Although business angels are a significant source of early stage finance, there is little systematic research into outcomes and returns in the UK.
The report, published in collaboration with the National Endowment for Science, Technology and the Arts (NESTA), says the average Internal Rate of Return (IRR) for business angels investing in start-ups in the UK is 22 per cent over four years. This compares with 27 per cent IRR in the US.
The report is based on a review of 1,080 investments. More than half were in very early stage, pre-revenue start-ups, the riskiest time of a company’s life. This was reflected in the investment returns. While 56 per cent of investments made a loss, the remainder resulted in positive returns with 9 per cent generating more than 10 times the capital invested.
A number of strategic choices and practices, 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, may lead to better outcomes, according to the report.
NESTA’s Chief Executive Jonathan Kestenbaum said, “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 government-sponsored Enterprise Investment Scheme (EIS) and other tax incentives contribute substantially to angel activity, with 82 per cent of angels using the EIS at least once. Angels said 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, said the research proves that business angels are now the key source of investment in early stage high risk companies. “BBAA estimates that angels are currently investing around £1billion per annum in the UK and it is important that further individuals should be encouraged to consider this asset class supported by targeted financial incentives.”
He added, “Angels bring not only their own finance, but [also] business-building skills. The UK needs to significantly increase the pool of business angels to invest in the successful innovators of tomorrow.”
On average, business angels in the UK invest £42,000, with each investor making around six 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 five investors co-investing in any one round.