Want more Angel investing in the UK? Then let’s talk about returns

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This is a guest post by Jeff Lynn, the Chairman of The Coalition for a Digital Economy (Coadec) and Co-Founder and CEO of Seedrs. In this piece he argues that if we want to encourage angel investing in the UK, the discussion in the angel community needs to focus more on the returns investors can achieve.

Last week saw the release of two significant reports on angel investing. In the US, super-angel Ron Conway presented the results of an audit his company, SV Angel, had conducted on the 500+ investments it has made over the past 12 years. Meanwhile, in the UK, Professors Colin Mason and Richard Harrison published an annual report on the state of angel investing in Britain.

At first glance, the differences between these two reports seem mostly about American vs. British style: the Californian Conway laid out his data casually before a TechCrunch conference, while the British professors wrote a formal, 100-page study that was distributed through a government website.

But closer examination shows that there is also a substantive distinction, and it’s a profound one. Whereas Conway’s short talk focused almost entirely on the performance of startups and the returns that angel investors like him have achieved, Mason and Harrison used their 100 pages to talk about every other possible topic—levels and types of investments made, tax incentives, co-investment structures and much else—and made merely one passing, vague reference to how these investments actually worked out.

I think this distinction underlies one of the most significant problems with the UK angel community: the tendency to see angel investing as something that people do for a whole host of reasons other than making a profit. Britain has a long tradition of characterising angel investing as tax efficient, as benefiting from government subsidies, as an opportunity to provide mentorship or help local businesses and so forth, but unlike other types of equity investments, angel investing is very rarely talked about as a way to make capital appreciate over time. There are exceptions, of course, especially in the many individual angels who focus almost entirely on making profits from their investments, but these tend not to be the people who set the tenor of discussion or are responsible for promoting angel investing more broadly. That role is largely taken by government departments, industry organisations like the British Business Angels Association (BBAA) and the sorts of groups that sponsor reports like Mason’s and Harrison’s, and the “official line” that comes from them pays shockingly little attention to returns.

There are two serious problems with ignoring returns. The first is that the average returns from investing in startups are exceptionally good. The main data on returns to UK angels comes from American professor Robert Wiltbank’s 2009 study, Siding with the Angels (which, to its credit, was commissioned in part by the BBAA). Wiltbank shows that startups have been a fantastic asset class over the past decade: while the distribution of returns has naturally been highly non-normal, on average angel investments have produced a 22% internal rate of return (IRR), outperforming not only public equities and property but also venture capital. Other data, including Conway’s audit, tell similar stories elsewhere in the world, and intuition backs it all up: as the costs of creating value continue to decline, agility and adaptability are coming to be far more relevant than scale. This means that, on average, lean, innovative startups are better positioned to generate returns for their investors than are larger companies.

But beyond being wrong, the more unfortunate consequence of failing to focus on returns is that it discourages investment. The hard truth in a capitalist society is that capital chases assets that are likely to appreciate, and where there’s a risk of losing the capital (as is the case in all types of equity, but in particular with startups), the potential for a meaningful upside is crucial. Sure, there will be a few people whose peculiar tax situations in a given year mean that they care more about EIS relief than about how the investment does. And sure, there will always be altruists who want to support businesses in their field or region no matter what the outcome. But these people do not an investor base make.

If we, as members of the “startup community” and more broadly as a society, want to see more money being invested in more UK startups, there’s only one way to do it: make the people who have capital aware of the substantial returns that are available from investing their capital in UK startups, full stop. Lengthy studies on differences in allocations between stages of development or the effect of this government scheme or that are all well and good, but that sort of information should not be a focus. Instead, we need to see more discussion and more data along the lines of Conway’s talk and Professor Wiltbank’s report. Let’s talk about returns.

  • http://uk.linkedin.com/in/damonoldcorn Damon Oldcorn

    Yes a bit like this blog, 1 maybe 2 succinct paras would have covered it. The Valley/CA way is transparent they are not afraid to deal with failure. While we PR the limited successes, UK/Ireland still not able to deal with the downside of entrepreneurship, which will always be proportionately greater. So given that perspective will be rare to get the real facts in any Govt or other industry sponsored reports.

    • http://www.tiny.cc/sj3e5 dikko

      I agree with him. Angel investing is much prosperous in US than it’s in UK, based on numerous aspects of the subject industry. http://www.tiny.cc/sj3e5

  • http://www.whitebearyard.com Stefan Glaenzer

    Excellent post, Jeff. Will have a look into it

  • http://www.paloalto.co.uk Alan Gleeson

    Good post Jeff, would definitely be great if there was much greater awareness amongst investors re the type of returns being achieved. With low interest rates and uncertain property markets, angel investment is an excellent alternative option.

  • http://www.thestartup.eu Stefano Bernardi

    Awesome analysis and comparison. Thanks Jeff. The rest of Europe is mostly the same if not worse, the problem is to get this across to the wealthy people who are not involved in the startup community.

    Unfortunately in Europe we don’t have so many success stories that produced hundreds or thousands of angels like in the States, so the real problem is how to get “normal” people interested in investing in startups for the only right reason, creating value and wealth.

    Really hope you’ll change something with Seedrs,

  • AndreaF

    I am glad it was you reading the 100+ pages and not me. Thanks for summarising it.
    In my experience, in the UK it’s a lot about tax benefit and prestige for the angels, in the US is about returns and the entrepreneurs.
    In the rest of Europe is about “why should I give you my money???”

