Retail outlets are closing up shop in the UK. UK banks are struggling to make sense of early stage or high risk investments – as they always have, and this is happening across the world.
At the same time Regional Development agencies are being closed and dismantled in the UK and the ‘free to present’ opportunities for entrepreneurs to meet business angels are due to be shut or ‘transferred’ in the next few months.
So, in this grim climate, can it really be said that the business angel investment sector is blooming?
I think so, and here’s why…
Firstly, government funded business link or regional business angel networks have delivered only a modest impact and any awareness they have created is likely to be quickly transferred into the private sector.
I recently ran an analysis on a regional ‘free to present’ business angel network and discovered that of the 30 or so business angels present, more than half were corporate finance professionals and only 2 or 3 could claim to be out-and-out business angels, that’s around 10% of the audience. No wonder that some entrepreneurs felt let down by this time consuming and expensive process (your time is your money, after all).
Don’t forget, in order to present, entrepreneurs are required to deliver a standard business plan. That is, an accountant’s view of how a mature business might look – which, as any business angel will tell you, is far too premature for most businesses looking for a £50k to £100k seed funding round.
Secondly, the banks have never played a role in early stage funding anyway. So, whilst the finance climate for established and growing businesses may have tightened, this hasn’t really affected the earlier end of business start ups.
Thirdly, the government sponsored networks – despite their soon to be gone status – has highlighted the value of business angel networks. Equally, having tried the ‘free’ route more and more entrepreneurs are better able to value the alternative ‘fee paying’ routes.
Fourthly, the new tax regime in the UK – generous incentives for successful entrepreneurs (which, as the Sunday Times pointed out, costs the UK treasury very little because so FEW entrepreneurs are able to claim it!!!), along with the 30% income tax credit for all money invested into growth businesses (under an approved EIS) is very attractive and will encourage more wealthy individuals to invest in start up companies – or at least the Venture Capital Trusts that make it a profession to pick minnows.
Another change is that successful entrepreneurs are exiting a share of their companies to take advantage of the entrepreneurs relief and then looking to plough this money back into new start up businesses.
Fifthly, a ‘wealthy individual’ is more clearly defined in the UK by the £100k higher rate of tax band. Paying 61.5% marginal tax on income earned between £100k and £113k means that these individuals will be looking for tax reducing strategies which will lead them closer to start ups.
For instance, tax free ISAs can take up to £10,680 and pension contributions are now capped at £50k (down from £255k).
Therefore, more and more of these individuals will be looking at a substantial part of their income being taxed at 50% or more. What can they do? Well, early stage direct investments – as a business angel – or failing that, via a VCT is a smart tax strategy.
If they wrote a £100k cheque, they’d immediately get a £30k rebate from the tax man. 30% returns on day one – nice!
Sixthly, investors are sick of property and want an alternative investment which they can touch and feel.
Of course, for the past 20 years – since about 1991, many wealthy individuals have built up substantial property portfolios and profited very well. But this route too is now closed. Not only are property values tottering on a precipice and going to collapse or, more likely, simply crumble over a 5 to 10 year period, commercial property is looking less and less appealing too. Businesses which take offices are employing fewer people and subcontracting to freelancers more – so for the same turn over, fewer employees means smaller offices.
Equally, the retail end of commercial property (and logistics which supplies it) is going to have a horrid few years – massive growth in supply in the past 10 years coupled with collapsing demand and retail chains going bust is a recipe for massive losses on the side the property owners.
Don’t forget too, that with the new UK capital gains rules of 28% – up from just 10%, a capital gain is no longer so attractive compared to alternatives and hence property is out of favour.
Lastly, there are more and more ways to get involved. The business angel sector is evolving – with crowd sourcing options, angelsden (fun, chaotic and a bit like dating!), and formal networks offering different routes to invest. In addition, for those who don’t like the fun (thrill of the chase?) there are also the Venture Capital Trusts.