Being an angel investor is tougher than it looks

{"text":[[{"start":null,"text":"

"}],[{"start":7,"text":"The writer is a former global head of equity capital markets at Bank of America and is now a managing director at Seda Experts"}],[{"start":17.08,"text":"Not long after I left investment banking, I was invited to an angel investing event in central London. Dozens of early-stage companies had set up stalls in a large reception hall to showcase businesses ranging from clean tech to immersive gaming to sports gizmos. Founders weren’t pushing a hard sell; they just offered demos and a chat. The whole affair was impressively run."}],[{"start":43.879999999999995,"text":"As I looked around the room, I recognised several faces. Many were late-career or retired managing directors from banks and funds, now with time on their hands and, presumably, capital to deploy. I wondered: Was this the “smart money” I should invest alongside? How many of us truly knew what we were doing?"}],[{"start":66.97,"text":"Angel investing often appeals to former financiers as a natural next step. It enables them to stay engaged, apply experience, and maybe earn a big return. There’s the draw of meeting visionary founders and the hope of backing the next breakout success. Once you leave investment banking, the funding pitches start pouring in. I’ve lost count of how many have landed in my inbox."}],[{"start":93.72,"text":"It’s all quite beguiling. After years of analysing balance sheets, modelling cash flows and structuring deals, it’s tempting for former bankers to think they can identify start-up winners. But venture runs on a different rhythm. It’s longer and less structured than any investment banking project. "}],[{"start":113.42,"text":"The contrast couldn’t be sharper. In banking, you operate within an institutional machine, supported by an army of analysts, sector specialists and lawyers. Angel investing strips away that infrastructure; it’s just you, a pitch deck, and a half-hour video call. Rigorous financial forecasting and due diligence give way to guesswork around total addressable market and a seat-of-the-pants judgment of management’s capabilities."}],[{"start":140.06,"text":"The time horizon also poses a challenge. Most early-stage investments remain illiquid for five to 10 years, or longer. You write a cheque and then wait. And wait. Maybe you get asked to put in more money. And then you wait some more. One angel quipped that the real challenge wasn’t the capital locked up, but the boredom. Staying engaged for the long haul, often without visibility or control, takes patience and discipline."}],[{"start":169.94,"text":"Even when things go well, jackpot returns can prove elusive. Structured notes, dilution and liquidation waterfalls can erode upside. BrewDog offers a stark reminder: as FT Alphaville reported, the company placed preference shares with a private equity firm in 2017, enabling the founders to take out a big chunk of money. But the high cost of servicing the 18 per cent compounding coupon has left ordinary shareholders with scraps. In another case, a former colleague backed a wildly successful fintech unicorn early on, only to see her stake heavily diluted in later rounds. She’s sitting on a respectable paper gain, but it’s no windfall — and she’s still waiting for her chance to cash out."}],[{"start":222.51999999999998,"text":"Still, ex-bankers can succeed, especially those who approach angel investing with seriousness and stamina. A few I know have built impressive portfolios. One took a board seat early, helped shape strategy, and now chairs a profitable company. Others have clubbed together into syndicates, pooling funds to diversify, negotiate better terms and conduct better due diligence. These aren’t casual successes; they reflect strategic, committed effort over several years."}],[{"start":258.36,"text":"Former financiers add tangible value. Founders often have deep but narrow knowledge; bankers can provide macro context, sector insight and financial acumen. They can also bring their personal networks, including potential investors, advisers and business partners."}],[{"start":278.94,"text":"But nothing guarantees success. Top angels assume most investments won’t pan out, relying on a few home runs to make up for a long tail of strikeouts. While tax incentives like the UK’s Enterprise Investment Scheme may boost returns and cushion losses with generous reliefs and offsets, they don’t change the underlying odds of failure."}],[{"start":303.68,"text":"The maths remains brutal. One ex-colleague, now a seasoned angel, shared his portfolio: 45 investments, with 10 complete losses and two positioned to return capital at a gain. The remaining 33, he says, have “option value”. While the strategy might eventually work, it demands deep pockets and deeper reservoirs of patience. Despite good paydays as an investment banker, he lacks cash flow because so much capital is tied up in these ventures. This explains why he moved recently to a low-tax jurisdiction to work as CFO for a private firm. "}],[{"start":344.07,"text":"Angel investing can be stimulating and, occasionally, lucrative. Bankers have the background and skillset to succeed. But those expecting a road to quick riches will be disappointed. This is no retirement hobby."}],[{"start":359.06,"text":"Letter in response to this article:"}],[{"start":361.41,"text":"Angel investors’ motives include virtuous reasons / From Colin Mason, Emeritus Professor of Entrepreneurship, Honorary Senior Research Fellow, Adam Smith Business School, University of Glasgow, Glasgow, UK"}],[{"start":384.43,"text":""}]],"url":"https://audio.ftmailbox.cn/album/a_1758173494_7948.mp3"}