What are the barriers to Angel Investing?

by Chloe Vernon-Shore, Partner at UK law firm Michelmores

As investors err on the side of caution amid economic concerns, data suggests that appetite for business investment remains high, particularly among millennial investors.

However, research published by Michelmores LLP showed a stark disparity between the number of respondents that would consider angel investing (60% rising to 82% amongst millennials) and the number that are already angel investors (2%).

An angel investor is someone who invests their own money in a small emerging business in exchange for a minority stake in the business. Angel investors tend to be entrepreneurs themselves, or people with extensive experience of the business world. Angel investment is, however, about more than just money and angels frequently offer mentoring and support and businesses that receive investment from an angel will also generally benefit from the investors’ time, skills, contacts and business knowledge.

So what are the barriers that prevent individuals from making the step from simply considering angel investment to actually becoming an angel investor?

Regulation

Angel investment is made at an early / emerging stage of a business. As a result, the likely success of the business is unknown. If a business is a success, an angel investor can realise high returns on their investment (10, 20, 50, sometimes 100 times on the original investment) but there is also a significant risk of the business failing.

As a result, angel investing is regulated by the FCA and an angel investor, to undertake any investment, has to be able to certify that they are a High Net Worth or a Sophisticated Investor, as defined by the FCA in accordance with the Financial Services and Markets Act 2000. By certifying as a High Net Worth or a Sophisticated Investor, an individual effectively confirms an understanding of the risk attached to angel investing.

This is, of course, important, but it does create a barrier preventing those people that cannot demonstrate a particular level of affluence or sophisticated business acumen from investing as an angel.

Lack of awareness

The research published by Michelmores identified several respondents that did not know about angel investment. As referred to above, the returns for an angel can be incredibly attractive so why aren’t more people talking about angel investment and advertising its potential? The answer is probably addressed in the previous paragraph; the risk profile attached to an early-stage business means that angel investment isn’t an opportunity that financial advisers will advertise to their clients in the same way that they might less risky investments. And you don’t know what you don’t know.

Language

The terminology associated with angel investment may be a barrier in itself. The angel investment community talks about “high-net worth individuals”, and this arguably creates an impression that angel investors need large sums of disposable cash, and that large ticket sizes are needed for each individual angel investment. This is inaccurate.

Angel investors do not have a blanket minimum investment size. Each deal will be for discussion and agreement between the founder and the potential angel involved. We have known individuals invest as little as £3,000. When you consider that this can realise a good return in a relatively short period of time, this is an incredibly attractive proposition to the investor. It may also be the last sum the founder needs to crystallise other investments.

Breaking down barriers

The barriers that we have considered are not by any means exhaustive. Regulation and risk are inter-connected and feed into a lack of awareness and knowledge about angel investment.  This is turn perpetuates the exclusivity of angel investment, which is further exasperated by the language used. All these hurdles operate to prevent individuals from taking the step from simply considering angel investment to actually making their first investment.

Like anything, raising awareness is key to growing this asset class and making it more accessible to individual investors and potential investors and to start-up and scale-up businesses. The data suggests that businesses seeking investment should target their efforts at affluent millennials, who are most likely to have a longer-term outlook and the appetite to become an angel investor.