Angel investing can be a lonely course. Not to fear: there’s safety (and profit) in numbers, says George Whitehead of Octopus investments
ANGELS MAY HAVE the reputation for only being relevant to a rare breed of ‘dragons’ but according to the British Business Angels Association there are over 15,000 active angel investors in the UK. Not only is angel investing becoming more common, but the sophistication of angels and angel groups is accelerating, making angel investing almost an asset class in its own right.
When investing in an early-stage business that promises to be hugely disruptive to industry incumbents, it is hard to follow a set of rules that will help you steer towards making ‘home-run’ returns. The reality is that angel investing is risky and tends to be required when businesses have numerous potentially fatal challenges ahead of them.
It is important to recognise that these unpredictable young companies are only really relevant to sophisticated investors and high net worth individuals who can afford to take an educated bet on a business. However there are without doubt some key rules of thumb that can significantly de-risk an investment in these businesses.
The number one piece of advice I have for angel investors is not to go it alone. While I am heavily involved in angel investing, I also work for a venture capital fund with £250 million under management, targeted at supporting companies with very significant growth potential. It should be noted that despite having this level of investment in the fund we still look to co-invest with other investors at every round.
Here are three reasons why co-investing with a fund is beneficial:
First, be prepared for at least one further round of funding. If things go well, you want to be able to follow your money and invest in a growing business that is hitting milestones and going places. If things go badly, you want to have the option of providing the necessary cash to turn the business around or bridge it to a point where it is in a position to reach breakeven, exit or raise further funding. Whichever it is, money in reserve is of great importance to an investor and by combining resources with a syndicate you are in a stronger position to be able to adapt to any outcome.
Secondly, consider the syndicate as an extra resource in both human and financial terms. Building a business that is genuinely disruptive and has global aspirations is tough. Aligning your interests with those who can help the business at different points of its journey adds value to everyone concerned.
Finally, there is increased power in a syndicate. By syndicating, you combine all of your resources to be in a stronger negotiation position when entering in to a deal as well as when raising a new round of investment from external investors. If you are alone and unable to confidently follow your initial investment it is not unusual to find yourself washed out as the company seeks to raise further rounds.
THE GOOD NEWS is that joining forces with other angels is becoming easier. Favourable tax rates and a maturing angel market mean that there are now plenty of choices available for angels looking to syndicate with one another. For example, there are angel networks that regularly put forward a show of businesses seeking funding and actively help syndicate investments.
On the whole these networks will only showcase companies that have paid to present (thus limiting their deal flow) and they will generally leave the negotiation of the investment terms and the ongoing management of the investment up to the angels. On the positive side, they tend to be cheap or free for angels to attend and they are always hungry for new members. The British Business Angels Association can provide you with a list of angel networks across the UK.
At the other end of the spectrum there are professionally run syndicates such as Octopus Venture Partners, which my company runs. In this syndicate angels pay £3,000 a year to be part of the group and to have the opportunity to co-invest alongside Octopus Investments’ Venture Capital Fund. Every member of the group is a seasoned entrepreneur or senior business leader and the angels are actively encouraged to share deal flow, become actively involved on the boards of portfolio companies and to help open doors to ensure that the businesses supported achieve their maximum potential.
Whether angels are looking to join a loose syndicate or a professionally managed group, co-investing is a growing trend. Take a breath before your next angel investment and consider having some company for the ride.
George Whitehead is venture partner manager at Octopus Investments