I want to invest in startups.. how do I start?

One of the most common questions we get when people reach out is around is how to start (angel) investing in start-ups. TBH this is something we wish there was more reading material on when we started.

There are actually multiple different ways to invest into (UK) start-ups, many of which give you the benefits of SEIS and EIS investing, which is what initially convinced us to start investing.

1) Invest directly - You as the investing individual will be directly on the cap table of the start-up. This generally requires you to, at a minimum, invest £5-10k. You will also need to do your own due diligence on the start-up and the legal documents.

However the hardest part is deal-flow. You have to source these investments yourself and if they are a ‘hot ticket’, convince the founder to take your money, over another angel or even funds…

Summary - No fees, direct invest / name on ‘cap table’, full tax benefits (if eligible)… but a lot more admin, requires material investment, the opportunity to find you and for the founder (if it’s a hot start-up) to want to take investment from you.

2) Invest through a crowdfunding platform - The entry for many angels is to invest using a platform like CrowdCube or Seedrs. These platforms allow you to invest very small tickets (starting at £10) and into a start-up of your choice.

For this you will be charged an upfront management fee (as will the start-up using the platform). For an angel with little spare cash, this is a great way to start and you might even get a nice return… just don’t expect to appear on any rich lists!

Once you feel confident to invest larger tickets, the platforms allow you to do this too and it will even become a direct investment (when you get to ~£10k an investment) but you are still paying fees.

As the crowdplatform only lets you invest on what they have on offer you get startups raising for different reasons. Sometimes the reasons is that a successful startup is using the platform to let their ‘community of users’ to invest and share in their success. Monzo is a great example of this. However in many cases the startup is raising on the platform as they are unable to raise from angels or funds. We caution you to always do your research.

A new benefit of crowdfunding platforms is that they have started offering secondary markets in which you can sell your stake in the (successful) startup investments you have made to other investors.

Summary - Simplest way to invest, with smallest capital requirement and still offering the tax benefits. However you have to pay fees, can only invest on what is listed (so not neccessarily the best quality)

3) Invest through a syndicate - Another variant of this is investing into a ‘syndicate’ which then invests on your behalf into the start-up. Syndicates are usually made up of ex-founders or operators in start-ups and as such as usually invite only.

Unlike the funds which would invest in multiple startups from a single fund, the syndicate would invest using a new SPV for every startup, giving the members optionality for which investments they wish to participate in. In most cases, the lead of the syndicate would charge the members either an upfront managemnt fee, ‘carry’ fee (% of profits investment make) or both.

As a founder, syndicates give you less certainty than funds, as you don’t know the exact amount they will invest, however the theory is that they will give you ‘value-add’ advice from the members. We share deal-flow with a number of syndicates such as; Ventures Together, Portfolio Ventures or Collision Ventures.

Syndicates, which are invite only, would also expect you to invest at least £500-1k in any investment you choose to make.

Summary - Simple way to get access to higher quality deal flow, without needing to invest directly or with large tickets. Also can offer tax benefits too. However you will have to pay fees and be invited in the first place (by being part of the industry).

4) Invest through a VCT (Venture Capital Trusts) - VCTs offer some of the same benefits (such as 30% income tax relief) of S/EIS funds but not others like IHT avoidance or write-off of losses. In general VCTs are far larger than EIS funds and as such lower risk (as there are more companies in the portfolio), while also targetting a lower return, more akin to a 5% annual. Example VCTs include Octopus, Albion and Molten.

VCTs and EIS funds typically invest at the same early stage, often competing with each other. VCTs usually require a minimum investment of £3k.

As an angel, we are always happy to invest alongside VCTs as they do not use up the S/EIS allowance of a start-up.

Summary - For a fee and not too large a ticket, get access to deal flow which should be vetted and lower risk. You are get some but not the full suite of benefits of SEIS/EIS investing.

5) Invest through a SEIS / EIS eligible fund - These funds spread your risk by putting your investment across their entire portfolio. The downside here is that they charge you a hefty upfront management for this privelege and that you do not get to choose what start-ups they invest in. Examples SEIS / EIS funds are Haatch or Fuel.

Note: Some funds have dubious methods where they have a SEIS fund and an EIS fund, and use the EIS fund to ‘follow-on’ invest in their previous SEIS fund, this then show that it has gone up in value (on paper - only as they themselves have decided to invest at a higher valuation). This is used justify charging investors their hefty fees. S/EIS funds typically require you to invest at least £25k.

S/EIS funds can cause annoyance to angels, as they try to take up the entire SEIS allowance as a condition of investing, denying early stage ‘value’ add investors, the benefits they expect / deserve for risking their net capital and giving guidance to founders.

Summary - For a fee and a significant amount of investment, get access to a diverse portfolio of startups. However we do have a few concerns on the quality of deal-flow here.

6) Invest through a Venture Capital (VC) fund - The true liquidity providers to founders who have found some sort of market fit, are VC funds. There are early stage funds such as SeedCamp and SpeedInvest, but most funds start closer to or at Series A.

VCs can invest from early stage to just before IPO. VCs typically invest large tickets (£100k+ at early stage, to £millions+) and want a 10% stake and board seat for their investment. There are lots of varieties of VCs (such as follower founds, who only invest when others do and on terms already set) but in general most VCs have pretty similar characteristics and differ on the segment of the market they invest in.

The standard VC funding model is to pay a 2% annual fee for the amount you have invested with them and 20% of profits. As a new investor into an established fund, your investment size will need to be close to £1m.

Summary - For a fee and a large amount of investment, get access to an experinced investment team who carefully vet and invest in a diverse portfolio of startups, many of which you would not be able to invest in as an individual. No tax benefits.

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