Much has been said and written about the equity gap. Some believe there is no gap, just a lack of investment-ready companies for equity providers to invest in. There’s some truth in this, but not much. The fact is, no matter how well-run or exciting a business, most equity providers won’t entertain small investments of a few tens of thousands or even a few hundreds of thousands of pounds.
With the exception of a limited number of Venture Capital Trusts (VCTs) there’s simply too much cost and uncertainty for institutional investors in smaller deals. The institutional market is therefore effectively closed to smaller companies, leaving them to negotiate with their bankers or with asset-based lenders, or to raise money from family, friends or business angels.
The rise of the angels
Over recent years the business angel market has become something of an industry. Potential investors, typically high net worth individuals, can join angel networks or more formal investor networks, gaining access to opportunities on an individual or collective basis.
There are many angel networks that hold regular investor presentations to profile early stage and growth opportunities. Investor networks such as Hotbed, take a different approach, finding suitable development capital opportunities, agreeing a clear exit plan with management, structuring and executing the deal and offering participation to members, normally in investment units of £25,000. This provides investors with a flow of opportunities and an interesting portfolio approach.
What are the angels looking for?
Investing in smaller businesses is not for the faint-hearted and, unless pre-vetted by an investor network that has done its homework, seasoned investors will quickly discard most opportunities. A poor business plan, low barriers to entry, unrealistic financial forecasts and (often) ridiculous valuation expectations are just a few of the factors that will quickly put an end to potential investment for these cash-hungry businesses.
While the majority of businesses are simply not suited to external investment, there are still plenty that are. For those that are well organised, with a sensible plan and more than a vague idea of when and how investors are likely get their money back, the angel and investment networks represent an under-exploited opportunity. There are three key reasons for this.
Firstly, members of angel and investor networks are, in the main, serious individuals who want to find sensible investment opportunities. They pay fees to belong to their networks and do not generally want to waste their time.
Secondly, there are often significant tax benefits for investors. If the business qualifies under the Enterprise Investment Scheme (EIS) regime, investors may be able to claim income tax relief and obtain relief from capital gains tax on a future sale of their shares. There may also be potential inheritance tax advantages.
And lastly, many angels may be happy to work part time on the business, giving valuable advice, providing knowledge, experience and connections and helping the management team to fast track their growth.
Those who deserve and need funding should go and look. It’s still there for the taking.