Why you should forget about NFTs and start angel investing instead

Angel investing can reap many rewards, both financial and social. Chantelle Arneaud explains the best bits of the business.

 Why you should forget about NFTs and start angel investing instead

Angel investing can reap many rewards, both financial and social.

As we come out of the other side of lockdown, it seems the world is going mad, splashing cash on things that unquestionably grab headlines, yet are questionable in their ability to deliver returns.

Recently, an invisible piece of artwork was sold for $18,000. When I say ‘invisible’ I don’t mean it was a new James Bond style tech that you’ve never heard of. I mean in actual terms, this art does not exist. And yet, someone invested in it. On top of this, the craze with Non Fungible Tokens (NFT) has seen monies poured into assets including a digital perfume, a digital house which went for $500,000 and the world’s first tweet, which went for a cool $2.9m.

Non-fungible tokens or NFTs are cryptographic assets, whose ownership is recorded on blockchain with unique identification codes and metadata that distinguish them from each other. A person can’t exchange one NFT for another as they would with dollars or other assets. Each NFT is unique and acts as a collector’s item that can’t be duplicated, making them rare by design.

This differs from fungible tokens like cryptocurrencies, which are identical to each other and, therefore, can be used as a medium for commercial transactions.

Clearly, there are a lot of new trendy things you could invest your money in. But how long will this craze last, and will there be buyers on the other side? Who’s to say. What I can say is that if you’re looking to invest your money into something exciting (and slightly more predictable), you should consider angel investing.

Angel investors are the superheroes of the start-up world. Not only do they provide the life-blood for early stage businesses in the form of much-needed capital, they provide invaluable advice, contacts and support.

Angel investing is a journey where you have the opportunity to identify and help grow the UK’s brightest businesses – and, if you’re savvy, make a good financial return in doing so.

So, if the idea of being an angel investor has never crossed your mind, here are five good reasons to consider it.

1. It will make you feel good

When you invest in property or publicly traded stocks it’s only your cold hard cash that makes an impact, and so the only time you’ll feel pride is when you get a return. With start-ups, it’s a different story. Cash is important, but it is not the only thing these businesses need. They need advice, support and your black book. When you invest in a start-up you join them on a journey, one in which you can directly impact their growth trajectory – whether that’s by making a vital introduction to a marquee customer, helping them get their pricing model right or ensuring they avoid getting themselves into legal hot water.

You may also be the difference between a business growing into a future giant or not existing at all. By providing support early on, you have the ability to help shape which companies get off the ground. So, if there is a cause you feel passionate about, like sustainable fashion or social care for the aging population, you can support seed businesses in those areas which can help have a broader social impact.

2. You’ll save money on your taxes

The UK government runs two lucrative and important tax schemes that a shocking number of people have never heard of – the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). Both of these schemes are designed to encourage investment into early-stage businesses. So far, the scheme has helped raise £22bn for over thirty-thousand companies.

It’s that successful because the tax incentives are that good.

The EIS scheme, which is for slightly more established companies, offers:

  • Income tax relief of 30% of the amount invested
  • Exemption from Capital Gains Tax (CGT) on any gains from selling your EIS shares
  • Further income tax relief at top rate of income tax (40% or 45%) for any losses made on the disposal of EIS shares
  • Unlimited deferral of capital gains

Its earlier stage counterpart, the SEIS scheme offers:

  • Income tax relief of 50% of the amount invested
  • Exemption from Capital Gains Tax (CGT) on any gains from selling your EIS shares
  • Further income tax relief at top rate of income tax (40% or 45%) for any losses made on the disposal of EIS shares
  • Unlimited deferral of capital gains

All of this is designed to encourage investing into early-stage businesses, while off-setting the risk, because investing in early stage businesses is risky.

3. You might wake up richer one day

Yes, one day you might wake up and read the news, and drop your phone in excitement when you learn one of your businesses has just been sold for big money. (Conversely, I do need to mention that one day you might wake up and read the news and drop your phone in utter disappointment when you learn one of your businesses has kicked the bucket.)

Joking aside, angel investing, while it carries risk, can be very lucrative. Data collected in the US in a 2017 Willamette University study on angel investment returns calculated an average return for angel investors of 2.5X.  With an average investment period of 4.5 years, this indicates a gross internal rate of return of 22%.

Compare this to other investment vehicles:

  • Mutual funds – not even the best performing mutual funds of all time will break 20% average annual return, and most do not go over 15%
  • Bonds – over the last year, UK interest rates on bonds have been cut to 0.1%
  • Stocks – the average return on a Stocks and Shares ISA in the UK is just 5.14% (April 1999 to April 2020)
  • Index funds – the S&P 500 has provided an average annual return of 13.6% since its inception
  • Invisible art – your guess is as good as mine
  • NFTS – no one knows

A more recent study published in January 2021 by FounderCatalyst showed that angel investments yielded an average 2.77X return. With the additional benefit of the EIS scheme, that grows to an average 3.19X return.

It is worth pointing out here that averages are averages. Any experienced angel will tell you that many companies take much longer than 4.5 years to mature and exit. Some companies fail quickly while others fail slowly, never growing and never exiting— locking up your assets indefinitely.

4. You’ll make new friends

While investing in ISAs or stocks will leave you solitary, leafing through the financial section with ink-stained fingers or spending quality time with your investment app, angel investing is social. You will meet new people, clever people like you.

A huge part of angel investing is networking. As you start to investigate opportunities you will meet passionate founders and like-minded investors with whom you can discuss said passionate founders. You’ll be invited to pitching events where entrepreneurs will present their investment opportunity to you while you sip wine and contemplate the potential returns.

You can also join an investment club (which I recommend for all new investors). You can opt for a sector specific club that aligns to your interest and expertise or for a sector-agnostic one. There are plenty to choose from and research agency Beauhurst has helpfully listed out the most active ones here (including Envestors Private Investment Club – which is at the top of the list!)

5. You’ll have the best dinner party stories − ever

There’s that one where you woke up a million pounds richer, or the one where an entrepreneur hunted you down to pitch his hug-telegram business (mid pandemic), or the one where you helped a seed stage business grow into a household name.

Whether you make a load of money or a little bit (or none at all) you’ll have a great story to tell. As an angel investor you will have a positive impact on the businesses you choose to invest in. And in life, sometimes what you get out depends very much on what you put in.

Related reading:

Your free digital guide to angel investing

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