Since the financial crisis of 2008, the alternative market for private investment in enterprise has grown dramatically. Record low interest rates, increasingly generous tax reliefs under Enterprise Investment Schemes, stress tests on banks and a change in attitude towards entrepreneurship have been key. Alternative finance business lending, including angel investing, is now more than 12% of the market for lending to all small businesses in the UK – and it is experiencing eye-watering year-on-year growth.
‘Crowdfunding’ enables individuals to back products or services for equity, in shares, or debt, in bonds or mini-bonds. Equity-based investment trebled in value to over £300m in 2015, with online platform Seedrs recently reporting results from its portfolio of an overall 14% annualised rate of return. Five years ago, there were just a handful of plucky startups in the sector. Equity-based crowdfunding was just 0.3% of the total start-up and early stage equity investment in the UK. Today, it is almost a fifth.
‘Peer-to-peer’ lenders match savers, who are willing to lend, with borrowers – either individuals or small businesses. Zopa and Funding Circle, the two biggest lenders in the UK, report that they have facilitated loans valued at over £4bn. According to analysts AltFi, absolute returns are just over 5%.
Then there are ‘angel’ investors. There are some 18,000 active ‘angels’ in the U.K., who invest an average of £47,000 every year into early-stage businesses, says the UK Business Angels Association. Individual angels are making more investments than ever and the Association reports average returns of 15% – 20% p.a. when invested across a portfolio.
Two years ago, I founded a network of angel investors in West London, with support from the Royal Borough of Kensington & Chelsea. Members of Wild Blue Cohort seek profit on their investment but also a more vibrant entrepreneurial economy – and local, on our doorstep, if possible. Members have invested in 11 companies to date, with 4 new deals about to close. Investments range from £10,000 to £200,000+, have created well over £2m+ in value and 35+ new projected full-time jobs.
The popular image of angel investing is of an elite gin-Jag-golf-club millionaire with piles of cash, confronted by a nervous, rambling entrepreneur intent on revolutionising home shelving or the safety of garden sheds.
The reality could not be more different.
Think of the Chief Financial Officer of a cloud computing company, or alumni of a global private equity or venture capital firm; and an ambitious, progressive entrepreneur set on displacing a market leading firm, removing intermediaries in transactions, achieving fast growth and winning guidance and support, not just cash off the table.
Over the last twenty years, the rise of Silicon Valley, global banking, the development of computing and corporate culture have transformed entrepreneurship, the nature of wealth and its investment.
Angel investors offer entrepreneurs a sizeable lump sum, as individuals or a syndicate, but also sector expertise. Eight members of Wild Blue invested recently in an online ‘marketplace’. Two investors joined the Board of the company and a third is acting as an informal advisor.
Technology, healthcare, online marketplaces, e-commerce businesses, education, food and drink companies have been favoured by angel investors in recent years. Businesses that appeal have an inspirational, trustworthy entrepreneur, a clearly addressable market and solve a defined problem. They are able to scale quickly, attract new investors and have a clear ‘exit’ strategy.
The age of raising finance for your business on the fairway of the 18th hole is well and truly over. It is now about online clicks, links and a flight of local angels schooled in the new economy.
David Barrie is founder/CEO of Kensington-based angel investing network Wild Blue Cohort.
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