WHAT have Amazon, the books website, Body Shop, the cosmetics chain, and Innocent smoothies got in common? All started up with the help of “business angels” — wealthy individuals who invest their own money in new businesses.

The most famous British angel is Ian McGlinn, the garage man who lent Anita Roddick £3,000 to launch Body Shop in Brighton in 1976. Thirty years on, Mr McGlinn’s remaining investment became £137 million when L’Oréal bought the chain.

Despite such successes, and the ballooning of private equity, there is a yawning gap in funding for start-up businesses. Roderick Beer, a manager at Beer & Partners, which matches investors with companies looking for money, says that business angels are “the only thing that fills the equity gap”, which he puts at between £50,000 to £5 million.

Angels clearly want to make money, but most are not the ferocious types portrayed by Dragon’s Den on BBC Two. But what they all have in common is lots of money and a willingness to take a punt.

Braveheart Investment, for instance, a Scottish network of 102 angels, stipulates a minimum investment of £50,000, which it might put into ten companies to spread the risk. Unsurprisingly, not every investment is sprinkled with angel dust. Out of 16 investment “exits” — sales, flotations or failures — over ten years, Braveheart has seen eight end in loss. Even so, flotations such as Wolfson Microelectronics and Clapham House, a restaurant chain, have more than made up for that, leaving a compound annual average return of 37 per cent.

But that hides that Braveheart has actually invested in 35 companies during its life. The truth is that you need a few bumper winners to make up for the many losers. Angels have to accept that losses are an occupational hazard.

The only scientific survey of angel investments was conducted in 2002 by Strathclyde University. Colin Mason, of the its Hunter Centre for Entrepreneurship, says 40 per cent of them lost money while 37 per cent generated gains worth more than 25 per cent a year. But, says Professor Mason: “Most angels make only one or two investments. Many are opportunistic and if they get burnt after the first couple of investments, they say, ‘That’s enough for me’.”

Their disillusion is unlikely to be helped by another Strathclyde finding: that failures typically show up within two years, but it takes four for the winners to reveal themselves.

To reap those winners, Modwenna Rees-Mogg, who runs Angelnews, a website dedicated to the industry, says: “If you are going to run a portfolio of investments, you’d need at least 25 to to bag ten times your money back.”

The pitfalls do not end there. Ms Rees-Mogg also highlights the difficulties of maintaining the tax breaks often used by angels under the enterprise investment scheme (EIS) legislation. These depend on companies maintaining their qualifying status. If, for instance, a company’s foreign turnover becomes too large, EIS status can be lost, forcing investors to repay any initial tax relief, plus interest, while also losing the right to set losses against tax arising elsewhere.

Such losses were plentiful in the wake of the dot-com boom, scarring many angels who piled in at the top. Since the 2000-01 tax year, when EIS-based investment topped £1 billion, it has dropped to about £700 million annually.

But Anthony Clarke, chairman of the British Business Angels Association, which represents syndicates and advisers, says: “Angels are getting smarter. They realise that [seed capital] is a valley of death for venture capitalists and have moved up the scale by forming syndicates and investing in later-stage businesses.”

Another way of avoiding problems is to invest alongside a venture capital trust (VCT), where the criteria for investments are almost identical to those for the EIS. This is the approach of Oxford Technology Management, which has VCT investments in 55 companies, of which 50 have also included angels.

But, even if you are tempted, never forget that this is high-risk, and professional advice is vital if you plan to invest substantial parts of your wealth.

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