For many investors, the chance to work with entrepreneurs and support them on their mission is part of the appeal of backing startups.
Many will have recently exited their own entrepreneurial venture and be looking to put their capital gains to good use.
Investing in early stage businesses allows them to diversify their portfolio and possibly benefit from strong returns. There are also attractive tax incentives, largely delivered through the Enterprise Investment Scheme (or its sister scheme, the SEIS, which is explained here).
Startups are also a vehicle through which investors can share their expertise with people starting out on the enterprise journey.
Unlike asset classes such as property and listed stocks, startups enable investors to have a direct influence on the growth in value of the asset.
For those keen to make a career out of angel investing, this can be highly rewarding and exciting, especially if they back a range of startups in different sectors. Many business angels, therefore, go far beyond the basic requirement of a regular shareholders’ meeting.
If you are time starved, however, a hands-on arrangement may not be possible.
How, then, can you make the most of investing in startups without it taking up too much of your busy schedule?
If the heavily-engaged business angel with upwards of 20 investments is one end of the spectrum in terms of involvement, what other scenarios might suit you?
The silent partner
While many startups seek investors for their connections and expertise as well their cash, some are merely looking for funding.
This type of opportunity may suit a business angel hoping for minimal involvement in their investments.
Extremely low on the involvement scale, is the role of silent partner – whose only function is to provide capital to the business.
Before any startup investment, trust in the management team’s abilities to deliver on their plans is critical. This is especially so for the investor wishing to leave the founders entirely unchecked as they work towards their mission.
An active investor may help to guide the founders through difficult dilemmas and encourage them to adjust or ‘pivot’ their business plans when things aren’t working. The silent investor must stand back as the inevitable challenges and setbacks arise.
It is worth reminding yourself, however, that the route to a liquidity event – such as a takeover or management buyout – could take several years. In that time, you may well be tempted to get involved once progress gathers pace.
If you genuinely wish to remain uninvolved through the journey, you must seriously consider how confident you are in the management team’s ability to realise their goals.
Key considerations include whether the team has the required mix of skills needed to succeed. Also, are the founders experienced in and knowledgeable about their target market? Do you detect any signs of disharmony between members? Not being afraid to hold fellow members to account is healthy in a management team; unfettered arguments and disagreements are not.
As George Deeb, author of '101 Startup Lessons – An Entrepreneur’s Handbook' explains, passion is also vital:
“It is critical that all involved have a deep passion for the product and fire in the belly to move at light speed to own your market. This is not a 9 to 5 job. This is a passion you are living and breathing in real time.”
Clearly, no matter how thoroughly you assess the management team’s credentials you are still reliant on some degree of assumption. How you envisage the business developing is only a projection and no investment is a guaranteed route to strong returns.
Some investors choose to put their trust in the entrepreneurial endeavours of family members. Certainly, this sidesteps any of the usual trust issues that come with management teams the investor knows only professionally.
But remaining relatively inactive in such arrangements may not be easy, especially if you have a wealth of business experience to share and a family member eager to access it.
Become a startup investor alongside the crowd
Equity crowdfunding is another route into startup investment that requires minimal input from the investor.
A growing number of online platforms enable new and small enterprises to raise funds, often – but not always - by selling equity in their business.
The downside of investing as part of a crowd rather than individually, of course, is that you have no control or influence over your investments.
But a major advantage is that it enables investors to quickly build up a diverse portfolio of interests. Investing in multiple startups from a range of sectors is an advisable tactic among sophisticated startup investors.
Relatively hassle-free crowdfunding platforms mean this can be done rapidly, without having to painstakingly analyse business plans and conduct a series of meetings with founders.
With some sites offering a minimum investment of as little as £100, there is also a low barrier to entry. Therefore, investors with busy schedules can 'test the water' with little risk or time commitment involved.
Invest in a Venture Capital Trust (VCT)
A VCT is a listed company which typically invests in small businesses, including startups.
The funds are managed and, therefore, require no input from the individual investor.
The investor’s only action of note is choosing which VCT shares to buy and when to offload them, hopefully at a profit.
VCTs offer you the chance to benefit from the growing value of startups, while also diversifying your investments. There are also added tax incentives - investors receive income tax on newly issued VCTs worth the equivalent of 30% of the investment up to £200,000 per year. This tax break does not apply to existing VCTs, however.
Also, dividends do not attract income tax, while any gains made are capital gains tax-free, assuming the various protocols of VCT investing are followed.
Investing in startups
The level of involvement you have in your startup investments is up to you, but must be made clear to any entrepreneurs you decide to back at the outset.
It is certainly possible to benefit from the many advantages of startup investment with a bare minimum of engagement. And who knows? Once you’ve dabbled with startups, you may decide to go full throttle into a career in angel investment.
Which ever path you choose, it is important to recognise that startup investment requires patience and a willingness to accept risk - but it can also be hugely rewarding.