11 reasons angel investors choose to invest in startups
Investing in start-ups can be exciting and rewarding when done properly. Angel investors are typically the first investors in high-growth start-ups providing much-needed venture capital. Investing early means two things for angel investors; higher risk but more importantly - the potential for much higher returns.
Venture capital and angel investing provides access to investment opportunities in game-changing start-up companies with the potential to disrupt entire industries…but only if done correctly.
In our experience, 20% of companies drive 80% of returns, so success hinges on accessing the best opportunities. However, rather than being stacked against you, a well-thought-through approach to portfolio construction, in our view, can ensure the odds are stacked in your favour.
Here are 11 reasons why angel investors include venture capital investment opportunities as part of a well-constructed investment portfolio.
1. A considerable opportunity
Startups that spot an addressable market that can be exploited or disrupted, with lucrative results, have greater chances of securing investment.
Recognising such growth focused opportunities as an investor isn’t always easy, however, as the case of Amazon proves.
Following recent share growth, a US$5,000 stake in Amazon when the online retailer first listed in 1997 would have been worth $11.7m by July 2021 - yet even the great Warren Buffet reportedly rejected the chance to invest, later admitting he regretted not recognising the opportunity and taking action.
Often the shrewdest angel investors are those who spot a winning market opportunity that others have overlooked.
2. An alluring management team
When the people driving the business are clearly going places, angels find the pull to invest hard to resist.
There is no watertight model for the perfect startup management team, but sought-after ingredients include chemistry (between each other and the business investor), in-depth understanding of the target market and sector, relevant experience, flexibility - in terms of being able to adjust approaches and learn from mistakes – and the right skills needed for the stage the business is at.
Whilst management functions required as the startup blossoms into a successful SME can be added later, integrity is a key factor - are the founders trustworthy? Are they giving the investor the full story about their aims, credibility and intentions?
3. The business is scalable
For a strong return on investment, sophisticated investors are looking for signs of major sales growth on minor incremental costs.
The true test of scalability is whether or not real customers in significant numbers will pay the full price for the product or service. Anything else is speculative and investors will rigorously question business plans to make their own assessment of how scalable the business is.
4. It’s built around a solid business model
The methodology of how the startup will fulfil the potential of its idea is critical. A realistic, workable approach to attracting and converting the customers needed to grow and succeed is a big tick for any investor.
5. Encouraging figures
Having 'good numbers' doesn’t mean those tempting figures plucked from the air and which are reasonable only in the imagination of the ultra-optimistic entrepreneur.
Read More: UK startup investment surge post-pandemic
‘Good’, to an investor, means evidence-based, realistic and robustly tested. If the calculations are attractive and feasible given the detailed research and data supporting them, investment may follow.
6. The wheels are already in motion
Evidence of a product making traction in its target market boosts business angel confidence, making them more likely to invest. Has anyone actually bought the product yet? Is anticipation of its launch building? Momentum is a powerful force for investors as it it's a great indication of customer confidence.
7. Timing and trends
Some battle-hardened entrepreneurs believe there is never a bad time to start a business. Others are more pragmatic, and keenly follow trends and wider economic conditions before they make their move.
When a product arises that is perfectly in-tune with the backdrop conditions, and everything is in place to roll it out to the masses quickly, investors will emerge.
8. A chance to diversify
For many investors where the bulk of their portfolio is in stocks and shares, they can be left exposed to potential market volatility. Similarly, property-heavy investors are at the mercy of the fluctuations of the wider market and aspects outside of their control.
Although the economic backdrop can influence the success or failure of startups, they are generally much less exposed to shifting stock market dynamics and more tied into a specific sector and/or customer demographic.
Adding startups to a portfolio gives investors a more diverse mix of investments, something that's seen in both the asset type itself - an early-stage company - and within the asset itself, as investments into 10 startups could quite easily be in 10 completely different sectors.
When carried out through venture capital schemes such as the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS), startup investments not only have the potential to diversify, but also allow investors to benefit from a range of generous tax reliefs which can help to minimise risk and maximise returns.
9. Being a part of growth
While some angel investors remain in the background as their investment grows in value, others may want to take more of an active role. Although tough, growing a startup is an adventure that many investors enjoy being part of, particularly if then can add value through coaching, mentoring or introductions to valuable extended networks of business contacts.
For active angel investors, there's an opportunity to influence the outcome of their investment. A seat on the board, supporting the founders, gives them a rewarding role in helping to lead the company to success.
10. Making a difference
Impact investing, backing projects that have a positive influence socially or environmentally, is growing rapidly around the world.
Data published by Dealroom for the UK’s Digital Economy, has revealed impact tech startups (early stage tech companies founded to build solutions to the United Nations Sustainable Development Goals) attracted a record £2 billion of investment in 2021, up from £1.7 billion the year before and marking a 127% increase in UK impact investment since 2018.
Increasingly, business angels are looking to invest in ideas and innovations which challenge the world’s problems while also delivering a financial return, and with industry data suggesting the two are more closely interconnected than ever before, impact investing is witnessing a considerable surge.
11. The potential payback
Investing in higher-risk asset classes such as venture capital can pay off and land you some significant returns. Consider Google's investment journey - launching in 1997 as Alphabet with a $1m seed round. By 1999 they were growing rapidly and raised $25m in VC funding for a 10% equity stake. Google went public in 2004, with its IPO raising over $1.2bn for the company and almost $500m for the early stage investors. This was a return of almost 1,700% – There are many similar stories but investors don't need to rely on finding companies that exit via an IPO. Many startups are acquired by trade purchasers and private equity firms as they grow and deliver attractive returns for investors.
Whilst past performance of startups cannot be a guaranteed measure to predict future success, with the right due diligence, you may find some credible startups with the potential to deliver returns of 10x money (1000%).
Should you invest in startups?
It was not too long ago that investing in fast-growing companies was reserved for high-net-worth individuals or VCs. Now, with platforms like GCV Invest, anyone can be an investor and build a diversified investment portfolio.
Financial returns are critical but combine this with positive social, economic and environmental benefits – and you have a compelling investment strategy that has the potential to deliver more than just financial returns. And the evidence surrounding the growth of impact-driven investment is there to see. In the UK, social impact investing increased from £833m in 2011 to £6.4b in 2020. A growing number of investors are willing to back early-stage high-growth businesses that have a positive impact on society and the world we live in. This combined with the ability to access lucrative tax reliefs such as SEIS and EIS makes investing in startups and venture capital an attractive asset class for experienced private investors.
GCV Invest is a private investor network for experienced investors, We specialise in providing investors with access to carefully selected investment opportunities with the potential to deliver better returns than traditional investment products.
You can find out more about GCV Invest here.