Siding with the Angels: New research shows how to make a profit from risk

19/05/2009

"As the UK grapples with finding new sources of finance to build the sectors that will drive our economic recovery, Business Angels will form a critical new asset class."

New research published today by NESTA (National Endowment for Science, Technology and the Arts) in collaboration with the BBAA (British Business Angels Association) reports for the first time that Business Angels stand to make a substantial profit from investing in start-ups, with an average Internal Rate of Return (IRR) of 22 per cent over four years, compared with 27 per cent IRR in the US.

Business Angels - investors who put personal money directly into young unquoted companies - are a significant source of early stage finance. But despite their increasing importance, little is known about their outcomes and returns in the UK. 

The report reviewed 1,080 investments. More than half were directed at very early stage, pre-revenue start-ups - the riskiest time of a company's life.  This was reflected in the investment returns. Despite the fact that the majority of investments make a loss (56 per cent in this study), a substantial number (44 per cent in this study) lead to positive returns with 9 per cent generating more than 10 times the capital invested. 

The report also suggests a number of strategic choices and practices that may lead to better investments outcomes such as investing in one's area of expertise, performing at least 20 hours of due diligence before investing and staying connected with the business, preferably at a board level.

Commenting on the research, NESTA's Chief Executive Jonathan Kestenbaum says "Angel investing can be a strong viable complement to traditional forms of investment which are not making anywhere close to 22 per cent returns.  As the UK grapples with finding new sources of finance to build the sectors that will drive our economic recovery, Business Angels will form a critical new asset class."

The study finds that the EIS (Enterprise Investment Scheme) and other tax incentives contribute substantially to angel activity with 82 per cent of British angels using the EIS at least once; and the angels stating that about 24 per cent of their investments would not have been made without the tax incentives.

NESTA and the BBAA are calling for the Treasury to increase the Enterprise Investment Scheme tax relief from the current level of 20 per cent to 30 per cent for the much higher risk start ups.

Anthony Clarke, Chairman of the BBAA says " This research has proven that Business Angels are now the key source of investment in early stage high risk companies. BBAA estimates that angels are currently  investing c.£1billion p.a. in the UK  and  it is important  that  further individuals should be encouraged  to consider this asset class supported by  targeted financial incentives. Angels bring not only their own finance, but  business -building skills.  The UK needs to significantly increase the pool of business angels to invest in the successful innovators of tomorrow."

The report says that on average Business Angels in the UK invest £42,000 and each investor makes around 6 investments.  Investors typically reviewed 20 opportunities each and acquired 8 per cent of a company.  Co-investments are seen as the preference for investing in start-ups with on average 5 investors co-investing in any one round. The figures generated by this study were comparable to the performance of the US Angel market relative to the size of the Angel community.

Contact:

For further information, please contact Chani Hirsch at the NESTA Press Office on 020 7438 2601 or Chani.Hirsch@nesta.org.uk or Jenny Tooth at the BBAA on 020 7089 2331 or jenny.t@gle.co.uk

Notes to editors:

About NESTA:

NESTA is the National Endowment for Science, Technology and the Arts, an independent body which works to foster innovation in the UK.
With the largest portfolio of early-stage businesses in the country, NESTA is a leading authority on how to grow new ideas. 

About the BBAA:

The BBAA is the UK's only trade association dedicated to promoting angel investing and supporting early stage investment.  The BBAA provides a forum to integrate and share good practice on developments and trends in early stage investing, offering new services and tools to support the investment process. With a membership of over 23 networks representing over 6000 business angels  as well as a wide range of early stage VC funds, BBAA  acts as voice to Government, stakeholders and the media on the angel and early stage investment industry. www.bbaa.org.uk

Please note the BBAA is a launching  a major national and regional campaign to promote business angel investing, backed by Government and which will be launched on 28^th May 2009 4-7pm at the ICAEW,  1 Moorgate Place, EC2R 6EA

The key findings of the report:

• Business angel investments can be made effectively with reasonably attractive returns; and several responsible business practices can materially improve the prospects of business angel investors.
• Although business angel investing is risky, overall it generates attractive outcomes. The overall return of 2.2 times one's capital investment in just under four years compares favourably to other types of investment. This is in spite of the fact that angel investors are not generally professional investors and they are making investments in particularly risky ventures.
• This overall return, however, is not normally distributed; most exits are failed investments, with 9 per cent of the exits generating 80 per cent of the positive cash flows.
• Investment success increases based on Angel's expertise, and particularly if they have industry experience, or if they are serial entrepreneurs.
• Being involved post investment was related to better outcomes, particularly where the investor was a fit for the board, although it may be possible to be over-involved, where angel investors who took management roles experienced worse outcomes.
• Follow-on investing was related to more investment failure, highlighting a tension between ensuring venture survival and the need for investor diversification.