If you’re looking to become an angel investor, or you’re just looking to manage your own portfolio for the first time, we’ve rounded up the best tips to help you achieve the best results.
START WITH A PLAN
Having a clear idea of where you are and where you want to go financially is a crucial first step.
Take a look at how you plan to achieve your goals, as well as contingency plans – such as carrying adequate insurance – for unforeseeable events that can derail even the best laid plans.
Use sources like the Financial Planning Association and Certified Financial Planner Board of Standards. Both websites contain useful resources such as articles, videos and planning tools to help you create your own plan. However, if the process seems too much for you, you should look into finding a quality financial planning professional to help you out.
It’s a basic rule for investing, but it’s still an important one. By diversifying your investments, you’ll improve your chance of getting a better return. You can also learn how to manage and improve the balance between risk and return by spreading your money across different investment types and sectors whose prices don’t necessarily move in the same direction.
Diversifying your investment can help you smooth out the returns while still achieving growth and reduce the overall risks in your portfolio.
HAVE REALISTIC EXPECTATIONS
Companies that investors often do the best with are the “singles” and “doubles” because they don’t need the company to raise large amount of capital to go after the £100 million+ outcome.
Investors can often be best suited going for companies that are worth in the low single digit millions who are trying to go for the most likely outcome for any company, which is £2050 million.
That can be a ten times return without having to raise VC capital. This is often a better approach than going after those rare unicorn investments.
By taking the time to develop an investment process, you will be able to address how you will build and maintain your investment portfolio. From the allocation of your assets to its implementation and monitoring, your investment process will define how you go about investing with the discipline of a professional.
Make sure that your process takes into consideration your capabilities and limitations. Keep in mind that managing your portfolio does not mean you have to do it alone – consider developing a network of like-minded investors to share information and emotional support.
FORMALISE A FUNCTIONAL INVESTMENT POLICY
Your investment policy statement should document all that you have covered so far. A well written investment policy will serve as a working document to help keep you disciplined and focused on executing your plan. You can find sample investment policy statements online which you can modify to meet your needs.
You may find as you work through these steps that you do not have the desire, time, or knowledge to manage your portfolio on your own. The more elaborate your investment policy, the more likely you may encounter difficulty developing a process that works for you.
Whether you decide to continue managing your portfolio on your own, or hiring a professional, either way these tips can go a long way for you. The time spent figuring all of this out will help you have a clearer understanding of what you're looking for in an investment and serve to guide you as you grow as an investor.
Startups and entrepreneurs are a great asset for any country. New business and ideas help introduce new sources of wealth into an economy, first by creating new products or services for purchase, and second by providing incomes for people who need jobs. In the UK, SMEs accounted for 99.9 percent of all private sector business, 59 percent of private sector employment and 48 percent for private sector turnover – which indicates the enormous importance in relation to both job creation and tax revenue that these type of businesses play.
This is one of the key reasons why there are now a rich amount of incentives available for both business and individuals investing in this sector of which private equity investments form a large part. Here’s how:
Venture Capital Trusts
Venture Capital Trusts (or VCTs) are companies whose shares trade on the London stock market. VCTs aim to make money by investing in other companies, typically companies that are smaller and looking to further develop their business.
To encourage the success of VCTs and increase interest in others to invest in them, the UK government offers tax breaks to those who invest in VCTs. If you are a UK tax payer, you can receive a tax rebate of up to 30% when you invest in a Venture Capital Trust for at least five years. Keep in mind that this rebate is only available when you invest in a new issue of shares in a VCT.
If you own at least 5% of the shares of a UK business, where you are a director, partner or employee, you may be eligible to apply for Entrepreneurs’ Relief. Entrepreneurs’ Relief is a tax relief from the UK government for individuals and some trusts who sell all or part of a trading business that they have owned for at least 12 months. This relief reduces the effective rate of capital gains tax to 10%.
Enterprise Investment Scheme
To recognise the importance of Angel Investing in the UK, the government has introduced the Enterprise Investment Scheme (or EIS). This scheme can gain both income tax and capital gains tax relief to investors who subscribe for eligible shares in small unquoted companies that qualify under the scheme.
The Enterprise Investment Scheme includes 30% income tax relief on up to £1,000,000 of investment per tax year, exemption from capital gains tax on disposal of EIS shares after the end of the three year relevant period, and unlimited capital gains tax deferral in respect of the disposals of other assets on amounts reinvested in EIS shares.
Seed Enterprise Investment Scheme (SEIS)
Lastly, in 2012, the UK government introduced a new scheme for angel investors called the Seed Enterprise Investment Scheme (or SEIS). This new scheme offers up to 50% relief on making investments in very small businesses with growth potential that are at a very early seed or startup stage, which have only just started trading and may have little or no revenues and very few assets.
The SEIS scheme also offers exemption from capital gains tax on gains realised from disposals of other assets, inheritance tax relief for SEIS investments, and exemption from capital gains tax on disposal of SEIS shares after three years.
As with EIS, there are a number of requirements in relation to the investors. For example, investors must be unconnected with the company and under SEIS the investor, together with associates, cannot own more than 30% of the ordinary share capital, the issues share capital or the voting power.
These tax reliefs placed by the UK government are great incentives as an investor to continue investing in entrepreneurs in the country, thus increasing the amount of success of entrepreneurs and startups in the UK. Do keep in mind that as with the government tax relief schemes, it’s important to carefully look at all the requirements for eligibility before applying. All tax reliefs carry conditions and advice should be sought when deciding which to pursue.
If you’re looking to enter the world of angel investing, you may be slightly intimidated. Where to start? Who to invest in? Where to find investments? What is expected of me?
These questions and more could be running through your mind, but getting started as an angel investor is actually quite easy. It’s this simple: you give a startup money and they give you stock.
It’s as simple as that.
The stock that you receive as an angle investor will either be preferred stock (stock with extra rights like getting your money back first in a sale) or convertible debt (which means you’re lending the company money and the debt converts to stock at the next sufficiently big funding round).
While there are some minor advantages to using either one of these stock options, it really doesn’t matter which one you use – so don’t get too caught up in the details of the deal terms, especially when you’re just starting out.
So, what’s the easiest way to get started?
First try finding a friend or colleague who’s already an angle investor and try getting included in his or her syndicates. Syndicates are when angel investors join together to invest on the same terms, and usually a lead investor negotiates the terms with the startup for the group. Through this option, all you have to do is write the checks – simple!
But at the same time, don’t feel like you have to join a syndicate. It’s still not that difficult to get started as an angel investor – even if you’re doing it on your own. Use some standard documents, such as the AA documents Wilson Sonsini and Y Combinator published online, to get your deal going and just make sure you have your lawyers review everything.
Next, when you begin negotiations with the startup, there are two main numbers you should really care about: how much money you’re putting in, and the valuation of the company. That’s because the valuation determines how much stock you get.
Second, and less obvious, is you should care about how much will be expected of you within the startup. Just like the amount you invest, this can vary a lot, depending on what you and the startup are looking for. You don’t have to do anything if you don’t want to, but always keep in mind that there are other ways to add value to a startup besides money as an angel investor.
But ultimately, you should try not to get too hung up on the mechanics or deal terms of an investment too much. To really become an angel investor – and be successful at it – you need to spend your time thinking about whether a company is good and finding winning startups to invest in.
In actuality, the hardest part of becoming an angel investor isn’t the mechanics of the deals, it’s about picking the right companies that will give you the most in returns. As an angle investor, you have to pick startups before others have realised they’re a hit.
So now where do you start finding these amazing startups? While there are plenty of ways to find them, especially the wide array of online resources, the best way to start is through referrals from your already established contacts. If you join a friend’s syndicate, this will be done immediately for you. If you don’t, ask your friends and family already in your circle of recommendations. Then, invest!
By investing and diving in, you’ll have a better chance of finding a steady stream of reasonably high quality startups. Why? Insiders in the angel investment world will be reluctant to send you any referrals until you’ve proven yourself by actually doing a couple investments.
So if you want to invest seriously, get started by working off your existing connections, look for good founds of winning startups, don’t get caught up in the mechanics of the deal and, overall, be a good investor in the startups you meet along the way and eventually you’ll start to get a steady stream of investment opportunity.