Angel Investments: the 5W's
Posted on February 2, 2005 @ 02:21:18 PM by Paul Meagher ---UK January 2005 ---The Funding Agents Sourcebook 2005-- Angel investments: The 5 W's--- Who - So what is an angel investor? The term angel stems originally from the private investors that would fund Broadway musicals. Over the years, the term has become more encompassing and now business angels invest in industries and countries all over the world. The UK angel market is a thriving one as more and more investors look for investments outside the traditional stock market and property market. The UK now has around 18,000 business angels. Collectively, it is reckoned they invest around 500 million a year in around 3,500 businesses though since a lot of deals are private in nature the exact sum is unknown. One way or another, however, angel money is a growing source of funding for early-stage business. So who are these people? A recent survey tried to paint a profile of a typical investor. It found that the majority of angels in this country are thought to live in London, the South East or East Anglia, although there seems to be a growing contribution from the Midlands. Most of them - around 95% it is believed - are male. In the main they tend to be over 35, have experience of running a company and often have directorships at one or more firms. That is another defining factor. Many of these people are looking for investments with which they can be involved and over which they can have a degree of control. Around 39 per cent have active managerial involvement in the majority or all of their investments. A further 40 per cent have involvement in selective investments. Just 20% prefer not to be involved. This is a very satisfactory arrangement for most companies seeking funding. In my experience, companies are often looking not only for funding but also for an investor with managerial experience and industry contacts. The "marriage" can therefore be highly beneficial for both parties. Where It is traditionally thought that angels like to invest in a business located close to their home. There is some comfort in being able to go and "kick the tyres". Some 17 per cent of target companies tend to be located within 50 miles of the angel's home. A further 30 per cent are within 150 miles. Most of the remaining 53 per cent are further away within the UK. A small, but growing, percentage of investments are abroad. Proximity, it would appear, is becoming less of an issue. With the advancement of technology, angels are getting more comfortable investing cross-border. The falling cost of communication and travel has meant that it is now easier than ever to check up on investments in the US or elsewhere. The rise in communications has certainly made it easier for angels to find investment opportunities. There are a number of websites dedicated to bringing investment opportunities to potential investors such as the angel investment network (www.angelinvestmentnetwork.co.uk) which allows investors to scan hundreds of potential proposals. However some investors still prefer the old-fashioned method of finding investments in printed publications or by attending presentation days. One of the keys to success is what corporate financiers call "deal flow". The more deals that cross your desk, the more chance you have of spotting a genuine growth opportunity. To that end, the majority of business angels are members of at least one angel association or network, and most have joined two or three. These associations and networks however tend to be quite regional in nature and often angels take it upon themselves to seek out investments outside their immediate community. Around 55 per cent of angels interested in doing a deal prefer to share the risk with like-minded people, and be able to access other investors. However, according to the survey, only around one in six prefers to invest with friends or as part of a syndicate or club - a desire to keep business, friends and family separate perhaps? What. So what is a typical angel investment? The majority of angels spread their investment around two or three companies. This makes sense. They probably look for one to generate a stellar performance, one to produce no more than an average return and one to go bust. Typically, angels invest on average around 30,000 but obviously this figure can be considerably higher, with many investments around 100,000 and upward. Angels want to see an executive summary or short précis at first contact. Many angels feel they are presented with too many complicated business plans and do not wish to be over-burdened reading long reports at the outset. It's a bit like reading someone's resume. The recipient of a new plan probably spends less than two minutes evaluating the initial submission, so attention has to be grabbed by an articulate, compelling and concise writing style that focuses on the excitement of the opportunity. Often the original investors are unwilling to give enough away to the new investors or there may be problems over the ownership of patents and rights. Some of these things really need a corporate financier to come in and advise on how to structure them properly before they go and raise money. Why. Why are Angels looking to invest? Although it is thought that many individuals invested for tax reasons, recent surveys have shown that angels actually invest for a whole host of reasons - of which tax planning and tax optimisation came surprisingly low. Top five Investment Reasons 5. Fun - small amounts 4. Have built and sold companies before 3. Discretionary capital 2. Portfolio diversification 1. Higher ROI Higher ROI is key. Invest in the stock market and you are lucky if you see more than single-digit growth year-on-year. Invest in a start-up and the sky is the limit. And not just start-ups. By and large, private companies are valued at about half what their equivalents are worth on the stock market. So you get in more cheaply. Of course, the corollary of this is that the risks are higher - often much higher. When Angel investors are normally weighted towards the earlier stage investment, despite the past and current market condition. This seems to reflect a desire for larger speculative returns over so called safer investments. The average business angel is a lot more inclined to accept a lower return than that of the 1990's and over a longer period. An exit strategy is also an important concern for angel investors. Most investors like to get in and out in 3 to 5 years. It is important to know when you want to get your money out. So to sum up, one thing I think is important is that people should concentrate first and foremost on the sort of businesses they know something about. So if you have spent your life in engineering, you'll probably be able to evaluate an engineering proposition very well, and you'll know the pitfalls and the difficult questions to ask. But you won't have a clue how a chilled foods business is run - and you probably shouldn't go there, however attractive the numbers may look. Other rules: don't invest "rainy day" money somewhere where you can't get your money back out easily (and that's most of these things). And don't throw good money after bad. Many investors in these things end up being called on for a second or third round of financing because the original plan has fouled up or there are delays in turning something into a commercial product. Be prepared to cut your losses. And diversify. If you are going to take this seriously, two or three investments make sense. Good Luck and happy investing!