  • Bob Ellis

    UK Angel Investors to UK Entrepreneurs: Show me the money!

    • Martyn Walker

      Why not? Where shall we meet!

    • Rich

      and also: give me an unreasonable amount of capital and while you’re at it sell your soul and let me crash your business – because we know you can’t get s**t better for a thousand miles from the UK!

    • Frank Viljoen

      Angel Investors, I am currently building what is set to be the BEST Social Networking App, ready for launching in the App Store, on 20th September 2010 with a sale price of £1.79 ($2.99). For this I am looking for a £50k investment for the build and marketing of the App and in return I am offering 20% return on the 1st Million downloads, = £200k? Any takers on this ROI opportunity?

  • Etrigan

    For once, a well-written and erudite post on Techcrunch. Nice one Jeff. However:

    When talking about the ‘average’ return on angel investments of 22%, you smothly gloss over what you call the ‘non-normal’ distribution of such returns. In simple terms, such high returns can only come with correspondingly high risk.

    In other words, that 22% return on a sample angel portfolio comprises maybe 1 investment making a 200% return, and 9 investments making a negative return (i.e. going bust). This is because as we know, smaller startups are indeed more risky and likely to fail than larger companies.

    So by all means, trumpet the higher returns on angel portfolios. But also be transparent about the iron law of finance- higher returns come with higher risk- and a particular investee portfolio does not contain one of those few startups that makes a 200% IRR, the investor is statistically very likely to see his entire investment portfolio brutally wiped out.

    • Jeff Lynn

      I absolutely agree. Angel investing is very high-risk (which, as you say, is going to be true for any high-return asset class), requires diversification, and even with a diversified portfolio you’re likely to have a negative return if you don’t hit one or several big winners. Those are key points for any angel to consider, and they need to be part of the discussion. That said, my sense is that most angels and prospective angels are pretty well aware of the downside, whereas it’s the upside that rarely seems to get publicised.

  • jrh

    I don’t really understand this complaint, because Conway refused to specify his IRR. He just said that more money is coming in than going out.

  • http://blog.thestateofme.com Chris Swan

    Nice post Jeff,

    I do however wonder whether the returns are good precisely because there’s a limited pool of capital committed (because investors have been discouraged – by a lack of returns data or otherwise). Just look at other illiquid asset classes like VC and Hedge Funds, both of which had a heyday before becoming too popular, ultimately leading to an overcommitment of capital and diminishing average returns.

    I’d also love to know how much time (in addition to money) the angels had to commit? The returns model would surely look less attractive if you figured in the day rate that a typical angel would bill for consulting or non-exec work (though no doubt some bill such fees to the companies they invest in).

  • http://pinkygonzales.com Pinky Gonzales

    When you say “super” angel, do you mean that in a “Big Gay Al” kind of way?

  • John

    Fine words indeed, but where’s *your* solution? I’ll note that seedrs has been talked about for well over a year, and still no sign of anything actually launching. It’s somewhat laughable to position yourself as the man with the answers to the problems of angel investment in the UK, and yet offer nothing by way of a solution other than hype and marketing fluff.

  • John

    Oh, look…


    “Getting very excited to share v1.0 of the Seedrs private alpha with directors and shareholders tomorrow. Fantastic job by @cmsilva and team.”

    So after all this time seedrs is only at the alpha stage. Why has techcrunch made itself party to nothing more than a publicity piece for yet another perpetually ‘coming soon’ startup?

  • Jessica

    What do you do John?

  • John


    Does the answer to that question alter in any way the vaporous nature of seedrs?

  • Jessica

    Obviously the answer to that is no, however it would alter the way I veiw your vaporous comments.

  • http://www.ezebis.com Pemo Theodore

    Its quite depressing reading this post altho a good reality check. No wonder it is so… difficult for european entrepreneurs to raise investment. I recently did a video interview with Randy Komisar on European Entrepreneurs. Randy is a venture capitalist with Kleiner, Perkins in Silicon Valley. http://www.ezebis.com/venture/randy-komisar-interview-european-entrepreneurs/

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  • http://www.angelsden.co.uk Angels Den

    Loving the PR on this!

    Your comment: “make the people who have capital aware of the substantial returns that are available from investing their capital in UK startups” was interesting, however.

    I’d proffer that they already are. But they’re also aware of the risks. It is our job to educate both parties to allow those risks to be minimised with an overall beneficial effect on the returns.

    To focus on the rewards without acknowledging the risks is simply patronising those capital holders.

  • http://www.merchandisingplaza.co.uk/ bryansmith

    I read your post. The way you tell about things is awesome. I always wait for your posts. They are inspiring and helpful. Thanks for sharing your information .

  • http://holyvc.com Vitaliy

    i am writing the blog about this issue(The Holy VC – about software developers and venture capital)…

    yes, this is well known “practice”… unfortunately…

  • stephen

    this is a self evident truth: the fact that angels in uk/europe don’t talk about returns is a symptomatic not causal. and so 1) the appetite /acceptance of risk is total diff this side of the pond 2) we simply don’t have a large enough pool of successful entrepreneurs intellectually capable of following in the footsteps of conway et al.

    most angels here are hobbyists which is why they never talk about returns: there’s little genuine engagement between them and founders because of this. angels den/etc just exacerbates this gulf – its the reality TV syndrome: entertainment that satisfies peoples expectations but delivers little of value. we need a cultural/mind shift to take place before angel investing becomes a real asset class that recognises angels/founders are on the same side of the table and that cash is not the only thing required.

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