As an investor with a solid portfolio of stocks and property interests, why would you consider getting involved in what's often seen as the turbulent world of startup investment? The perils of backing early stage businesses are well evidenced, with various studies putting a startup’s chances of survival at somewhere between 10 and 50 percent.
Yet sophisticated investors continue to flock to the angel investment game, despite the very real prospect of capital wipe-out.
Most startup backers are fairly pragmatic about their ‘why’ - the opportunity for sizeable returns makes the risks worth taking.
A 2016 study by the Angel Resource Institute suggests startup investors can expect an average return on their investment of 22 percent, after an average of 4.5 years.
Serious startup investors will often back 20 or more enterprises in search of such returns.
Smaller amounts of investment fed into a larger number of businesses helps them to mitigate the failure rate of startups. Exponential gains from one or two bright spots in their startup portfolio can offset losses elsewhere.
Then there is the lingering prospect that your next startup interest could be a multibillion-dollar ‘unicorn’ in the making. Imagine if you’d backed music streaming site Spotify from day one, for example. An IPO earlier this year put its value at US$26.5bn at the end of its first day of trading.
Diversification is another major pull factor for business angels. Although volatile themselves, startups are not directly exposed to the threat of market turmoil, unlike public stocks and shares. Startups are an extra asset class to add to your portfolio to give it more balance.
Tax breaks have also intensified interest in startup investment in recent years.
UK investors who back certain unquoted, small firms can benefit from the Enterprise Investment Scheme (EIS). Meanwhile, those investing in very small, early stage businesses with high growth potential may find the startups are eligible for the Seed Enterprise Investment Scheme (SEIS). Through Social Investment Tax Relief (SITR) there are also tax breaks for angels involved in social entrepreneurialism.
On top of financial incentives, startup investment is an opportunity to make a positive impact within up-and-coming businesses, and in the wider world.
On his website, Richard Branson says he invests in startups because “they are the job creators and innovators of the future”. For savvy investors, often with a wealth of experience in a particular sector behind them, angel investing can be a hugely fulfilling pursuit. Having achieved their own entrepreneurial success, they can impart their expertise to help others do the same, creating new opportunities in the process.
There are other sirens to the risky-but-exciting startup game too, however. Since the nineties, the image of entrepreneurialism as a high stakes thrill ride has spread evermore widely.
The dotcom boom ignited a global wave of entrepreneurialism. Broadcast time and column inches devoted to going it alone then increased exponentially. Business tycoons assumed rockstar status, while TV dragons taught us how to fly in the startup world.
And, under the watch of Lord Sugar, winning investment became a gameshow where fortunes can turn on the wag of a finger.
Compared to the stock market, with its never-ending cycle of ups and downs, startup investment offers an exciting world of opportunity to newcomers.
Throw in the chance to meet and work with innovative thinkers, and an alluring prospect awaits.
Government and quango intervention has also contributed to heightened interest in startup investment. While Silicon Valley remains the startup mothership, startup accelerators and hubs can now be found in most major cities, including in the UK.
Networking events, training and mentoring help to prime new enterprises for investment and nurture them towards success. For investors, they make startup opportunities more visible and easier to access.
Growing interest in startup investment may also be partly due to the ongoing rise in startup populations. Various studies show the number of businesses, and therefore the opportunities to invest, continually increasing in the UK.
UK government figures show there were 5.7 million businesses in the UK in 2017 – up from 4.2 million a decade earlier. The Department for Business Innovation and Skills (BIS) stats show that the business birth rate in the UK has edged up over recent years, while the death rate has remained relatively flat.
At the last count in 2016, the birth rate – the proportion of active business that were formed that year – was 15 percent. This compares to 11 percent in 2011. The death rate in that period rose only marginally, from 11 to 12 percent.
And more recent figures suggest the technology sector is where most new startup investment opportunities are arising.
There were 10,016 software development firms launched in 2017, representing a 59 percent surge on the 6,300 launched in 2016.
This study, based on RSM’s analysis of Companies House figures, also shows that new technology startups in London in 2017 hit 4,238, which is a remarkable 76 percent climb on the previous year.
With rising startup numbers comes soaring investment levels. According to research by London & Partners, 2017 was a record year for UK tech investment.
UK tech scale-ups, those businesses with an average annual growth rate of more than 20 percent over a three-year period, attracted £2.99bn in investment. This is almost double 2016’s figure of £1.63bn.
These numbers may well continue to increase in the coming years, as more and more investors switch on to the benefits of backing startups.
In the longer term, startup investment opportunities could reach new levels, partly influenced by UK education policy.
Over the last decade, enterprise and entrepreneurship education have become increasingly prominent on school curriculums.
A landmark 2014 report, ‘Enterprise for All’ by Lord Young, set out a number of recommendations to embed entrepreneurship in the classroom. It came amid recognition from the government that the days in which schools needed to generate process-driven skills required by mass employers were over.
With 95.5 percent of businesses employing less than 10 people, young people need to learn more about self-reliance and creativity, and less about conformity. Various measures have since been put in place, including injecting enterprise into lessons and exams, getting entrepreneurs into schools to inspire and advise, and various startup competitions and schemes.
And so, the first generations of school leavers whose education has been steeped in entrepreneurship will soon make their way in the world. Many will be dreaming of a career at the helm of their own business.
The long-term gain for the UK economy will hopefully be an army of exciting new enterprises – some of which will have what it takes to survive. For investors, it means more opportunities to broaden their portfolio, share their expertise with emerging talent and enjoy the startup journey.