Angel investment could soon become an interesting proposition, particularly due to the government budget announcement to offer tax credits to investors putting their money into start-ups. What are the opportunities and risks for business angels, asks start-up coach and entrepreneur Simon Azzopardi.
Simply put, a business angel is a successful entrepreneur who is willing to invest his or her own money into a new venture due to a belief in a product’s potential and a team’s ability to execute.
An angel is typically not a one-time investor but rather plays an active role in both existing investments and seeking future investments. Therefore, an angel investor is usually an individual with a certain volume of liquid assets and a high-risk appetite.
So people who have, say, €100,000 that they would like to invest should consider being an angel investor?
It’s not as straightforward because angel investing is very risky. Optimistically, 50 per cent of the start-ups you invest in will shut down in under two years, 30 per cent will survive, delivering little to no returns, and 20 per cent will thrive, covering the returns for your entire portfolio. Now, keeping this into consideration, it’s clear that the number of investments or deals you make need to be sufficient to cover or spread these risks. With a typical investment of between €20,000 and €50,000, in isolation a budget of €100,000 is difficult to justify in order to make a decent return.
So what is the number when angel investing starts making sense?
The truth is that there isn’t. You could argue that mathematically, you need in excess of a particular sum of ready-to-invest cash for it to be worthwhile. However, there are other factors that may influence an angel investor. What motivates an angel investor varies from making substantial returns to social or status reasons. Maybe it’s simply to remain active in an industry that the investor understands. What is clear is that angel investing is not necessarily only about return on investment.
So should someone be interested in angel investments, how should they go about meeting start-ups?
First, let us look at how entrepreneurs in the start-up world operate. Start-ups, particularly early stage entities, tend to form communities and be active at start-up events, such as Start-Up Weekend, as well as other meet-ups.
They do this because they want to be around individuals who have the same drive and passion. They understand that by being around energetic individuals with varying experiences, they would learn from each other, benefitting tremendously.
Similar to entrepreneurs, angel investors also have a propensity to form groups or communities, albeit with a different scope. Such communities give angel investors the chance to discuss different opportunities as well as compare different start-up models. They may also want to group investments between them in order to distribute risk or simply reduce the overheads of managing their investments.
Therefore, my advice to individuals or entities interested in similar investments would be to participate or register an interest at a start-up event. This will first and foremost give you an idea as to what start-ups are around, as well as a taste of the start-up culture in Malta. Moreover, such events are ideal to start getting closer to start-ups.
What stands out in Malta and why should you invest in locally incubated start-ups?
First of all, Malta is an ideal environment for start-ups. It’s a great place to live with access to quality talent and lower burn rates of capital. Most importantly, there are decent young entrepreneurs coming in from all over Europe to take advantage of what Malta has to offer. To give a few examples of some of the start-ups already based here, we have Pirate Roaming looking to remove roaming charges when abroad, Hotjar offering an interesting analytics platform for conversion rate optimisation, and Reaqta, that is looking at software security in an entirely refreshing way.
True, Malta is still very new to this game. However both the quality and momentum at which the space is developing should certainly attract interest from angels and corporate investments.
Lastly, what about culture? Anything that needs to change here?
You can make excellent returns through angel investing. However for long-term presence in the start-up world, a good angel investor needs to be a good person. Angel investing is not a business model where you make money at someone else’s expense. Start-ups create wealth but not in a zero sum game. The beauty of it is that no one has to lose for you to win. If you mistreat the founders you invest in, the company will do worse and your referrals and deal flow will dry up.
Finally, it’s important for angels to remember that they are the first investors in a start-up and typically not the last. Taking too much equity or control could severely harm the start-up’s future potential and therefore your own returns.