Growth impact

Female investors alarmed by angel rule changes

Gemma Stuart (pic: Gut Wealth)
Gemma Stuart: my pool of eligible investors will shrink (pic: Gut Wealth)

A decision to change the rules around angel investor protection is causing alarm among those who believe it will be particularly damaging to female and ethnic supporters of growth firms.

New rules defining high net-worth individuals came into effect yesterday and raise the minimum income threshold required for protection from £100,000 to £170,000.

The upgrade has been designed to ensure individuals have an adequate income to support their investments.

However, women and ethnic groups believe their engagement with growth firms will suffer as they tend to have lower incomes and therefore the pool of investment from them will shrink.

Government figures on income for 2020-21 mean the change will cut the number of eligible investors in Scotland by 72% from 60,000 to 17,000. The number of female investors will fall by 75%, from 14,000 to 3,500. In Northern Ireland there were zero females in the higher earnings bracket.

The Treasury said the extra protections have been introduced amid a rise in the use of retail investment platforms. Exemption rules for high-net-worth individuals have not been updated since 2005.

In a letter to the Treasury during the consultation period, the Startup Coalition, the Entrepreneurs Network and the UK Business Angels Association, described the rule changes as “anathema to the trailblazing startup ecosystem that has been built today”.

It added: “Under-represented founders already have a harder time accessing capital. As female-led angel groups and others have warned, the changes will squeeze out more women and ethnic minority angels.”

The letter added that angel investing “risks becoming an elite-only activity, undoing huge amounts of good work.

“We want investing to be as diverse and open as possible. Technology such as crowdfunding and angel syndicates platforms have enabled the democratisation of the startup ecosystem.

“The changes risk reverting angel investing to an elite-only activity, leaving people ostracised from the growth of the UK’s tech sector.”

Andrew Noble, a partner at Edinburgh-based angel group Par Equity, said: “The changes to the Angel Investor Threshold could have damaging unintended consequences for technology ecosystems outside of London, and for underrepresented founders.”

Andrew Noble: unintended consequences

He said he understood the Treasury’s wish to protect investors who can’t afford to lose their capital.  However, he said there are a number of concerns around the proposals.

He said there will be an immediate contraction in the EIS Fund market, restricting inflows into funds managed by VCs across the UK, who are investing in early stage companies.

“This will be felt most acutely across the north of the UK, as many investors like to back managers who are deploying in local markets to them.

“It will make it harder for first time VC funds to raise necessary capital, increasing the barriers to entry for an already “exclusive” industry.

“It will make it harder for new angel investors to enter the market and build necessary experience and networks to be successful.  Because angels typically invest more locally and back founders who they identify with, this will cause a disproportionate reduction in the number of angels who are based in the north of the UK, and therefore a contraction of capital for tech companies in the north.”

He said it will also reduce the number of female angels because there are proportionately fewer women earning more than £175,000 rather than £100,000. This means there will be fewer female angel investors ready to back female tech entrepreneurs, he said.

He noted that there are also proportionately fewer angel investors who are from ethnic minority backgrounds in the higher income range.

Gemma Stuart, Edinburgh-based founder of Gut Wealth said:  “I plan to raise investment in 2024 for my health business Gut Wealth and in very real terms, my pool of eligible investors will immediately shrink by over 70% in Scotland. 

“The messages we get from Westminster as small business owners don’t match their actions with this policy change.

“They talk of small business being the backbone of our economy but this change will not only damage investment opportunities here and now in Scotland but the ripple effect in our economy will be felt for decades if less individuals can angel invest.

“This change is on the back of The Scottish Government’s Pathways Report in 2023 which outlined that the share of total equity investment by value for female founder teams remained stagnant over the last decade, only receiving 2% of funding.”

“While we should be concerned about this for Scotland, as a female founder too, looking at the decline in women who would be eligible to be angel investors across the UK is a stark reality that this well-meaning policy change has failed to see the impact on businesses and investors outside the London bubble.”

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