Blog

Angels, portfolio investing, the Crowd and the startup

Jonathan Gold

13 Jul 2014

So if you are looking for investment for your new business idea or even perhaps investing what should you do, where to go, Angels, VCs or the Crowd Finance community? Only the brave or the foolish will give you investment advice on this as it has to be your choice. I am not giving advice here only pointing you at some of the evidence.

Perhaps the most famous and definitive study of investing in Start-up businesses was performed by NESTA in 2009, the report is worth a look "Siding With Angels" published in May 2009. They surveyed 158 business angels in late 2008 who invested in total £134m in 1080 deals and 406 exits. An exit of course is getting your money back out, harder than putting it in, that' a hint by the way.

There was also an interesting, more up to date, but slightly smaller study carried out by Deloittes on behalf of the BBAA (the British Business Angels Association) published in late 2013. This one looked at 262 angel deals from 62 angels and £137m worth of investments. I suggest you look at both yourselves they are not a tough read but are the best evidence based work I have seen, outside my own experience as a Fund Manager, in the UK. Then you can make your own mind up.

However, my point here is that I have noticed a growing use of these studies to justify investment in Crowd Funding. I am in favour of any form of investment activity. Just don' forget to read the small print and take real advice from proper financial advisors and I'm not one...

The point is that the two studies above conclude, roughly, that:

  • You can make a good return from investing in start-ups... BUT
  • Most start-ups fail
  • Investing across a number instead of just one or two is a good idea
  • Don't do it unless you can create a portfolio to spread your risk
  • Be prepared to loose money these are risky investments.

Some in the Crowd Funding world have take this as a positive indication that Crowd Funding reduces your risk, as . Well that is not entirely true; although you are spreading your investments.

What they fail to remind us of is:

  • Business Angels have large amounts of cash and can afford to loose some
  • Many Angel investors do loose money
  • Some make money
  • Most spend money on the investment process, see below...

Most Angels are experienced business people and or employ advisors to help them assess and spread their investments to reduce risk. Many also work with venture capital fund investors who assess and carry out extensive research on potential investments, and still loose as well as win.

In short, the two are not comparable in such a simple way as some would have you believe from the articles and chatter I see out there on the web.Lastly, if you are an entrepreneur looking for investment why should all this bother you? Well because you get different things from different investors. VCs are not Angels (no pun intended...) and the Crowd is different again.  Pay attention to the terms and conditions and what you have to do to manage the investors is something you should all think about before accepting the cash.

Just remember getting investment is a lot easier than paying it back.


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