Is Angel Investing Worth The Money And Effort?
Almost all of us believe (or would like to) that angels are messengers of God who guard us through our difficult moments. Angel investing is just that but for early stage ventures who are struggling in their finances during their budding years. Such ventures are rarely able to secure means for their capital through investors or loans from financial institutions and often have very limited means to keep their company financially afloat.
Generally, investors and financial providers seek well-established and reputable companies as there is more certainty in their return of investment or repayment of loan. Established firms have a financial track record that they can observe before deciding to invest in it, while budding ventures lack point of financial reference. This is similar to banks having the tendency of giving loans or credit cards to individuals with a healthy credit report.
This is when these new types of investors come in to fill the investment gap until these start-up companies become established and are able to draw other potential investors or financial providers to fund their business.
What is angel investing?
Angel investing is basically providing capital for a business start-up particularly in technology-related businesses, in exchange of ownership equity ranging between 10% and 30%.
Angel investors are often retired entrepreneurs or executives, who may be interested in investing their own private funds for other reasons, rather than purely monetary returns. These include equipping themselves with current business development knowledge, mentoring budding entrepreneurs, and sharing their experiences and network.
Needless to say, it’s still not something they jump into blindly. The potential of monetary return is still important to these investors, just like any other types of investment.
In addition to funding, these investors often provide valuable management advice and share important contacts to the companies in their investment portfolio that will help the start-up move forward and ultimately secure the ROI for the angel investor.
How do I invest?
In order to qualify, an individual would be required to fulfill certain basic requirements. He/she must:
- Be a high net worth individual or high income earner*.
- Have sufficient knowledge and experience in business and investing.
- Be accredited by the Malaysian Business Angel Network (MBAN), the official trade association and governing body for angel investors.
- Be willing to provide funding only for early stage innovative technology-based ventures, as approved by the Ministry of Finance.
- Not be an immediate family member to the start-up company (i.e. spouse, children, parents and grandparents).
- Make investment in cash with a minimum amount of RM5,000 and a maximum amount of RM 500,000 per annum.
*High net worth: Possess total wealth of RM3 million
*High income earner: Have annual gross income of at least RM180,000 for individual and RM250,000 for combined income.
How do I identify an eligible start-up company?
These budding companies should basically fall into the following categories:-
- Must be a Malaysian owned private limited (Sdn Bhd) company, incorporated and residing in Malaysia.
- The core business must be technology-based and approved by Ministry of Finance.
- Has a cumulative revenue of less than RM5 million and has been operating for three years or less.
As an investor, should you consider angel investing?
Investment in a start-up venture is highly volatile as the return on investment depends entirely on the success for the venture’s operations. Therefore, angel investing is considered extremely high risk and requires more effort than other types of investment. Therefore it is most suitable for investors with big risk appetites and are seeking capital growth through their investments.
However, though angel investing comes with its own set of risks, investors are allowed to invest in multiple technology-based companies at the same time and this creates a diversified investment portfolio and knowledge exposure. Such companies could prevail in various industries, such as telecommunications, healthcare, transportation, information technology, etc.
Some start-up companies that have benefited from angel investment are, iMoney.my, MilkADeal.com and Alibaba.com.
As a means to boost domestic angel investment from private sectors into early stage companies in technology-based sectors, the Malaysian government has introduced a special tax exemption since the 2013 Budget for angel investors.
Many young entrepreneurs with innovative ideas or products are constrained due to lack of capital. This tax incentive mainly aims at drawing investments to such businesses to ensure its competitiveness compared to other firms and boost the local business sector. Thus, the investors can benefit from tax savings through this tax incentive programme.
It also helps to reduce the high risk associated with investing in start-up ventures in the form of tax exemption. To qualify for the tax incentive, investors must hold shares in the company invested for at least two years or more as this incentive is only awarded at the third year of investment.
At the same time, both the investors and the start-up company can rest assured that the investment transactions are genuine. The Angel Tax Incentive Office (ATIO), governed by MBAN, ensures that the investors are accredited by MBAN and the start-up companies are genuine and eligible before approving the investment transactions.