Grant Lowe, of Private Wealth Advisers, looks at the risks and rewards.

Angel investing has nothing to do with religion or the plot of a new Dan Brown book. Instead, it’s a term used to describe investment in start-up businesses.

The word ‘angel’ is believed to have been first used for wealthy people who gave money to save failing Broadway theatre productions in the 1970s. Now it’s in general use to describe investors who provide much-needed ‘seed capital’ to early-stage start-up businesses, in return for a stake in the company.

Who becomes an angel investor?

Anyone can become an angel investor; however, the typical profile is a high-net-worth individual or organisation.

Given the high number of start-up businesses that fail, angel investors must be realistic that they may never see any of their investment money returned to them.

However, often people become angel investors not just for the potential monetary rewards on offer. Many angels are experienced, successful businesspeople, and see investment as a way of assisting other budding entrepreneurs.

Angels might remain passive investors. However, some will take a more active approach in assisting the businesses with ongoing advice, mentoring, and access to networks.

Small businesses form the lifeblood of a nation’s economy, so encouraging and assisting entrepreneurs to turn their ideas into profitable companies is an important role.

Things to consider

An investment in a start-up business is a high-risk proposition. A high percentage fail, and those that succeed can take many years to move from a growth stage before turning a profit.
So angel investors need to be realistic about the return on their investment, and must understand that for every ‘winner’ they can expect to see many ‘losers’.

Chairman of the New York Angels investment group, David Rose, says the failure rate of angel-funded start-ups can be around 50 per cent. Of the remainder, 20 per cent might return the capital that was originally invested, leaving just three out of ten businesses potentially giving investors a profitable exit.

Other issues for investors to consider are time frame and liquidity – your ability to realise your investment.

These are privately held businesses, so there is no easy way for investors to get their money out if they need it. Even if the start-up is successful, it may take many years before it’s able to return capital to its investors.

Angel investing should be considered a very niche part of a much wider, diversified portfolio, and investors should be aware of the risks associated with this form of investment.

How to invest?

There are many ways for people to become angel investors. For instance, you could invest directly into a business that’s being set up by a friend or family member.

There are also many angel associations and networks in New Zealand that set up introductions between entrepreneurs and potential investors.

One well-known example is Ice Angels, part of the business incubator The Icehouse, that has been operating since 2001. The group hosts showcase evenings where a select number of start-ups have a few minutes each to pitch their businesses to potential angels.

Some of the angel associations and networks also offer investment via a managed fund or investment syndicate. However, these opportunities are often only available to wholesale investors.

A more recent development has been the rise in capital-raising via equity crowdfunding platforms, such as Snowball Effect.

Success and failure

Angel investment provides much-needed capital to the country’s entrepreneurs and start-up businesses.

There have been some great success stories in recent times, including Auckland company PowerbyProxi which was bought by Apple late last year; Crimson Consulting, an education services company started in 2013 and now valued at more than $200 million; and Rocket Lab.
For every success there are a far greater number of failures – such is the high-risk nature of start-ups.

If you’re a potential angel investor, you must be realistic about possible monetary returns, but you may choose to invest just for the satisfaction of helping New Zealand’s best and brightest.

Definitions:

Seed capital: The first money used when you’re starting a business, often coming from the founders’ own personal assets, friends, or family. It covers initial operating expenses.

Diversified portfolio: Diversifying is about having a wide variety of investments, which reduces your risk. It’s about not having all your eggs in one basket.

First published Autumn 2018

Story by Grant Lowe

The editorial above reflects the views of the editorial contributor only and content may be out of date. This article is sourced from a previous JUNO issue. JUNO’s content comes from sources that it considers accurate, but we do not guarantee that the content is accurate. Charts are visually indicative only. JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions.