Angels return when house prices dip

House prices are falling; time for entrepreneurs to break out the champagne.

One of the biggest impediments entrepreneurs face when trying to win money from an angel investor to back their start-up is the comparison with property investment. Many entrepreneurs think they are competing with a better idea or a more experienced business leader when they pitch for angel investment. In fact, the real danger is that there is an easier, safer way to get similar returns.

Investors must ask themselves why they would risk their money on an idea, however brilliant, when they can simply stack their money into property, leverage it with all-too-ready bank debt and double or triple it in the same five to seven-year period that both options offer.

It’s called the “opportunity cost”. Of course, we know that angels do not make start-up investments solely for the returns: they like the excitement of building a business, working with clever, energetic young business leaders and enjoy the opportunity to give back to society some of the opportunities they have received.

But it is a difficult equation in the kind of housing markets we have seen in the first decade of this century – until recently. Compare the lure of tax breaks (on the family home) and easy bank finance in a hot housing market (until recently) with the prospect of steering a headstrong entrepreneur along a financially viable path, scouring the world for more money and facing the prospect that in getting it, the original investment will lose at least some of its value as the original shareholders’ equity is diluted to attract new investment.

Property prices have started to settle. Homes are returning to what they should be – places to live a happy life – and not places that magically transform into a treasure trove without effort or input. Angel investors, comparing options, will see more opportunity in a start-up again. Keeping that comparison in mind is a smart move when entrepreneurs pitch to angels. Explicitly comparing why a business opportunity is better than putting the same amount into a property involves comparing effort as well as return. Smart entrepreneurs will be ready to accept a loan that converts into equity later, at the agreement of both parties, a path into investment that gives angels a bit more security and the time to build a constructive relationship.

BRW

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