This article delves into the model of high net worth investment clubs, a growing part of the private investment landscape.

Direct investing is becoming an increasingly popular option for wealthy investors seeking more involvement, control and transparency. The trend includes high net worth investment clubs, which bring together would be investors – be that HNWIs, family offices, angel investors or cash-rich entrepreneurs – looking for the next big thing. Robert Walsh, managing director of QVentures, one such investment club in London, discusses current dynamics.

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Where to invest next? That is one question that often crosses the minds of the investor community, and never more than in the present times of low interest rates, Brexit and some – if not as prominent latterly as it has been – economic uncertainty. 

One area of investment which is forming part of a rising number of portfolios, particularly of high net worth investors, is direct investing in innovative, ahead of the curve UK companies. These are early-stage businesses looking for not only significant cash injections to take them to the next level, but also the guiding hand of angel investors who have knowledge as well as the money to contribute. 

What is also growing is the offering of the mechanics in which to do so, with investment clubs, particularly in London, on the rise in both popularity and numbers. 

Each year, private investors account for between £800 million ($1.06 billion) and £1 billion of early-stage investment in the UK. Charity Nesta’s figures suggest the total market size of potential deals in 2015 was £1.2 billion of venture stage investments with an average investment size of £3.1 million. In addition, seed stage investments totalled £215 million, with an average size of £648,000. 

Altogether, this makes early-stage investments particularly attractive to the new generation of investors, including family offices whose younger multi-millionaires are looking to invest more diversely and directly.

But if you are thinking of Dragon’s Den when the words ‘investment club’ are mentioned, then you have conjured the wrong image. 

True, the workings are similar - companies pitch in a room to a bunch of seasoned investors looking for good early stage businesses in which to put their money to work. 

It is also true that it can be highly competitive, and like the Dragons on TV, those with money to invest are quite often Angel investors who have been there, seen it and done it in the world of business. 

But the calibre of companies is far higher, and the attitude is far more in tune with people wanting to do and get a good deal rather than showing up for the cameras. 

Investment clubs usually operate on monthly meeting basis where invited investors are brought into a pitching room, very often in business clubs in London, with around five or six companies ready to speak for ten to fifteen minutes about why their growing company deserves investment. 

All companies pitching at this stage have already secured at least 50 per cent of their funding round. 

This means they are not just getting off the ground with funding that others have already put in, bringing peace of mind to investors.

There are also rules for investors who must invest a minimum amount in each company round, but the figure put in can be beyond £1 million if an investor (be it family office or HNW individual) really likes the company. If an investor does like a company, conversations are taken offline – there is also open Q&A after pitches – and there are probably another two or three private meetings between investor and entrepreneur before any formal agreement. 

Unlike crowdfunding, this part of the procedure allows an investor to look the start-up in the eye, to get a feel for who they are investing in as well as the numbers. 

To give a sample of growth of investment clubs in London, at QVentures, which is one such investment club, membership has grown 40 per cent per annum, with ten new members joining each month. 

It must be underlined that early stage business investing is volatile and illiquid. Money is locked in, companies can go bust.

The fact is, unlike mid- or late-stage investments, every start-up opportunity is unique. Many of the companies that pitch at investment clubs aren’t just ahead of the curve; they provide investors with a serious glimpse into the future. Artificial intelligence companies and B2B is hot right now. Those types of companies are the ones which tend to get investors animated at investment club meetings. 
But solving unmet needs across the full range of industries – sometimes even industries that do not yet exist – means there are often no registries, no directories, no associations to join, and absolutely no data points to crunch. To handle this unsteady, fast-moving opportunity, family offices and HNWs need far more insight and experience than most will have when they first look to invest in start-ups. Therefore the lure to work with the Angels, who know the rub better than they, is strong. 

Working with lead investors who have committed their own money and are looking for likeminded investors to finish the round is also a key step. 

This is often the model of investment clubs, where the lead investors’ return will come from the successful monetisation of their investment and not the rest of the syndicate. In turn, this keeps everyone’s interests aligned and will often create a cap table that know each other and always work in the best interests of the company.

Syndicates have also increased the level of diversity within the types of investor involved in the private investment landscape. While the classic angel investor remains prominent, completing around four to six transactions a year with a typical size between £50,000-300,000, now successful entrepreneurs, professional individuals and early stage investors are likewise involved in the same scene. These kinds of investor bring with them fresh opportunities, ideas and values.