Skip to main content

WHERE ANGELS FEAR TO TREAD? THE LACK OF INFORMAL INVESTMENT IN WALES

For many small growing firms, individual informal investors play a vital role in supporting their development.

These so-called ‘business angels” are defined as individuals, acting alone or in a formal or informal syndicate, who invest their own money directly in unquoted businesses in which there is no family connection in the hope of financial gain. They also, after making the investment, take an active involvement in the business either as a mentor, adviser or member of the board.

They are therefore important additions to the funding market for early stage businesses and potentially, given the reluctance of banks to lend to such firms, have a critical role to play in ensuring a strong private sector-led recovery within the UK economy.

Unfortunately, there is very little data available on business angels and their investments on a regional level. The best proxy for this, at least in terms of informal investment by individuals into SMEs, is the Enterprise Investment Scheme (EIS).

This initiative, which applies to individuals investing in companies of less than 250 employees with assets of less than £15 million, has been designed to help small higher risk trading companies raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.

In this case, investors can invest up to £1 million in qualifying shares and receive 30 per cent of the cost of the investment as a relief against income tax as well as deferral of some capital gains tax liability.

So where are business angels to be found?

The latest data from the tax authorities show a concentration of investments in companies registered in London (48 per cent) and the South East (17 per cent) between 2008 and 2011.

In contrast, there have been only 146 EIS investments in Wales during the same period, raising a total of £23 million. This represents 2.5 per cent of the number of investments in the UK and only 1.4 per cent of the value of investment. Therefore, with Wales having around 4.2 per cent of all businesses in the UK, we are underperforming as an economy when it comes to attracting private sector investments for new and growing firms.

There is also the issue of the amount of funding that is going into businesses in Wales, which is again lower than the average for the rest of the UK - the average Welsh investment via EIS is £157,000 as compared to £286,000 for the UK.

Therefore, not only do Welsh companies underperform in terms of attracting private sector investors, the amount of funding they get to help the business to grow is also lower than for the rest of the UK.
Simply put, Wales needs more business angel investors in place to invest more money into Welsh firms, especially at a time when access to capital for growing firms remains restricted.

How can this be achieved?

Some of it is down to a lack of information and on the demand side, there needs to be greater awareness raising of equity investment by business angels as a viable form of funding amongst growing firms within Wales.

But there is also a need to stimulate greater number of investors into the Welsh economy and therefore the Welsh Government may wish to consider how it could add value to initiatives such as the EIS to further support and encourage investment by private individuals, especially those from outside of Wales.

This would not only ensure that greater levels of investment flows into Welsh businesses over the next few years but may also, through such positive interventions, attract entrepreneurs from outside the country to relocate their businesses as a result of a more favourable business and financial environment that is supportive of growing firms.

Popular posts from this blog

THE CRACHACH

Unlike me, do you consider yourself part of 'the establishment' here in Wales?  As thousands gather for the Eisteddfod in Mold this morning, they will, according to some social commentators, not be participating in the greatest cultural festivals of Europe. Instead, they will merely be bit-part players in one of the annual gatherings of the great and good of Wales.  Unkindly, this set of the movers and shakers in Welsh society is known as 'the crachach' , and constitute a social class all of their own, dominating the educational, cultural and media sectors of Wales and allegedly looking down upon any outsider with new ideas, reinforcing mediocrity and failing to see beyond the limits of their own narrow experience.  They are said to live in a comfort zone that awaits the expected invitation to the next glass of chilled chardonnay and canapés, forgetting that due to their lack of leadership and drive, Wales remains firmly rooted to the bottom of the UK prosperity league ...

THE IMPORTANCE OF THE CREATIVE CLASSES

One of my favourite academic books of the last two decades must be the “Rise of the Creative Classes” by Professor Richard Florida.  This was one of the first detailed studies of the growing group of individuals who use their creativity and mental labour to earn a living and not only included those in arts and entertainment, but also people working in science and technology as well as knowledge-based professions such as healthcare, law, business, and finance.  Fast forward to 2022 and Professor Florida has written an updated report on the creative classes although he and his team now identify a different type of individual who is taking full advantage of the growth in digital platforms, social media, and online marketplaces.  Such ‘creators’ are defined as those who use digital technology to make and publish unique creative content, whether in the form of video, film, art, music, design, text, games, or any other media that audiences can access and respond to.  They ...

THE IMPORTANCE OF FRANCHISING

When we talk about start-ups and entrepreneurship, rarely do we discuss the potential of franchising not only as a way of establishing new ventures in the economy but also as a method of growing existing businesses. According to the British Franchising Association, franchising is the granting of a licence by one person (the franchisor) to another (the franchisee), which entitles the franchisee to own and operate their own business under the brand, systems and proven business model of the franchisor. The franchisee also receives initial training and ongoing support, comprising all the elements necessary to establish a previously untrained person in the business. This enables individuals to start their own businesses without having to develop their own ideas and utilising an existing brand and established market. Of course, whilst each franchise business is owned and operated by the franchisee, the franchisor controls the quality and standards of the way in which the business is...