other routes. For small amounts of investment these costs (legal and due diligence etc) can be prohibitive and so a barrier. In addition the SME may also be putting its own retained and taxed profits into the project with very little additional incentive to do so although they may be taking as big a financial risk as the Angels. The Govt. should seek ways of minimizing SME risks in seeking Angel investment.
iv) The Govt. should seek ways to incentivize the non-SME UK industrial base with corporate venturing either into Angel invested opportunities or in combination with Angel investment. Facilitating Open Innovation may encourage more Angels to invest in start-ups for presenting to non-SME corporate opportunities and thus have a positive impact on the exit market.
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The tax breaks and EIS & SEIS are helpful and welcome but they are primarily about softening losses. One of the key problems though is companies that are successful (which is actually what we are trying to create). This is when you would think angels should make the returns that make it all worthwhile. But they don't typically.
Successful growing companies tend to require lots of cash and most angels do not have deep enough pockets to provide it which means bringing in new investors. And with those new investors tend to come preference stacks and cram down rounds that wipe out much/all of the angel investors' returns.
Dale Murray talked about her experience of a cram down round that would have wiped out all her angel investors when she was offered the needed investment at a pre-money valuation of £1. Lord Young used the phrase Dead Angels to describe it. I have seen this happen many many times.
Preference stacks also tend to wipe out the early investors too. I have seen preference shares that demand up to 12x return on an investment before other (earlier) investors see any distribution.
With preference stacks and cram down rounds wiping out the returns even if the company is a great success, its no wonder that angels are reticent to invest and will tend to keep their investments to those companies with modest cash requirements that they can fund from their own pockets. Which will generally not be the sort of high growth gazelles the economy is looking for.
It needs smarter people than me to work out what can be done but something to discourage this sort of predatory investment behaviour or incentivise good behaviour could give a lot more confidence to angels that if they back the earliest and riskiest stages of a new venture, they will share equitably in the rewards if it is successful.
The Downing Street discussion was positive. The improvements to investor incentives through the new CGT provisions in the EIS are welcome. There are matching government funds to allocate to medium sized investments through Enterprise Capital Funds. None the less this fund could be made more effective if it was allowed to back companies raising more than £2 million.
At the company level, there was mention by Lord Young of the return of SMART scheme financing for early stage businesses. This scheme was very important to the development of our company Bookham Technology in the 1990’s, that went on to become a world leader in optical components in telecoms and datacoms. Likewise, David Willets’ talk of the need to replicate the benefits of the USA’s DARPA scheme in the UK was encouraging. One of our portfolio companies in Los Angeles benefits substantially from a DARPA contract that makes both technological innovation and fund rising from private sector sources substantially easier.
Overall there was encouraging evidence that the government understands the issues surrounding the funding of innovation and the investment in companies that can grow large enough to become locally and globally relevant. Past, often under appreciated, experience in the UK and the current joined up policies in China show that government can make a difference if it allocates sufficient resources in an intelligent manner.
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It seems appropriate to add two more mixed clichés to the comments below: you cannot please everyone all the time and one size does not fit all.
The tax incentives, particularly the one-off opportunity under SEIS, should make an impact in the short term.
The Business Coaching for Growth programme underpinned by its Access to Finance theme is a major step in the right direction, helping SMEs and encouraging the angel community to mutual benefit. Assistance in targeting other routes to funding including corporate interest and potentially corporate funding is also welcome.
There is never a simple answer to this ongoing conundrum, but we would encourage Government to continue to be bold in its initiatives to provide an environment which enables the SME market to emerge stronger and healthier in the years to come.
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We received a tremendous amount of feedback on the subject before Friday's meeting and 3 themes have emerged from that:
1. More should be done to assist angel investors to collaborate, and to support those who facilitate that collaboration: suggestions included an approved structure for dedicated EIS funds and reducing the regulatory burden for intermediaries and small funds.
2. Further simplify and improve EIS: many people commented on the inability of angel investors to protect themselves from disproportionately low returns compared with VCs entering in later rounds and the huge disincentive to investment that this creates.
3. Provide more effective practical support for start-ups: suggestions included improving access to suitable mentors and a "service EIS" scheme under which experienced individuals would receive tax advantages for providing appropriate services.
More details of the results of our consultation are available at the below link:
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Senake A.
Director, Buzz Technology Ltd & Jointventurehubs.com / ERP solutions specialist
I would like to answer this question as someone who (a) founded and raised angel finance for my industrial robotics company (b) worked at RBS Financial Markets (c) someone who has hired - to mutual benefit - both recent graduates and long term unemployed (d) has some market aligned, semi-proven innovative solutions to enterprise and job creation.
Some of my thoughts on what can be done are as follows:
(1) Align innovation and shareholder returns.
(2) Put in place a transparent structure for incremental innovation. This would minimise risk, share rewards and reduce short termism for innovators, entrepreneurs and investors alike - tackling the broken seed funding, youth employment and pension ecosystems at the same time.
(3) Build on the success of crowd funding, by putting dormant people and resource to use - further reducing risk.
(4) Use securitisation. Administered right, it could make the angel investment market far more liquid and low risk.
(5) Add prototyping, sales and marketing' to the school curriculum. When I raised angel investment, having fulfilled two blue chip machinery orders was a contributory deciding factor for my investor.
(6) This innovation infrastructure should ideally extend to the government:public/business interface so that you attract the best ideas from the crowd in return for a small share of created value and/or recognition. Currently, only lobbyists and protesters are incentivized to 'join the conversation'.
(7) Finally, provide a short term - say 12 month - safety net for innovators and entrepreneurs so that they don't need to explain to their wife/family why they are leaving a safe job to embark on a (tax and job generating) venture creation. Do this without incurring additional public cost.
Please get in touch if you require any more information on the above.
