Frustrations of an Angel Investor 1: 80% of new businesses fail, so why take the risk?

Why do investors keep pumping in money when most start-ups fail?  To an extent, it’s blind faith, but a lot can be attributed to the EIS tax avoidance system.  This was perfectly illustrated in a recent presentation I attended.

This isn’t exactly what was said, but I think it’s a fair illustration:

  • An investor puts a total of £100,000 into 100 startups – £1000 each – making the following assumptions:
  • 80 will fail, so that £80,000 will be lost
  • 10 will trade successfully (but not phenomenally) and the investor will get their money back eventually, let’s assume with no premium.
  • 8 will be sold at an average multiple of 3x the original investment
  • 1 will sell at a multiple of 10x
  • Just one – the nascent “unicorn” – will sell at a multiple of 50x, netting the investor £50,000

So overall, the investor will get back £94,000 – which looks like a loss of £6,000 on the original investment.… Keep reading...

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