When you start to talk to investors for the first time, there are a lot of buzzwords that pop up. Here’s a quick guide to a few – and our views on them.
Many of us will have heard of Angel Investors – an invaluable group. They’re usually people who have made some money in their careers, are looking for a better return than the banks offer, and who MAY have some incredibly valuable experience.
Our advice in dealing with the angels is that their experience can be invaluable, especially if it is the right kind. We recently watched an angel investment turn into a total train-wreck. Had it not been for the experience of one of the angels, the business would have failed far sooner than it did – he almost saved it. However, in the post-mortem, he told us that if any of the angels had sector knowledge – they could perhaps have saved it. But, more tellingly – if any of the angels had sector knowledge, they would not have invested in it – because with knowledge of the sector, they could now see the fundamental premise was unworkable.
The point of that story – for both angels and entrepreneurs – is that sector experience is incredibly important. It can help guide your business plan to avoid mistakes, or when it gets tough, help you through.
The celebrity investors from TV’s Dragon’s Den are really angel investors. They are High Net Worth Individuals (sometimes known as HNW, HNWI, or if you’re lucky – UHNW – ultra-HNW!). Their actions are typical, although dramatised – they show passion and interest, and often differentiate on more than money – “I can help you with my network…”.
You can learn a lot from Dragon’s Den. Real angel investors are unlikely to be as stereotyped; they will rarely wear as much make-up, go for the soundbites, or show such passion. However, they are often emotionally involved – at the end of the day it is their money, and a smaller angel may be investing a significant proportion of their personal wealth with you. That gives them a very different set of drivers to the institutional or corporate investor.
EIS & SEIS
Anything involving HMRC always seems to make entrepreneurs wary! In fact, these two schemes are ways for investors to put money into a business in a really tax-efficient manner. SEIS is the Small Enterprise Investment Scheme – EIS is hopefully now obvious!
There are rules on the amount of money and the type of company that can work under these rules. Rather than spelling them out here, a very short summary is that SEIS allows investors to put small investments into a young company, and the potential tax breaks mean that in some cases, there is no risk- if the business does well, the investment goes up; if the business fails, the tax rebates match the original investment.
EIS is similar, but allows for larger investments, and older, more mature companies. As a result the tax breaks are not quite as good, but they still provide an incredible level of protection for the investor.
For the entrepreneur, all this means is that there are some rules to make sure the company is eligible – and then a few forms to complete. We can certainly help with these; the far more important thing is to make sure that you have a credible plan, to ensure that investors are enthusiastic about supporting your dreams.
EIS – A Caveat for Investors
We’ve seen a worrying trend among EIS and SEIS investors; they get hung up on investing in businesses to get the tax reliefs. That is madness. It is easy to create a company and make it EIS or SEIS compliant. As an investor you will get tax relief. But, the real big win is picking businesses that are going to succeed. Look at the plans, ensure that you believe, consider whether this is an industry you know something about, or at least have an interest in – only then consider an investment. Otherwise, you may lose your investment. With your tax credits, the downside of failure is negligible – but you owe it to yourself to pick the winners.