[Have You Tried? Angel Investment] "15 Million Won Became 100 Million Won in 5 Years"

Funding and Mentoring Roles for Early Startups
Income Tax Reduction Benefits and Tens of Times Returns Are Attractive
"Sudden Closure Possible" Need Long-Term Perspective

An angel investor (hereinafter referred to as an angel) is an individual investor who provides funding and mentorship to prospective entrepreneurs or early-stage startups. For teams struggling with business direction or lack of funds, they are truly like 'angels.' They invest with a long-term perspective of over three years, based on the company's technological capabilities and growth potential. Angels should not have purely financial motives; they must become good partners to help the company grow. Although there is a risk that the shares they hold could become worthless, if the company's value rises, they can earn tens of times the profit, making it a 'high risk, high return' investment method.

Angel investment is well known for its attractive income tax deduction benefits. Investments up to 30 million KRW are 100% deductible, investments between 30 million and 50 million KRW are 70% deductible, and investments exceeding 50 million KRW are 30% deductible from income. There is a limit that only up to 50% of annual income can be deducted, but since the deduction amount can change the income tax bracket itself, the tax-saving effect is significant. For example, if a person with an annual income of 100 million KRW invests 50 million KRW in a year, they can save about 12 million KRW in taxes, and if a person earning 1 billion KRW invests 300 million KRW, they can reduce their taxes by 50 million KRW.

Is it okay to invest as an angel now?

The path to becoming an angel investor is open to everyone. It is estimated that there are about 13,000 angel investors in Korea. If certain conditions are met, such as investing more than 100 million KRW in the past three years, one can qualify as a professional individual investor (professional angel). The number of professional angels increased from 183 in 2020 to 210 in 2021, and 256 last year. The Angel Club, a group where angel investors share information, also grew from 240 to 250 to 257 during the same period. Professor Woojin Lee of Kookmin University’s Graduate School of Global Venture, a professional angel, said, "Now is the right time for angel investment." He explained, "Although venture investment has contracted, the number of entrepreneurs does not suddenly decrease. Entrepreneurs remain in the market. Companies are trying to receive investments even at low valuations, and when large venture capitalists (VCs) hesitate to invest, this is an opportunity for angels."

A representative from the crowdfunding platform FundingForYou also said, "When the economy is good, angels want to invest in companies, but it is difficult because companies have already received large funds or their valuations have risen." He added, "Now, even good companies find it hard to raise funds, so it is an opportunity for angels." Last year, the number of FundingForYou’s investment members increased by 235% compared to the previous year, and funding performance also rose by 109%.

Although domestic and international economic instability and rising interest rates have dampened investment sentiment in startups, early-stage startups have been relatively less affected. According to the '2022 Venture Investment Trends' announced by the Ministry of SMEs and Startups earlier this year, investment in startups less than three years old was the only category to increase. Investment in early-stage companies rose 7.8% year-on-year to 2.005 trillion KRW, surpassing 2 trillion KRW for the first time. In contrast, investments in mid-stage (3 to 7 years old) and late-stage (over 7 years) companies decreased by 21.6% and 13.3%, respectively, compared to the previous year.

Invest with a long-term perspective... Help companies grow

Professor Lee, who has been active in the 'AI Angel Club' since 2015, has invested a total of about 800 million KRW in more than 20 companies so far. He mentioned a company where a 15 million KRW investment yielded 100 million KRW in profit after five years. He said, "I have lost a lot of money too. Some founders suddenly cut off contact or declared bankruptcy." He emphasized, "Angels need to be partners who can provide psychological stability to founders."

Unlike VCs, angel investors are not required to report or disclose their individual investment performance. Therefore, domestic angel investment statistics are calculated based on income tax deduction applicants. The government provides income tax deduction benefits to promote angel investment, and estimates the profiles of angels based on the documents submitted when applying for the deduction. Seokhoon Seo, head of the Korea Angel Investment Association, said, "Many angels are high-income professionals such as doctors and lawyers. Some entrepreneurs who have succeeded in starting businesses invest to help junior entrepreneurs."

The average age of companies receiving angel investment is 1.2 years. Angels who discover and invest alone contribute an average of 150 million KRW per person. When multiple individuals form a private investment association to invest, the average contribution per association is about 350 million KRW. Private investment associations must meet requirements such as ▲total contributions of at least 100 million KRW ▲minimum contribution per unit of 1 million KRW ▲no more than 49 members ▲a duration of at least five years. If one lacks expertise in angel investing, they can try small investments through crowdfunding platforms. Professor Lee emphasized, "Angel investment involves high risks and should be viewed with a long-term perspective. Investors need to actively support the companies they invest in by introducing their products or services to people around them and providing feedback."