Angels are everywhere. It's a nice thought, isn't it? Over the last twelve months, and since the onset of the credit crunch, we've heard all sorts of stories about angels. One of the most commonly reported is that there's been an increase in the number of “new” angels signing up to private investor networks, up by as much as 31% according to Angel's Den.
Our experience is bearing this out. There really are a lot of angels out there, be they sophisticated or HNWI, and there's a lot more attention being paid to early-stage. As the markets have become riskier, and perhaps also as banks have laid and paid off HNVIs, there are more would-be investors and founders out there. Able entrepreneurs looking to raise sub-six-figure sums have some good opportunities.
Unfortunately, it's a bit more complicated than that. Angel networks are often self-serving and put out misleading data, driving up their membership revenues. One private network boasts that 40% of the unvetted entrepreneurs who register with them receive funding from their members. It doesn't take an expert to realise the absurdity of that; we'd be surprised if more than 25% of their applicants were highly investable, and of those we'd be surprised if they all closed deals, and did so solely within that network. Angelsoft, a platform provider for angel groups, claim that only 14% of plans get screened, and only 3% received funding in 2008.
The British Business Angels Association -- who rather unhelpfully don't date their news releases -- state that there are fewer angels, and that they are investing 20 - 50% less. At first glance this is at odds with the networks claiming more angels than ever, but it's really not. Qualifying as angel investor doesn't take much, and in the majority of cases, it doesn't even require making an investment. To be one of the reported 31% increase, angels need only sign up with a network, typically having self-certified that they've met one the FSA's qualifying guidelines:
- A "high net worth investor" (HNWI) is someone with earnings of more than £100kpa or net assets in excess of £250k, excluding pension, insurance benefits and primary residence
- A "sophisticated investor" is someone with at least 6 months' membership of a network or syndicate of business angels; or who has made more than 1 investment in an unlisted company in the past 2 years; or has had professional involvement with private equity in the past 2 years; or is a director of a company with turnover of at least £1 million in the last 2 years
So these individuals are out there, with money, are interested in investing, but aren't doing so. Why not?
There will always people who claim to be “investors” but who don't invest. A trip to W1 on a Thursday for the weekly Open Coffee meet-up should be enough for most people to see the London scene has some pantomime performers alongside committed investors. This is not limited to London, though, and it's not really the problem.
In part, we need to go back to the networks again. They're poorly organised (subject of much TechCrunch debate last year), quote crazy numbers, and -- compared to the States -- provide much less information on what they really get up to. There are groups in the UK trying to improve this, but it's rare to see information like this getting posted. “1-out-of-20 to 1-out-of-30 angel investments work”? That may be a more believable figure.
Another factor impacting UK angel investment is a lack of experience. The newer angels don't have it, as it comes from investing money and time, amplified by smarts. Perhaps a few dozen investments of £50,000 and a few years' experience is pretty instructive, or a successful exit or two, but few angels will stretch that far. To put this into perspective, Angel News claimed in their January newsletter (#56)that only around 157 people in the UK used their full £400,000 EIS allowance, 55 used between £350,000 and £400,000, and a further 300 between £200,000 and £350,000. Admittedly, these numbers are extrapolated from HMRC EIS data for 2006/07, but they're still interesting.
Our experience over the last year or so is that whilst many HNWIs lost a good 40% on the markets, the wealthier extreme were highly leveraged, and lost much more. They won't be back investing for a little while, and when they do, they'll be far more conservative.
Strangely, there might be some hope from venture capital. Despite speculation over the future of their strategy, several UK/ European VCs are claiming to have raised significant funds for investment. We suspect a lot of this money is going into warchests to protect existing portfolios, and the suggestion last year that Accel's $1bn funds are there to safeguard Facebook is intriguing. Our theory is that with VCs ring-fencing much of their funds, they'll increasingly look to “cheap” earlier stage investment, citing the opportunity there. VCs investing early-stage chasing opportunity is a self-fulfilling prophecy and will surely create opportunity.
Is this good or bad for entrepreneurs? It's complicated. Angel investing needs to become more open and an element of democratisation is needed. We have some ideas on how this might happen, and we'll be talking more about them over the coming months.
Entrepreneurs need to be careful, and whilst it's nice that there might be more approaches to make, doing a deal with a wise angel will be more to their benefit than a new “early-stage” VC or an inexperienced angel. We've written before about the “Belgian Dentist” investors, and we think it can be as dangerous taking money from a first time investor as it is investing in a first time entrepreneur. Founders need to look at the track records of would-be angels, speak with other investees, and lend serious consideration to the number of rounds they might need and how well their investors will cope with the unexpected. Founders may also need to take on non-executive directors separately, for experience and mentoring that they might have previously received from their angels.
As always, we're impressed by practical start-ups that boot-strap and only raise investment when they've proofed and prototyped their venture.
We'd love to hear from angels, networks and entrepreneurs with their opinions on this. We haven't had time to discuss some of the developments with co-vesting or virtual incubators (like Reincubate), but we'll touch on those subjects in future posts.