Business angels generate an average return of 22% on investments in UK start-ups according to research published by NESTA and the British Business Angels Association.
The figure is based on a holding period of four years, and is slightly less than the return made by business angels in the US of 27%.
Jonathan Kestenbaum, NESTA’s chief executive, says: “Angel investing can be a strong viable complement to traditional forms of investment which are not making anywhere close to 22 per cent 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 report surveyed 1,080 investments, over half of which were directed at very early-stage pre-revenue start-ups. Most investments – 56% – made a loss, but 44% made positive returns and 9% generated more than 10x the money invested.
Tax relief plays an important part in encouraging angel investment according to the study. The Enterprise Investment Scheme (EIS) was used by 82% of angels at least once, and 24% stated that without the EIS and other tax incentives, their investments would not have been made.
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 the much higher risk start ups.
Anthony Clarke, chairman of the BBAA says “This research has proven that business angels are now the key source of investment in early stage high risk companies. BBAA estimates that angels are currently investing around £1bn per year in the UK and it is important that further individuals should be encouraged to consider this asset class supported by targeted financial incentives. Angels bring not only their own finance, but business –building skills. The UK needs to significantly increase the pool of business angels to invest in the successful innovators of tomorrow.”