Sophisticated investors: what makes investing appealing?
Most high net worth individuals have had an insider’s view of the business building process.
They understand just how tough it can be to make it and the many barriers to success.
Despite this, many stake significant proportions of their wealth on the ability of startup entrepreneurs to overcome such challenges.
For them, the right business investment opportunity, with the right people at the helm, is hard to turn down.
There are many reasons for this. Some of the most appealing reasons include
Business investments can be more volatile than other asset classes, bringing both greater risks and rewards.
Backing businesses is an illiquid investment that requires patience from investors. They may wait upwards of seven years for an exit via a sale, merger, management buy-out or listing. This is if they have picked a startup that survives the difficult five-year window and built a compelling business. However, the prospect of a lucrative return on investment can make the long journey worthwhile.
Profit is rarely the sole motivation for investing in startups and SMEs but it is a major draw, despite the risks. The expected return on investment at the outset – and the actual figure received – can vary wildly in both directions. The length of time taken to reach the exit also tends to deviate from the original plan.The largest angel investment study ever undertaken, albeit in 2012, puts the average return rate at 2.6 times the initial investment (or 27% annual rate of return) with a 3.5-year path to exit.
This research, led Willamette University’s Robert Wiltbank and Warren Boeker, of Washington University, tracked 539 angel investors and 1,130 exits, including closures.
The UK Business Angels Association (UKBAA) estimates that angels lose money on 60% of their investments. Many successfully offset this risk by investing in numerous startups in multiple sectors.
For sophisticated investors with stocks and other asset classes, businesses present an opportunity to diversify their portfolios. Enterprises largely operate away from the direct exposure of global economic trends and the mass fluctuations that stock markets face.
If markets plummet, the rising fortunes of the startups they have backed may well protect and even increase their wealth. This is especially true for investors that have chosen to invest in startups and SMEs in a wide range of industries.
The UK government offers some of the most generous tax reliefs and incentives available to investors into startups.
The Seed Enterprise Investment Scheme (SEIS) and its older sister the Enterprise Investment Scheme (EIS) were launched to stimulate entrepreneurship in the UK by providing tax incentives to help mitigate the levels of risk involved in investments of this kind.
With both schemes offering similar incentives but with notable differences, you can find out all about the relevant tax reliefs here:
- The Enterprise Investment Scheme (EIS) tax reliefs
- The Seed Enterprise Investment Scheme (SEIS) tax reliefs
Making a mark
Startup investment is an opportunity to help solve local, national and global problems. Increasingly, entrepreneurs are building ventures that merge social or environmental impact with financial return. And private investors, alongside blue-chip giants, fund managers and investment syndicates, are keen to get on board.
Impact investing enables high net worth individuals to change the world, while potentially boosting their portfolios - and with so many socially and environmentally-minded entrepreneurs around, investors can hone in on causes that matter most to them.
Unlike stocks and shares, business investments can be directly influenced by the investor. For some business angels, their investment is accompanied by a seat on the board or at least some advisory role within the startup.
Those from a corporate background may harbour unfulfilled ambitions to become entrepreneurs. Their investment can give them a taste of the entrepreneurial adventure without the overriding responsibilities.
A chance to add value
Many high net worth individuals have a world class level of expertise in a specific sector. Investing in a startup in the same space gives them an opportunity to put their in-depth knowledge and experience to good use.
Perhaps they want to bring more innovation or new talent into the industry – or are passionate champions for improvements to practices and service delivery in the sector.
Investors who have navigated the entrepreneur’s journey will remember the challenges they faced along the way.
They may recall the darkest days when expert support and guidance that would have been so welcome never came.
Backing up-and-coming entrepreneurs is a chance to give others a helping hand to the top and share the lessons they learned as their company grew. The satisfaction this brings is even better if healthy returns are forthcoming.
Angel investors can play a vital role in speeding the path from research labs to market. Innovations, such as new medical devices, can be relatively capital-intensive but have huge scope if their efficacy is proven. Business investors can help to get them off the ground.
Meeting interesting people
Business investing opens doors to working with some of the enterprise community’s many dynamic and infectious characters. Life as a business investor is rarely dull, especially for those that choose to invest in several sectors in firms at all stages of the growth journey.
Investing in startups and SMEs is a way of staying connected to the business world, perhaps after retirement or an exit from their own entrepreneurial successes.
Learning new skills
Rather than a passive sideline to bolster their portfolio, business investing for some angels is seen as a new career path. Many are keen to develop their mentoring and consultancy skills as they support their investment interests to achieve their milestones.
They can also gain a deeper understanding of the startup ecosystem and the various new sectors their investments take them into.
The ‘what if’ factor
Most seasoned investors approach their investments with realistic expectations. There will always be that faint hope, however, that the entrepreneur they have backed is the next Mark Zuckerberg or Jeff Bezos. Chasing new born ‘unicorns’ – billion dollar enterprises – is akin to playing the lottery.
But for all the scaremongering about startup failures, business investment does have the ability to throw up hugely positive surprises that were never foreseen in the planning phase. It all adds to the buzz of business investment.
Investing in startups
The ability to invest in startup opportunities has never been so great. It's as important as ever to complete your own due diligence and ensure the opportunities are right for you as an investor, but the options for everyone to access the investment opportunities are undoubtedly there.
Favoured by sophisticated investors around the world, every investor will have their own reasons for investing into startups, but they all ultimately fall under the same umbrella - which is the investor has confidence in the startup company and believes their investment proposition is perfect for their own portfolio.