Frank Holmes of Gambit on what you should consider before making an equity investment into a company
INTEREST in investing in start-ups has soared with the popularity of Dragons Den and The Apprentice displaying entrepreneurial skills, good or bad, on our television screens.
Business angel investment is not for the faint hearted and losses are an occupational hazard.
It is undoubtedly a risky proposition with often no security or defined timescales before returns are reaped, if at all.
The latest available government statistics for 2009 reported for the first time, that enterprise deaths in Wales exceeded births whilst the five-year survival rate for businesses born in 2004 and still active in 2009 was 47%, the same survival rate as the UK as a whole.
Despite a large proportion of start-ups either failing or never really achieving financial targets, there are some high profile success stories that would not have got off the ground without seed capital investment.
Fresh Trading Limited was a start-up that planned to enter the branded fresh smoothies market using an outsourced production system and led by a team of three friends with consulting careers behind them.
Many potential equity investors looked at this proposal and rejected it, but it has resulted in Innocent Drinks, a great angel success story with sales in excess of £100m, over 250 employees and offices across Europe.
One of the most famous British business angels is Ian McGlinn, the garage man who lent Anita Roddick £3,000 to launch Body Shop in Brighton in 1976.
Thirty years on, Mr McGlinn’s remaining investment grew to £137m when L’Oréal bought the chain. Google and Amazon are also remarkable success stories emanating from early stage angel investment.
As a business angel, you have to have capital that you can afford to lose, but apart from money, in order to mitigate the risk, you have to back your investment with time and application.
There are some golden rules that may be worth revisiting when considering an investment, including:
Funding in what you know and understand;
Undertaking your due diligence on the product, market and competition;
Only investing what you can afford to lose;
Understanding the risks versus the potential rewards and:
Reminding yourself that you are in it for the long-haul.
In these times of economic turbulence, there are plenty of opportunities requiring angel investment stimulated by limited available bank funding and entrepreneurs starting businesses due to lack of employment opportunities.
However, finding the right investment can be difficult.
The catch-22 of angel investing is that you are more likely to hear about poor quality companies that could be a bit desperate for cash than the really good ones that find it easier to raise money privately through family, friends or their contacts network.
Investment syndicates and angel support organisations report elevated interest from cash rich investors unable to get returns from the more traditional markets.
Indeed, we are aware of private debt lenders seeking higher interest rates than those available from the institutional alternatives.
Paul Ragan, who expanded his company “ProtectaGroup” into a multi-million pound business, which he later sold as the country’s leading independent insurance broker, remains a dedicated entrepreneur and business angel.
He said: “For me the experience of doing deals and mentoring business has been vast.
“The numbers of failures exceed those successes, which I put down to a lack of knowledge, business guidance and poor financial governance – something a dedicated Welsh Centre for Business could provide.
“This would create a transparent environment to ensure support in all areas whether it is through mentoring, training or funding and business growth and job creation would remain the key priority.”
The Government has announced a raft of initiatives to encourage entrepreneurs and generous tax breaks for investors, including the Enterprise Investment Scheme (EIS) for qualifying companies.
It is worth taking advantages of EIS. Brussels has recently cleared the Government to expand EIS by increasing the rate of tax relief available from 20% to 30% and doubling the annual investor limit to £1m.
The Treasury hopes the tax breaks will encourage greater investment in some of the UK’s fast-growing, smaller companies.
Since the EIS was established in the 1990s, Treasury figures show that it has supported, along with venture capital trusts, more than £11bn of investment.
The Treasury is keen to encourage angel investors because they typically support high growth companies creating innovative new products and jobs.
It hopes the measures will increase the amount of investment directed at the high-growth small business sector.
In conclusion, you will have to be very disciplined if you go down this investment route and even then be prepared to kiss a lot of frogs before finding a prince or princess.
Frank Holmes is a partner of Cardiff-based Gambit Corporate Finance.He will be the guest speaker at a Bobath Children’s Therapy Centre Wales event this Friday at the St David’s Hotel & Spa in Cardiff – as part of Cerebral Palsy Awareness Week.