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Right Choices Can Make Big Returns For Business Angels

Business angels are likely to make a significant return on their investment in new business, says research that has reviewed more than a 1,000 investments.

The average internal rate of return (IRR) for a business angel is 22% over four years, according to the report by NESTA (National Endowment for Science, Technology and the Arts) and the BBAA (British Business Angels Association).

Just over 1,000 investments were reviewed. More than half were directed at very early stage, pre-revenue start-ups.

Despite the fact that 56% of investments make a loss, 44 % yielded positive returns with 9% generating more than 10 times the capital invested.

The report also suggests investing at least 20 hours due diligence before investing and maintain a business connection at board level improved chances of a better return for business angels.

NESTA's Chief Executive Jonathan Kestenbaum said: "Angel investing can be a strong viable complement to traditional forms of investment which are not making anywhere close to 22% returns.  As the UK grapples with finding new sources of finance to build the sectors that will drive our economic recovery, Business Angels will form a critical new asset class."

The study finds that the EIS (Enterprise Investment Scheme) and other tax incentives contribute substantially to angel activity with 82% of British angels using the EIS at least once; and the angels stating that about 24% of their investments would not have been made without the tax incentives.

NESTA and the BBAA are calling for the Treasury to increase the Enterprise Investment Scheme tax relief from the current level of 20%to 30% for higher risk start-ups.

The report reveals on average business angels invest £42,000; acquired 8% of a company and each investor makes around six investments.

 A business angel is an independent investor generally bringing business expertise and contacts to help entrepreneurs starting a new venture


BBAA chairman Anthony Clarke said: "This research proves business angels are now the key source of investment in early stage high risk companies. Angels are currently investing c. £1billion a year and it is important that more individuals are encouraged to consider this asset class supported by targeted financial incentives."


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