There’s no question it’s a really exciting time to be part of our ‘Innovation Nation’. The game-changer for both angel investors and startups came earlier this year when the Turnbull Government, as part of its innovation platform, introduced tax incentives for early stage startup investments.
Australia now has the world’s most generous tax incentives for angel investors to explore innovation opportunities and put their money into supporting higher risk early stage startups. Angel investors receive a 20% tax rebate and capital gains tax exemption for up to 10 years when they invest in a company that qualifies as an early stage innovation company.
History suggests that such schemes can be a major coup. In 2012, the UK government introduced the Seed Enterprise Investment Scheme (SEIS) to encourage seed investments in early stage companies. A 2013 report by Deloitte in the UK indicated 58% of angel investors would have invested fewer funds, or not at all, if the SEIS didn’t exist.
CEO of StartupAUS, Alex McCauley says: “If we see those kinds of numbers, Australian entrepreneurs will enjoy substantial improvements to their ability to access early-stage capital and investor talent.”
It’s a risky business – what you should to consider
Investing in early startups poses inherent risks. So as a first time angel investor, what do you need to consider in order to mitigate these?
World-renowned entrepreneur and angel investor, Bobby Yazdani, provided some excellent insights at the recent Private Wealth Network Family Office Congress IX in Melbourne. Bobby has successfully mentored entrepreneurs and invested in over 100 early-stage startups including Google, Uber and Dropbox.
“I only invest in what I understand. This way, I can put both my knowledge and capital to good use. Also, I always make sure I reserve a dollar for every dollar spent.”
In an interview with Bobby, he also shared some key questions he asks himself when considering an opportunity; what he coins, his ‘Five Ps’.
Bobby’s Five Ps’
- Do you believe in the potential of the business? Are you willing to support their talent and nurture the relationship?
- Will this business be profitable? Can you envisage yourself helping to build this?
- Will the product be disruptive? What’s different about it? How sustainable is it?
- What’s the motivation behind the people you’re looking to invest in? Do you feel their personality is the right fit?
- What’s the price? Is it worth the investment?
Other tips seen across the start-up ecosystem
- Understand your risk tolerance – how much money are you actually willing to invest and potentially lose? This is a risk and return game and you need to understand your limits before rolling the dice
- Walk into every opportunity with your eyes wide open – it’s imperative you conduct your due diligence on both the offering and the actual team. The latter is paramount in determining their focus and implementation capabilities, so invest time in getting to know them properly
- Build a portfolio – spread your risk and diversify by having a pool of capital you can deploy over a number of different opportunities. In industry circles, this is widely referred to as the ‘spray and pray’ strategy!
- Ask for help – startup investing is a skill that you need to learn. So build a network, seek advice and learn from those that have done this before, especially ones that have invested in your areas of interest
- Join an investment group – there’s a growing number in Australia that can help link you to entrepreneurs such as the Angel Investment Network, Innovation Bay and Business Angels. They also provide training, mentors, access to an experienced network of angel investors.