What is an angel investor and how do they operate in Scotland?

Edinburgh has an active community of angel investors

Yet few phrases conjure up such colourful images as “business angels”, rich businesspeople who spread their wings and swoop down to invest money in start-up companies.

Although the reality may be far less romantic than the name suggests, Scotland has a thriving business angel community, with investors pumping a record £26 million into 31 start-up companies in 2014, helping to push the total amount of risk capital invested in Scotland up to £244m.

Archangel Informal Investments, Scotland’s largest syndicate, expects the total amount of capital invested by its members will break through the £100m-barrier this year, [2016] with the combined funding arranged through the group and its partners – such as the Scottish Investment Bank, the investment arm of Scottish Enterprise – having already passed the £200m-mark last year. [2015]

David Grahame, executive director at LINC Scotland, the national angel capital association, said: “If you’re an unlisted company then you can only sell shares to certified high net-worth individuals (HNWI) or certified sophisticated investors.

“To be certified as a HNWI you need personal wealth in excess £250,000, over and above your principal residence and your pension fund, because those are not meant to be at risk.

“The sophisticated investor definition is more to do with accountants, lawyers and others with a similar background.

“Most business angels in Scotland actually invest from their income – they may have wealth as well, but technically they’re investing a certain amount each year from their income because it’s so tax efficient.”

Grahame stressed that LINC Scotland does not offer investment advice and pointed to general guidelines, which suggested that investors should not put more than 10 per cent of their investable assets into angel investing and should take a portfolio approach to spread the risk.

“That’s why groups and syndicates are very popular in Scotland – you could maybe risk a modest amount, perhaps £5,000 with any one deal, but spread the risk between, say, ten deals over two years,” Grahame added.

“There’s strength in working with other investors because you also pool your know-how, which also gives you some risk management.

“Some investors will want to setup their own syndicate with like-minded individuals, but others will want to join one of the existing 20 groups and we can help explain the options to them.”

For anyone interested in following the progress of early stage companies in Scotland, and in particular how they fund their development, the monthly newsletter published by Young Company Finance (www.ycfscotland.co.uk) is an essential resource. As the only publication devoted exclusively to this sector, YCF gives reports of all significant investment deals, and news and comment on the young company market generally. For further details and to register for a subscription, email [email protected]

Investors have different motivations for becoming business angels – some want to help companies to grow, while others simply want a return on their capital.

Some want to focus on a specific geographic area, while others focus on a specific economic sector.

Rob Dick, chairman of Tweed Renaissance Investors (TRI Cap), began his working life as a farmer, before setting up his own business in the chemicals trade, which he subsequently sold.

“When we setup TRI Cap in 2004, we didn’t really know what we would invest in or whether anyone else would invest with us, but most of the people – including myself – were driven by the desire to put back something into the Borders.

“Being an angel, you have to be prepared to take the rough with the smooth and be just as prepared to lose money as gain money.

“But, on the other hand, one of the best things about it has been the people because I’ve gained a lot of friends, both through the syndicate and through the companies in which we’ve invested.”

ESM Investments was founded in 2011 by Steven Morris to invest in technology companies.

Between 2001 and 2011, Morris had founded one tech business and been the co-founder of another, giving returns on their shareholders’ initial investments of 25-times and ten-times respectively.

“If an investor approached us with a view to joining ESM then we would ask them about their motivation – why do they want to do it, have they invested before and what was their experience?” Morris said.

“Some investors will just want to invest their money, while others will want to get involved with helping the company.

“Probably the more common path is partway in between – the investors will be happy to answer specific questions from the companies about their area of expertise.”

Ian Ritchie has become one of Scotland’s best-known business angels, having become an investor after selling his Office Workstations business to Panasonic in 1989.

“I tend to be a lone hunter – I invest in businesses by myself,” he explained.

“Often I’m the first investor through the doors – the business will just be two people and I will come on board as non-executive chairman to help guide them.

“One of the mistakes that I’ve made over the years was to invest in the technology instead of the team, but no matter how good the technology is, if the team doesn’t want to commercialise it on a global scale then it will never happen.”

Ritchie added: “When companies are looking to business angels to raise investment then they need to look at much more than just the money.

“They need to look at the skills and experience that those angels can bring, especially when it comes to a non-executive director to sit on the board.

“There’s no such thing as a ‘local’ market when it comes to technology so companies need to be thinking ‘global’ from the start.”

Young Company Finance – which has been tracking investment deals in Scotland since 1998 – can help companies to identify which business angel syndicates have invested in particular sectors or geographies.

Jonathan Harris, publisher and editor at Young Company Finance, said: “Young Company Finance – which has been tracking investment deals in Scotland since 1998 – can help companies to identify which business angel syndicates have invested in particular sectors or geographies.

Jonathan Harris, publisher and editor at Young Company Finance, said: “The business angel community in Scotland has been a major factor in helping young companies to get started, and has served as a model for several other regions around the world keen to encourage business angel investing.”

• This article was produced in partnership with Young Company Finance.

•

’Like’ The Scotsman on Facebook for regular updates

DOWNLOAD THE SCOTSMAN APP ON ITUNES OR GOOGLE PLAY