Why you should ignore the NFT craze and look at angel investing instead

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NFT ADAM

Chantelle Arneaud from Envestors spoke to Business Leader about the emerging investment trends of NFTs and whether you should look to add them to your portfolio.

What is an NFT? Find out here.

As we look forward to a post-pandemic world we are seeing cash being spent freely on some headline grabbing items, but will they be able to deliver returns for the investors?

You may have read about the invisible piece of art that sold for $18,000. In actual terms, this art does not exist. And yet, someone was willing to invest in it. Also the current interest in Non Fungible Tokens (NFT) has seen monies poured into assets including a digital perfume, a digital house which went for $500,000 and the world’s first tweet which went for a cool two point nine million dollars.

Non-fungible tokens or NFTs are cryptographic assets, whose ownership is recorded on blockchain with unique identification codes and metadata that distinguish them from each other. A person can’t exchange one NFT for another as they would with dollars or other assets. Each NFT is unique and acts as a collector’s item that can’t be duplicated, making them rare by design.

This differs from fungible tokens like cryptocurrencies, which are identical to each other and, therefore, can be used as a medium for commercial transactions.

Clearly, there are a lot of new trendy things you could invest your money in. But how long will this craze last, and will there be buyers on the other side? Who’s to say. What I can say is that if you’re looking to invest your money into something exciting (and slightly more predictable) you should consider angel investing.

Angel investors are the superheroes of the start-up world. Not only do they provide the life-blood for early stage businesses in the form of much-needed capital, they provide invaluable advice, contacts and support.

Angel investing is a journey where you have the opportunity to identify and help grow the UK’s brightest businesses – and if you’re savvy make a good financial return in doing so.

So, let’s look at some key reasons for considering becoming an angel investor.

You’ll feel good

When you invest in property or publicly traded stocks it’s only your cold hard cash that makes an impact, and so the only time you’ll feel pride is when you get a return. With start-ups, it’s a different story. Cash is important, but it is not the only thing these businesses need. They need advice, support and your black book. When you invest in a start-up you join them on a journey, one in which you can directly impact their growth trajectory – whether that’s by making a vital introduction to a marquee customer, helping them get their pricing model right or ensuring they avoid getting themselves into legal hot water.

You may also be the difference between a business growing into a future giant or not existing at all. By providing support early on, you have the ability to help shape which companies get off the ground. So, if there is a cause you feel passionate about, like sustainable fashion or social care for the aging population, you can support seed businesses in those areas which can help affect a broader social impact.

You’ll benefit from important tax schemes

The UK government runs two lucrative and important tax schemes that a shocking number of people have never heard of – the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). Both of these schemes are designed to encourage investment into early-stage businesses. So far, the scheme has helped raise £22bn for over thirty-thousand companies.

It’s that successful because the tax incentives are that good.

The EIS scheme, which is for slightly more established, companies offers:

  • Income tax relief of 30% of the amount invested
  • Exemption from Capital Gains Tax (CGT) on any gains from selling your EIS shares
  • Further income tax relief at top rate of income tax (40% or 45%) for any losses made on the disposal of EIS shares
  • Unlimited deferral of capital gains

Its earlier stage counterpart, the SEIS scheme offers:

  • Income tax relief of 50% of the amount invested
  • Exemption from Capital Gains Tax (CGT) on any gains from selling your EIS shares
  • Further income tax relief at top rate of income tax (40% or 45%) for any losses made on the disposal of EIS shares
  • Unlimited deferral of capital gains

All of this is designed to encourage investing into early-stage businesses, while off-setting the risk, because investing in early stage businesses is risky.

You could find yourself richer one morning

Yes, one day you might read the morning news, and drop your phone in excitement when you learn one of your businesses has just been sold for big money. (Conversely, I do need to mention that one day you might wake up and read the news and drop your phone in utter disappointment when you learn one of your businesses has kicked the bucket.)

Joking aside, angel investing, while it carries risk, can be very lucrative. Data collected in the US in a 2017 Willamette University study on angel investment returns calculated an average return for angel investors of 2.5X.  With an average investment period of 4.5 years, this indicates a gross internal rate of return of 22%.

Compare this to other investment vehicles:

  • Mutual funds – Not even the best performing mutual funds of all time will break 20% average annual return, and most do not go over 15%
  • Bonds – Over the last year, UK interest rates on bonds have been cut to 0.1%
  • Stocks – The average return on a Stocks and Shares ISA in the UK is just 5.14% (April 1999 to April 2020)
  • Index funds – The S&P 500 has provided an average annual return of 13.6% since its inception
  • NFTS – No one knows
  • Invisible art – Your guess is as good as mine

A more recent study published in January 2021 by FounderCatalyst showed that angel investments yielded an average 2.77 X return. With the additional benefit the EIS scheme that grows to an average 3.19 X return.

It is worth pointing out here that averages are averages. Any experienced angel will tell you that many companies take much longer than 4.5 years to mature and exit. Some companies fail quickly while others fail slowly, never growing and never exiting— locking up your assets indefinitely.

You’ll expand your network

While investing in ISAs or stocks will leave you solitary, leafing through the financial section with ink-stained fingers or spending quality time with your investment app, angel investing is social. You will meet new people, clever people like you.

A huge part of angel investing is networking. As you start to investigate opportunities you will meet passionate founders and like-minded investors with whom you can discuss said passionate founders. You’ll be invited to pitching events where entrepreneurs will present their investment opportunity to you while you sip wine and contemplate the potential returns.

You can also join an investment club (which I recommend for all new investors). You can opt for a sector specific club that aligns to your interest and expertise or for a sector- agnostic one. There are plenty to choose from and research agency Beauhurst has helpfully listed out the most active ones here (including Envestors Private Investment Club – which is at the top of the list!)

You’ll have an amazing story to tell

The story where you woke up a million pounds richer, or the one where you helped a seed stage business grow into a house-hold name.

Whether you make lots of money or just a little bit (or none at all) you’ll have an interesting story to related. This is because as an angel investor, you’ll be able to make a positive impact on the businesses you decide to invest in. Whether you make a fortune or not you’ll make a difference.

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