Business Angels
SOURCE: BUSINESS & FINANCE, JUNE 2006
Recent TV programmes such as Dragon's Den and Make me a Million and their ritual humiliation of the entrepreneurs pitching for the investments have greatly increased the public awareness of Business Angels. But do these programmes accurately represent the role Angels play?
Business Angels come in a variety of different guises (I hesitate to say shapes and sizes!) and perform a many different roles. In general there are two main defining features: they have been successful in developing their own businesses and have significant personal funds to enable them to invest in other businesses. They also generally have a desire to work with start-up and early stage (i.e. younger than five years old) businesses to assist the founders in developing their business.
What is it then that Business Angels can bring to the table?:
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They are usually successful businessmen in their own right who have been through the trials and tribulations of starting-up businesses and growing them. They can provide a mix of experience, coaching and mentoring skills to the founders as they confront the challenges that face a growth business from its start-up phase through development and commercialisation of its products and growth into a more mature business. Their experiences and hard lessons learnt can be hugely valuable to the entrepreneur starting out on his/her own, often with limited commercial experience of their own. Lack of experience can be one of the major barriers to commercialising technology successfully.
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They have a wide network of contacts within the business, finance and corporate advisory sectors, whereas the founders, particularly in relation to those who are young or coming from an academic background, are unlikely to have the same level of contacts. Being able to tap into an Angel's network can greatly assist in opening doors and creating opportunities within a much shorter timeframe than might otherwise be the case.
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They will usually invest their own funds in equity in the business and this often provides essential early stage risk capital for businesses where more traditional sources of finance are not available. The banks can be nervous about lending to an early stage company, especially in the technology sector, as the company is unlikely to have any tangible assets of any real value to act as security. The technology is often unproven on a commercial scale and there will not be a revenue stream.
The importance of the Angels as a source of risk capital in the Scottish market place has grown over the last few years as a result of the venture capitalists reducing their level of investment exposure to early stage companies and increasingly focusing on the larger markets/deals south of the border. This is illustrated by the January 2006 Report on the Equity Risk Capital Market for Young Companies in Scotland 2000-2004 (published by Gavin Don of Equitas and Prof. Richard T Harrison of The School of Management and Economics, Queens University, Belfast). The Report found that Angel investment over the past five years had accounted for approximately 27% of all investment (excluding what are termed the "Blockbuster" deals in each year) in the Scottish risk capital market. Furthermore, the Report found that in 2004 Angels invested £34m in the Scottish risk capital market, more than twice as much in Scotland as members of the British Venture Capital Association reported as commitments to early stage companies.
One of the most influential developments on the Angel market has been the establishment by Scottish Enterprise of the Scottish Co-Investment Fund (SESCF). The SESCF funds can be used by the partners either to fill a funding gap which they cannot finance or to match fund the Angel investment and have greatly leveraged the size of investments which can be made by the Angels.
A good example of Angel investment is the SMART Equity Scheme which was established by Braveheart Ventures to fund companies who had successfully applied for Scottish Executive SMART awards. The SMART Equity Scheme involved members of the Braveheart syndicate, the Bank of Scotland and the Scottish Enterprise Scottish Co-Investment Fund contributing an amount of equity as seed capital for spin-outs from various Scottish universities which had successfully applied for SMART grants. That equity investment provided the match funding that was required to enable the spin-out companies to draw down against the SMART grants. In addition to this, a member of the Braveheart syndicate was appointed to the board of the investee company to provide the business experience etc. The SMART Equity Scheme is now fully invested and its success is perhaps best illustrated by the fact that many of the early investments made are now receiving second round funding from other sources including the Scottish Enterprise Business Growth Fund and other equity investors.
The Angel market in Scotland has been maturing rapidly in recent years with a variety of syndicates being formed throughout Scotland, the most well known of which are Braveheart Ventures and Archangel. The level of development of the Angel market and increasing sophistication can be seen from the growth of Braveheart Ventures, it becoming regulated by the Financial Services Authority and now planning to float on the Alternative Investment Market.
Business Angels play a crucial role in the risk equity capital market in Scotland. While they are a significant source of finance they also provide their business experience and connections which, while harder to measure, can be as, if not more, important than the money. As a result Angels contribute greatly to the development of new business ventures which provide valuable employment and economic growth benefits for the Scottish economy and are much more than just another source of finance.
AUTHOR: Bill Fowler