Did you ever consider that angel investing is like getting married – but without the prospect of the nicer elements normally associated with the first night?
And that every investment is not just heading for divorce, but actually is supposed to head for divorce?
Actually, this makes a lot of sense when you think about it. While, again like marriage, there are many reasons for doing it, most people invest to make money.
And our tax system is very generous – actually commonly agreed to be the most generous in the world – towards angel investors. But this applies to capital growth and not to dividends or other pay-outs.
In fact, this means that our tax system strongly biases towards buying shares cheaply and then selling them some years later at a higher price.
This capital gain can be free of tax and, in addition, the UK EIS tax schemes provide other benefits – especially if the investment goes wrong.
The result is that angel investors need to be thinking about how they can sell their shares at some time in the future.
Otherwise they are locked in to owning shares which can’t be traded in the way that big companies can – because small and early stage companies are not generally on the stock market.
The only way out – or ‘exit’ as it’s called – is a trade sale or floating the company, for example, on the Alternative Investment Market.
Sadly, in NI we have had precious few flotations, so for most investments money can only be released if the company is acquired by another larger company.
Fortunately for all concerned this is not uncommon. Large companies are, as a general rule, bad at innovating – the one thing which smaller companies are good at.
So acquisitions happen to grab good products and ideas and sometimes to capture good teams, especially technical teams.
Acquisitions also happen because a novel idea, once proven, can often be rapidly accelerated on the market when put in the hands of an existing large sales channel.
It’s a subject I will come back to later, but acquisitions of this type are usually good news and not the bad news ‘they sold out too early’ that some commentators will make out.
History shows that the entrepreneur will probably form another (even more successful) venture and that the angel investors are likely to plough much of their profit back into further companies.
All of this leads to the rather perverse need for companies to pitch their early stage ventures to potential investors while including details of how they hope to sell the company.
So, before the marriage (investment) takes place, you are already planning the divorce (company sale) with the strong support of all parties.
Actually, in the last couple of years there has been a serious lack of exits. Yes – we don’t have enough divorces!
It’s a knock-on effect of the banking crisis and the problems in the Venture Capital sector, where VC companies have moved towards less risky later stage investments.
This has meant that angels have had to leave their money in companies longer, which risks there being less money about for new companies.
So divorces are good and we need more of them.
To push the analogy even further, as the Director of Halo, the NI business angel network, I guess I’m like the minister performing the ceremony. And even I am pushing for divorce!
But in this case (and I won’t make any parallel with real life marriages) the divorce provides the delight of an exit where all parties should make a lot of money.
So perhaps I should end the ceremony with the words: ‘To have and to hold, til delight us do part’.
More information about Halo angels, or to contact Alan, click on www.haloni.com .
