Angel investor club is open not only to the wealthy

It's hard to argue with returns of as much as 700 per cent. Yes, there are risks to angel investing, but, as a recent report from the Halo Business Angel Partnership (HBAP) showed, some investors earned as much as a 700 per cent return following the sale of companies in which they invested.

Recently we looked at the growth in individuals lending money to a company, or so-called "peer-to-peer lending". But if you want super-sized returns, it's equity, rather than debt, you need to get.

So, if you have a dream of being a successful "angel" to rival those on Dragons' Den, what do you need to know?

Finding an investment This is the hard part. Pick the right investment and you can sit back and watch the money roll in. When Mark Little's start-up Storyful, for example, was sold to Rupert Murdoch's News Corp for €18 million in January, investors made a return of seven times their investment, while the sale of 2020 Insights to Swiss Post netted a return on investment of seven times to the original angel investor.

On the other hand, pick the wrong one, and you can expect to wave bye-bye to all your hard-earned cash. Stephen Houston, a professional angel investor and Halo's Angel Investor of the Year for 2013, knows this only too well. Since 2009, he has made five investments; in one of these he made a 100 per cent loss and he had to completely write off his €25,000 investment. The others have yet to exit.

But if you’re up for the challenge, there are some portals out there to help you find a suitable investment.

The Halo Business Angel Partnership, managed by the Dublin Business Innovation Centre, offers some protection, as it aims to match private investors with pre-screened investment opportunities in start-up, early-stage and developing businesses.

"We filter companies as they come through, and also angels as they come through, in terms of the quality of companies," says manager John Phelan.

It doesn't, however, recommend companies. Companies and investors come together to discuss the opportunities, with companies presenting for 10 minutes, followed up by a Q&A. "It's Dragons' Den without the drama" is how Phelan puts it.

With HBAP, you’ll need at least €25,000 to invest, and you can do so either on your own, by co-investing in a deal, or by joining or forming a syndicate. The partnership charges an annual fee of €123.

Another option is the Irish Angel Investment Network, which has about 500,000 members around the world, and allows investors to invest from "a few thousand euro to millions of euro".

Angel investors registered with this website range from a Dublin based accountant with between €10,000 and €250,000 to invest, to a software engineer in Boyle, Co Roscommon, looking to invest up to €5,000.

Syndicates can also be a way of accessing an investment. Typically constructed of two or more private investors working together to share the risks and rewards of investing in private companies, they can be organised via the Halo Business Angel Network or Irrus Investments, for example.

If you go down this route, Houston recommends that you look for an “alignment” in investors’ expectations. “It’s not fair on the company for a syndicate to have multiple voices. The idea of syndication is singular, that you have a single voice.”

And it’s not just Irish-based companies you should be considering, with online platforms for discovering and investing in start-ups abounding.

While offering equity stakes in companies is as-yet restricted in the US – at least until Title III of the Jumpstart Our Business Startups Act comes into play – in Europe it is growing in popularity.

In the UK, Seedrs. com accepts Irish-based investors and you can invest from as little as £10. It doesn't charge a fee, but will take 7.5 per cent of any profit you might make. Another option is seedups.com – an Irish start-up itself – which allows you invest in companies across Ireland, the UK and US via its crowd investing mechanism.

When it comes to picking the right one, Houston recommends that the skillset – and the personalities – of the founders is key.

“It’s a very intense relationship in the early days, and you have to make sure that the ‘chemical connection’ is right. As an investor, you have to be able to sit down and talk to them.”

You also want to make sure that the company’s product or service addresses a real need in the market. While it’s dangerous to let your emotions rule the decision, “your initial reaction is enough to let you know whether or not a second meeting is worth it”, says Houston.

Remembering the risks Angel investing is not for the faint-hearted, or for those who simply can't afford to lose their investment.

“It is very high risk. You should never put more than 5-10 per cent of your liquid assets into it,” advises Phelan.

The most obvious risk is that you’ll lose your money. While figures on failure rates for start-ups vary, you can expect that anywhere between 40-75 per cent will not survive.

Houston says investors should accept a “40 per cent fallover rate”.

One approach to diminish these risks is to diversify – so put your money into 10 companies, rather than one. If one of these works out, it would cover a couple of failures.

But there are other risks to consider too. Illiquidity is a risk. The chances that you will be able to monetise your investment may be slim to none because there is typically no secondary market for such shares. The best option you might have will be either to sell your shares back to the company or to find another investor.

“It’s quite difficult to get it [your investment] out. It wouldn’t be the norm at all; if you had to sell it out under distress, you might have to sell it a discount,” says Phelan.

“There are no two ways about it. You’re in it for the long haul.”

And even if your investment does come good, it’s likely that you will have to lock away your funds for quite some time before this happens. This means that you won’t be earning a return on your money until then, as start-ups rarely pay dividends.

Finally, just because your original equity investment equated to a 1 per cent share in the company, this doesn't mean that if the company is a success you will hold on to this weighting. If you've seen the Social Network, you might remember what happened to Mark Zuckerberg's erstwhile business partner, Eduardo Saverin. He originally had a 34 per cent stake in Facebook, which was then diluted to 10 per cent, and then reportedly down to about 2 per cent.

