“There is joy in the presence of the angels.” Luke 15:10
Business angels have been recognised as an important source of finance for entrepreneurial businesses for nearly 20 years in the UK and for even longer in the USA. But angel investment activity is difficult to identify and track. In the 2011 report on the UK business angel market the British Business Angels Association (BBAA) reported that the 1,800 active angels within its network had invested £32.2m of the £98.3m raised by 245 companies. This analysis formed part of the authors’ estimate for total UK angel investment of £318m.
Angel investing is inherently risky. The 2009 NESTA/BBAA research report “Siding with the Angels” analysed returns suggesting that 56% of angel investments exited at a loss, with most losing the entire investment, and 44% at a gain. The average exit multiple was 2.2x the original investment in 3.6 years, although 9% of exits were made at a multiple of 5x or more. Overall the result was a gross IRR of 22%.
The primary motivation of the business angel is to make at least 10 times their investment over, say, a 5 year period, ideally in a tax efficient manner. This equates to an internal rate of return (IRR) of almost 60%, to compensate for the risk involved.
They may also be motivated by the satisfaction of being involved in a new venture, keeping up to date with technology or trends, and the potential excitement of being part of a real success story.
“Opportunity is missed by most people because it is dressed in overalls and looks like work.” Thomas Edison
Entrepreneurs should ask themselves three questions before approaching investors:
a. Do I have the tenacity, determination and enthusiasm to raise funds? The process may take 3-6 months and is likely to become all-consuming. You will be rejected more than accepted and are more likely to fail than to succeed. Angel groups across the BBAA network received almost 10,000 business plans during 2009/10 of which only 8% were deemed of sufficient quality or interest to pitch to members and only 1/3rd of these, or 2.5% of the original submissions, secured funding.1
b. Do I need angel finance at all, given that many startups do not receive investor funding? Is it possible to bootstrap my new venture? Could I finance my embryonic business with the support of some co-operative clients, a helpful supplier or maybe a modest, friendly loan from the “bank of mum and dad”?
c. Is my startup something in which I would invest, if the roles were reversed? Is it just another mousetrap or something truly innovative that changes the way people buy or use mousetraps or approach the mouse-catching problem?
“It is not known precisely where angels dwell – whether in the air, the void, or the planets. It has not been God’s pleasure that we should be informed of their abode.” Voltaire.
Where to find angels? A useful resource is the British Business Angels Association which has a membership of over 100 organisations and angel networks. Individual angels can be more difficult to identify and may be found at investor network or pitching events, or online through personal blogs or social media platforms such as LinkedIn, Twitter or Google+.
Exposure to angels may also be achieved through the increasing number of accelerator programmes, incubators or competitions, such as Tech Entrepreneurs Week, that have developed over the past years. Table 5 of the NESTA report, “The Start Up Factories”, provides a list of 12 UK-based accelerator programmes.
A recent innovation to help connect UK high-growth businesses with investors was launched by the Government in mid 2012, GrowthAccelerator Access to Finance (A2F). For a modest fee an A2F expert coach works with the business to help make it “investment-ready” and with the guidance of the GrowthAccelerator investor relations panel, facilitates introductions to three potential investors. It’s early days, but at the time of writing almost 1,000 business have signed up with GrowthAccelerator.
In Part 2 we’ll look at what makes an Angel stop and look!