Proposed changes to investment thresholds highlights lack of funding diversity

The government is introducing a law to raise the income threshold for potential angel investors, potentially making it harder for people from underrepresented groups to fund startups

Clare McDonald,
Business Editor

Published: 29 Jan 2024 14:45

The concepts of technology startups and angel investment are often mentioned hand-in-hand, with the innovation landscape dominated by entrepreneurs pitching ideas on how to use technology to change people’s lives.

Angel investors play a big part in providing the money that gets these businesses going. Until now, the rules that make individuals exempt from Financial Conduct Authority (FCA) rules around the communication of financial promotions have allowed angel investments into businesses as long as that individual is of “high net worth”, which until this point has required them to have an income of at least £100,000 over the previous financial year, or net assets of at least £250,000.

Following a consultation, HM Treasury decided to change the criteria for what defines a “high net worth individual” – from 31 January, an individual will either need an income of at least £170,000 over the previous financial year, or net assets of at least £430,000.

This news came as a shock to many, with some in the angel investment space claiming it felt rushed and hushed.

The biggest concern for the technology sector is that the changes will cause a significant drop in female angel investors, as well as from underrepresented groups across the UK, threatening the diversity of potential small businesses in the tech space.

Mandy Nyarko, an angel investor with Ada Ventures and co-founder of Startup Discovery School, said: “Since 2005, the income threshold that gives you the opportunity to make investments under the high net worth criteria was set at £100,000.

“But as of 31 January, that is set to increase to £170,000; this will have an outsized impact on intersectional angel investors – in fact, it is forecasted that in England alone, this will reduce female angel investors down by 69%. We’re currently only accounting for 14% in the entire UK angel investing community. This will also have a massive impact on women-led ventures, as Alison Rose’s latest female entrepreneurship report stated: ‘Women back women.’”

Gender pay gap

The tech sector is already aware of the gender pay gap that sees women earn less than their male counterparts – current figures suggest women in tech get paid around 8.2% less than men – meaning there will be fewer women who fall into the high net worth bracket.

Research by Alma and HERmesa about the changes found an estimated 650,000 people could be counted out of angel investing based on the income change alone – in England, it would cause a 69% drop in women who have the requisite income.

With only 14% of angel investments in the UK coming from women, a drop of this kind could leave a large dent in the diversity of startup investors. “We constantly advocate for more young girls going into science, technology, engineering and maths (STEM), because as the technology era has evolved, we’ve seen lots of products and services that don’t reflect the lives of women, as the decision makers are not women, which then goes on to have negative consequences for women consumers,” said Nyarko.

“Quite frankly, I wouldn’t be surprised if we saw a reduction in women-led businesses, because innovation needs capital injection in order to succeed, and if we don’t have female investors and female business owners in the ecosystem, then essentially the voice of women in the world is lost. And that’s something that we just can’t sit back and watch happen.”

Then, Nyarko added, there is the affect it will have on the intersectional population of the investing landscape – for example, those who are black and female – who are already underrepresented when it comes to those classed as high earners or investors.

“Take someone like myself; I’m a woman, I’m a person of colour, and I grew up very working class,” she said. “That’s not typically what you see in the angel investing community. But luckily, over the last few years in the UK, what we’ve done really well is give an opportunity to democratise access to knowledge and pathways to wealth creation to all different types of people.”

The government claims the reason behind these changes is to protect investors, reducing risks to their net wealth as a result of their investments, and while there are still other ways to invest – for example, as a sophisticated investor or if they have been part of an angel investment group for six months – it will still make it more difficult for many people, predominantly women, from minority ethnic groups, or those outside of London, to invest in early stage businesses.

The fact remains that the female investment community feels overlooked, leaving many to question if there were any women present in the group of 32 who responded to the government’s consultation.

“Do you really need to go and tackle something that’s not a problem?” said entrepreneur and former chief information officer Barbara Gottardi. “Why can you not leverage these people that actually have good experience to ask and to check before you do something like that? I think they’re trying to control individuals and they completely misjudged the byproduct that this has created.”

There is now a Change.org petition, as well as an open letter launched as part of a campaign by many women and allies directly or indirectly affected by these changes.

These women are calling for a halt to plans to make these proposals law, allowing an extension for further discussion and consultation with a more diverse group of experts to make it easier for people from underrepresented groups to invest in early stage businesses.

Andy Ayim, whose Angel Investing School helps educate individuals across the world about how to start angel investing, said that if these changes go through, “the equity wealth gap will widen”.

“What we saw was that women and people of colour were disproportionately receiving less of the funds from fundraising efforts,” he said, adding that “there’s a lot of middle-class white men essentially invested in other middle-class white men”.

While Ayim does not believe these changes can now be reversed, there is hope there could be an extension on the consultation to ensure the right people are involved in further discussions. “What we want to do is really grow and increase entrepreneurship from our ecosystem,” he said. “This proposes to stifle entrepreneurship, because angel investors are critical to early stage businesses getting the capital they need.”