Are you looking for the 1 in 10 investments to return x10 to pay back all the failures? And expecting another 4 to return the money invested? How many investments do you need to make to have an expectation positive return? How big should your portfolio be? Business Angel investment is said to be a game for High Net Worth (HNW) individuals - just how high must the net worth be? We look at the maths behind investment probabilities to examine the realities of investments in SMEs. And the conclusion is that the HNW should be worth...
When looking at your potential investment return, do you factor in your time? If not, why not? Do you add more than a lawyer or accountant would to the company? If you do, you should certainly factor in those costs into your payback calculations…
Top lawyers and accountants charge clients £250 per hour or more. Why? Because they need to pay for their offices, continuous training, experience and support staff.
As a Business Angel, you have these expenses. And your training will be more extensive since you will be covering more than just one area. You will be learning about the whole business environment, not just a small part of it (i.e. legal, accountancy, etc). You will have wide experience than one subject – after all, you have run a company before.
So you are putting extra time into the company on top of your investment of hard-earned cash. You are more experienced than the other professionals, so how much should you charge? Or put another way, if you did charge for your time, what impact would it have on your investment decisions?
The calculations are best done in a spreadsheet and yield the results below (email me at firstname.lastname@example.org if you’d like a copy):
What does table show?
In all cases I’ve considered a £100K investment over 5 years and its final value. The Sweat section indicates how much time is charged to the company over the five year period. The Return section indicates what the value of the company will be given a specific rate of return assuming NO fees are paid – I’ve chosen an annual average rate of 20%. Finally, equity earning shows what the return would be had the Business Angel been paid for their sweat.
What does it mean?
If you invested £100K, spent 2 days per month working for the company and consider your time to be worth £600 per day and the company’s value grows at 10% compound per annum then your return on investment is COSTING you money! You have made a loss. The increase in value of the company has not covered your meagre costs.
If the company achieves 15% compound return, then return on investment is poultry 5%. That’s never going to pay for the investments that fail completely. General wisdom says we should be aiming for 50% to achieve that!
Imagine you charge the same as that lawyer at £250 per hour (daily £1875) and only do 1 day per month rather than 2. Then the company’s 15% return is too low and you need nearer 20% to be breaking even on your investment.
What is the impact?
Business Angels must be realistic about why they are investing. If they consider their time to be of little value (e.g. they are doing it for fun) then spending time with companies makes sense. If you are serious about increasing the value of your investment, be aware that by spending time with your investee company, you may well be achieving the reverse!
As an aside, if these fees are stacked up in the accounts then on exit there could be more room to manoeuvre when it comes to managing the tax implications.