Entrepreneurs raising funds via SEIS and EIS are, on the whole, treading a well-worn path as they widen their circle of contacts in search of investment.
Invariably they start by talking to friends and family; investors who are prepared to take a view on backing someone they know well and who might not look so closely at the underlying proposition. Once this route is exhausted our budding entrepreneur starts to seek out other private investors not previously known to them and then finally, dependent on how much is being raised or the stage of their business, will look to find an institutional investor.
It could be argued that in this whole process the hardest challenge is finding the business angels, the private investors who are not part of the friends and family circle, and then persuading them to part with their cash. So who are these people and where do you find them? Traditionally a business angel was an individual who had made money through the sale of their own company and was looking to achieve further capital gains by investing in a portfolio of early stage businesses in a sector in which they already had deep knowledge. Typically, this investor would also take a seat on the board and be closely involved in advising their investee company. These business angels are still very much around but are increasingly hard to find as they themselves retreat into a comfort blanket of closed circle relationships, investing in people and businesses already known to them or accessed via a preferred introducer.
Equity investment platforms
Equity investment platforms aim to substantially widen the circle of private company investors available to an entrepreneur but these new investors have a very different profile. The majority will not have made their money through the sale of their own business and indeed may never have worked in a small company. Their reasons for considering investment will vary widely and thus their attitudes to risk will also be very different.
At CoInvestor, we recently conducted a wide ranging YouGov survey amongst UK adults each of whom had investable assets greater than £100,000. More than half our respondents had investable assets greater than £250,000 and nearly a third more than £500,000. The results were in part expected and in part surprising.
A unanticipated number (70%) did not have a financial adviser, more of them held an investment in a cash ISA (65%) than in a stocks and shares ISA (46%), and none of them, not even the millennial’s, had yet invested into ETF’s via a robo adviser. When we delved into their attitudes towards private investments the response was more heartening; whilst only 7% currently held investments in start-ups, EIS or VCT’s, 22% indicated an intent to do so in the future. Their reasons for this were a combination of seeking higher returns, tax efficiency, yield and diversification.
When asked why they did not currently hold these early stage investments 55% stated their main reason as not feeling that had sufficient knowledge to make an investment decision and 38% put investment risk as the principle reason.
It is these answers that give the clue to the investment appetite of the private investors who entrepreneurs are hoping will replace traditional business angels. These investors do not have deep sector experience and generally remain very wary of the risk, and yet are starting to consider this investment sector in response to volatile public markets, changing legislation and an emerging awareness of the opportunity.
As an industry, we need to respond;
Entrepreneurs must recognise attitudes to risk, if possible raise more from friends and family and be more realistic on valuations
Advisers need to continue to educate themselves about the early stage investment sector and research optimum ways for their clients to access this market
Fund managers need to consider providing investors with access to their expertise in a variety of ways
Investment Platforms need to work with all the above to provide education and opportunity in equal measure