National website launched to connect entrepreneurs with angel investors
Posted on November 24, 2004 @ 06:42:03 AM by James Badgett London, Financial Times October, 2004 - The Angel Investment Network Ltd. today announced the launch of it's national website that matches entrepreneurs seeking capital with angel investors. The online matching service is the first of its kind in the UK. The Angel Investment Network, found on the web at www.angelinvestmentnetwork.co.uk, allows angel investors (wealthy individuals who invest their personal funds into early-stage firms) to register online free of charge to review investment proposals from entrepreneurs. The service enables entrepreneurs to submit their investment proposals free of charge. Only when a match is made with a suitable investor, are the entrepreneurs required to pay a one-time fee of 99 pounds. Based in London, the Angel Investment Network was created to fill the needs of investment matching in the UK marketplace. The company has a diverse range of shareholders specializing in business acquisitions, government and information technology. As an entrepreneur, I recognized a need to create a forum to bring entrepreneurs and angel investors together for the benefit of both parties, said James Badgett, President of the Angel Investment Network. The website is a user-friendly and effective way to either find money for your business or find an investment that suits your needs.? Angel investors invest more than 3 billion into small businesses annually. Even with this amount being invested, a common complaint by investors is that they cannot source enough opportunities. With current down turns in the stock markets, investors are becoming more concerned with where to put their hard earned money. Entrepreneurs are voicing similar frustrations. There are over 800,000 small and medium sized businesses in UK and banks are not nearly as open as they were a few years ago to financing these companies. This leaves a huge void in small business financing that the UK Angel Investment Network can help fill, added Badgett.

Angel Investors
Posted on August 4, 2004 @ 06:37:18 AM by Natasha Zuccolo Rawdon-Jones They may not match the selfless altruism of traditional angels, nor the glamour of Charlie's Angels , but anyone professing to be a business angel is proving mighty popular at the moment. 'I get about 400 emails a day from dying dotcoms,' says one high-profile angel, who preferred to remain anonymous to restrain the growth of his inbox. For thousands of early-stage businesses caught up in the funding euphoria that accompanied the tech-stock boom, cash piles are now running dangerously low. These 'Zomb-e' or 'living dead' companies know they will soon be running on empty, but equally that the prospects for funding in current market conditions are bleak. Business angels, normally the first resort for early-stage finance, have become the last resort now that the funding plug has been pulled by venture capitalists. A report last week showed the total value of private equity deals in Europe fell by 70 per cent over the first three months of this year. Venture capitalists are, for now, quite content to sit on the huge cash piles already raised for investment. But do current conditions scare off even the angels? Yes and no is the unhelpful answer. Clearly there are fewer individuals around willing to risk their hard-earned entrepreneurial wealth on the exuberant whims of a 22-year-old web programmer. Then again, those people who got sucked in by tech-stock euphoria were probably not real angels anyway. Serious, season-ticket-holding business angels are not so fickle as to be controlled by market fashions. They are in for the long haul. Julie Meyer, co-founder of First Tuesday, the high-profile networking organisation, says: 'They are very market-neutral - they don't go on about where the Nasdaq is.' Ryan Prince agrees. He runs i-gabriel, a syndicate of high-profile angels, including Charlie Muirhead, Esther Dyson and Paul Myners (chairman of Guardian Media Group), who invest in 'enabling technologies'. 'From a number of perspectives angel investment is where you want to be right now. The IPO (initial public offering) window has closed, but angels typically invest two to four years before an IPO, and in this market valuations are more in line with fundamentals. It's a great opportunity,' he says. So, it appears that genuine business angels have a protective halo that insulates them from the waxing and waning of stock markets. Academic studies of the informal private-equity market in the UK show that angels invest over a longer-run. 