It’s no secret that smaller (or unquoted) companies are the backbone of the UK economy. According to the Federation of Small Businesses, there were 5.9m such companies in the UK at the start of 2020. These employed around 16.8m people (61% of the workforce) and made revenues of £2.3 trillion − over half of the private-sector total.
While there are many risks involved, not least a high chance of losing all your money, investing in these companies has many attractions. In a best-case scenario, just one small shareholding in an unquoted business could eventually pay itself off many hundreds or even thousands of times over. The returns are theoretically unlimited, potentially giving you the funds to live out your life in financial freedom. Via several UK government schemes, there are attractive tax incentives available to private investors. Investors in small companies can also achieve the satisfaction of helping the UK economy to grow and great ideas to succeed.
For those interested in this exciting asset class, author Dr. Richard Hargreaves’ book Business Angel Investing should be top of the shopping list. Dr. Hargreaves is an experienced business angel, having nearly 50 years’ experience investing in young companies and helping them grow. After 10 years of investing in unquoted companies, he started venture-capital (VC) firm Baronsmead and then Endeavour Ventures, which invests in growth technology. He retired from Endeavour in 2018 to focus on being a professional business angel, investing only in B2B-software-driven opportunities.
This is a revised edition of a book first published in 2013 under a different title, updated to cover the changes in unquoted-company finance over the past few years. It is aimed at those who are looking for practical guidance on investing in unquoted businesses for the first time and more experienced financiers who want to refine their approach. Broadly, the book looks at how to find potential investments, and how to assess, organise and manage them, before planning how to exit.
Devil in the detail
Business Angel Investing is divided into four parts, all drawing on the author’s own experiences as a venture capitalist, active angel investor and non-executive director. These are packed with practical advice on how to be a successful investor and interspersed with case studies from Dr Hargreaves’ career, from which important lessons can be learned.
The first part looks at the basics of angel investing as whole, answering questions about the typical investor, whether they make money and what you need to think about before getting involved. To give a simple definition, a business angel is a private individual who invests in early-stage companies, usually for the long term. The other main source of investment for such companies comes from venture-capital firms. VCs typically put a minimum six-figure sum into their deals, so angel investors play an important part in filling the equity gap experienced by firms looking for smaller amounts of money.
Highlighting the attractions of the sector, Hargreaves sets out some figures from a survey by the British Business Bank. It found that some 30% of investments realised between one and five times the initial amount, with 14% realising more than five times. The most common exit route was a trade sale and angels were found to have held most of their investments for more than 10 years. On the downside, the survey found that approximately 56% of investments made were either completely lost or failed to return the amount invested. Unsurprisingly, overall portfolio returns tend to come from a few big winners.
The next part looks at how to find and assess good angel-investment opportunities; the types of investment instruments used in the sector (shares, bonds etc.) and how they are structured; the tax reliefs available; and how to analyse the legal terms of a deal. One of the biggest challenges an angel investor faces is generating deal flow to have a good chance of achieving attractive financial returns. Luckily there are many ways of doing this nowadays, with Hargreaves suggesting that joining a reputable angel network is one of the best.
As mentioned, the time involved in seeing an unquoted shareholding through to exit can be many years. So, in the third part of the book readers are given advice on how to manage their investments by taking an active role. Many angel investors like to get practically involved with the companies they invest in, maybe via a non-executive or advisory position, so Hargreaves discusses the key points of how to add value as part of a well-structured management team. A full chapter is also dedicated to what to do when things go wrong − for instance a lack of sales, need for financing or ‘people problems’.
The final part looks at the all-important exit from your investment. While some small companies go on to deliver returns in the form of dividends, the general hope in this industry is to make money through a sale of the company or a listing on the stock market. Hargreaves discusses the pros and cons of the IPO exit route, along with strategies and processes involved when selling a company.
Angel investing isn’t a ‘get rich quick’ scheme. If you make huge returns, it’s going to take a long time and even then it isn’t guaranteed. Nevertheless, it can be a hugely rewarding endeavour for many investors who have the required knowledge and experience to make it work for them. As angel investor Tim Mills says in the foreword to this book, “the returns when you get it right make what can often be a series of roller coaster journeys fully worthwhile.”
Richard Hargreaves has put together an excellent guide to angel investing here, with his industry experience coming across throughout. Business Angel Investing is packed full of practical knowledge and insights covering everything from how to find potential investments, doing adequate due diligence, structuring your portfolio and how to use your own skills to help your investments succeed.