Indeed if a business raises additional capital at a later date, it will issue shares to the new investors, reducing your percentage. In addition, as seedrs.com notes, these shares may have certain preferential rights to dividends, sale proceeds and other matters, and the exercise of these rights may work to your disadvantage.

“Dilution is always a possibility,” says Phelan, but he adds that it may not necessarily be a bad thing. “If the company needs further investment to scale up, you get diluted. But because the pie just got bigger – you may actually go up in money terms.”

As Houston notes, “the impact of dilution is a psychological one if the rounds have been positive”.

Making a return on your money If your investment comes good, it can come really good. Take Decawave, the Dublin-headquartered chip firm. It has had €25 million invested with it for the last seven years, about €20 million of which came from 171 private investors, and €1.6 million from angel investors in Dublin. The company is now looking to IPO in the next two years or so, in a €100-€150 million deal.

“Those investors will make five to six times their money back on the IPO,” says Phelan.

However, the challenge with an IPO is that to monetise your investment you will need to sell all the shares at once, and doing so in a relatively young, thinly traded company may send the stock price plummeting. IPOs are also expensive. As such, experts typically say that the best exit for an angel investor is a trade sale for cash, as it usually maximises value for all shareholders, because they can all exit at the same time.

“Strategic exits are easier and a more natural fit for smaller companies than going into IPOs,” advises Houston, adding that for companies with a sub-€10 million exit valuation, a management buyout can be a natural fit as well.

On the other hand, a share buyback, where the company or the other shareholders buy the investor’s shares, may be one of the least attractive options, because the investor will want a high valuation on their shareholding, while the company will want it to be as low as possible.

Phelan, however, is agnostic on the best exit. “I think anything that gives you the money back is good.”

And remember, it might take some time to make a return. Typically, it is suggested that it will take about five to seven years but, according to Phelan, evidence from HBAP shows that the timeframe can be as short as three to four years.

Considering tax-relief options Investing in a business may come with tax relief, depending on what company you opt for. If the company is compliant with the Employment and Investment Incentive Scheme, which replaced the Business Expansion Scheme in 2011, you might find that you can get tax relief on your investment of up to 41 per cent.

The scheme offers 30 per cent relief on investments of up to €150,000 a year, provided that the investor keeps their money invested for three years. The level of relief offered can be increased by a further 11 per cent at the end of the investment, if it has been proven that additional jobs were created as a result of the investment.

And it is growing in popularity. According to latest figures from the Revenue, 655 investors put some €29 million into the scheme in the first four months alone of this year (full-year 2013 was 1,020 investors and €41 million invested).

However, it may be the case that early-stage start-ups – which you may wish to target with your investment – simply won’t be able to avail of the scheme because of the short period of time in which they need to repay the investment.

“I haven’t seen it working. Some people are very positive about it and some use it, but my understanding is that three years is too short a period to make it work for them,” says Phelan. “And there’s no upside on the equity part. Most clients want to be in the equity part.”

Getting involved Depending on the scale of your investment, it may warrant a non-executive position with the company, through which you can contribute your industry knowledge and experience.

“Most people do it for different reasons, it’s not always about the money,” says Phelan.

A lot of investors will have had success in their own businesses, and “love the challenge” of investing again.

“That challenge can be as much fun as the enjoyment of succeeding,” says Phelan.

For Houston, angel investing has become an almost full-time – non-paying – job. “It’s a very time-consuming business being an angel,” he warns.

His preferred route is to take a position on the board of the company, having learned from experience. “In one [investment] I didn’t enforce it and I got frustrated and took a step back. I’m now too frustrated to push any further.”

It's not crowd-funding Crowd-funding, as popularised globally by Kickstarter and FundIt in Ireland, is very different to angel investing.

With crowd-funding, you don’t take an equity stake in the business, and there is no potential upside if the business is eventually sold for a fortune – as was the case recently with Oculus Rift. The virtual reality headset developer raised $2.4 million on Kickstarter, and was then sold for $2 billion to Facebook. But those who contributed via the crowdfunding site didn’t share in the rewards.

As Houston notes, "you're not investing, unless you're getting an equity share certificate". Looking for an investment? Places worth checking out NearDesk (neardesk.com/) What is it: The oyster card for desks: rent desk space by the hour at various locations around the UK. Investment sought: £600,013. Percentage already funded: 86.6%. Source: seedrs.com

Networkr App What is it: A networking app based on Linkedin. Like Tinder, but for professionals. Investment sought: £25,000. Percentage already funded: 14.6%. Source: seedrs.com

WhatSalon (whatsalon.com/) What is it: Hailo for haircuts. WhatSalon is a mobile first platform that allows consumers browse, find and book hair and beauty appointments in local salons at the touch of a button. Investment sought: €750,000. Percentage already funded: 66%. Source: irishinvestmentnetwork.ie

Island Consulting What is it: Provides highly specialised and sought-after SAP compliance services and technical support services. Investment sought: €250,000. Percentage already funded: 48%. Source: irishinvestmentnetwork.ie