'Most angels are serial investors. Macroeconomic fundamentals - the stock market, inflation, the interest rate - do not register as a significant influence on angels' invest ment behaviour. The only factor that did affect things was the tax regime,' says Professor Colin Mason of Southampton University, who has carried out numerous surveys of angel investment. The issue in the current market is more that there was a glut of over-investment in companies with flaky business prospects. This means angels have had to be more circumspect about the quality of early-stage companies that had already secured funding in the past. This may have changed now. A lot of the frothier business plans, the me-too con cepts, have sunk. The quality of businesses and of intellectual property being built is now far better and more bankable,' says Prince. Mason estimates there are 20,000-40,000 business angels investing £1 billion in up to 6,000 companies a year in the UK. This funding plays a vital role in giving the initial impetus to early-stage start-ups, which tend to be overlooked by venture capitalists. Precise figures are impossible to obtain because many angel investors do not want to volunteer their status. But it is clear they are a vital cog in the workings of an entrepre neurial culture. 'The average entrepreneur doesn't need £5 million to get an idea off the ground - it's, say, £100,000,' says Meyer, who now runs Ariadne Capital. And if they don't happen to have a rich uncle, many good ideas can go unfunded. Unsurprisingly, angel investment culture is very different and more developed in the US. Some $40 billion is estimated to be invested by angels over there. 'Europe is dominated by families who made it in the old economy,' says Meyer, who has toured the Continent looking to connect businesses. 'They will invest if they know one or two things about it, otherwise they won't touch it. Then they give the nod to a whole network of friends across Europe and they'll all come in. 'In the US there are these under-35 year olds, as new money as it comes, who are driven by recycling entrepreneurial wealth and know-how, as well as making more money,' she says. Indeed despite the cash crunch, this passing on of know-how and contacts often proves more important than the funding itself. In the US there are formalised mentoring groups from which angel investment may sprout organically. The Indus Entrepreneurs (TiE) is one such group, originally focused on Silicon Valley's South Asian technology immigrants, but open to all. Charter members offer mentoring sessions for young entrepreneurs with ideas and business plans. For older members who have already made their millions, it is a chance to replay the entrepreneurship game by proxy. Young entrepreneurs get advice, access to valuable contacts, potential clients, suppliers or partners, and possibly a slice of investment. 'We're not doing it fundamentally as a favour,' says Kanwal Rekhi, TiE's president. 'If you invest, it can be a lucrative activity.' But there is an all-pervading spirit of community entrepreneurship. And TiE has just opened in London. The organisation stresses that mentoring, not angel investment, is its primary purpose. But the scheme, which begins next month, will offer aspiring entrepreneurs a helping hand. Angels ganging together are not a new concept. The caricature of British angel investors is a network of Hertfordshire gentlemen farmers who will all pile in on the nod of one of their members. Syndicates such as i-gabriel promise to bring a more formal edge to the UK. The real benefit from angel investment is that such investors are in a position to take greater risks because it's their own money, and they have a genuine understanding of the sector. Out goes ghastly due diligence and in comes gut feeling, and a few rules of thumb. Those risks don't always pay off, though. According to Mason's survey data, angels in the UK lose their money in around 40 per cent of investments and make high returns - of 50 per cent or above - on under a quarter. 'It's vital for entrepreneurial culture,' says Meyer. 'Take Stockholm and Copenhagen. There's a massive difference in entrepreneurial culture in these two cities, and it's all because generations of Stockholm people made their money in technology and digital media and then reinvested it in this community.' So what are the tricks of the trade for tempting an angel to invest? 'You wouldn't speak to an angel unless you knew it was a good idea because your credibility is at stake,' says Charlie Hoult, an entrepreneur who relied on angels for his Metrocube incubator. 'The first question they ask is "Is it Eis-able?",' he says, referring to the special tax advantages on offer to serial investors under the Enterprise Investment Scheme. Should an investment go bust then it can be reclaimed against a tax liability. Entrepreneurs who make the effort to go to TiE's London meetings will also discover that they can get into legal difficulties by soliciting investment on spec from more than 50 angels. But if it's the cash you're after, there's plenty out there. 'The problem is not the supply of funds, there's simply not enough investable opportunities,' laments one angel. 'The entrepreneurs who come looking are not investment-ready; they don't know how to make a business plan or to make a pitch.' And angels are unlikely to bail out the living dead.

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