More and more people are willing to start their own company and independently manage it. In Europe alone, there are more than 630,000 companies. However, as these companies try to expand, the main issue most of them face is access to financing. In fact, these companies depend only on love money (money from friends and family) and cannot take out loans from banks because of their risk profile.
There is a way these entrepreneurs can have money to move their companies forward, and it is through business angels. Business angels are private investors willing to help entrepreneurs not only by giving them money but also with their experience, as they are willing to accompany and assist the entrepreneur for some years.
The example of the United Kingdom
Even after leaving the European Union, the model of business angels in the UK is a good example to follow by surrounding countries. The United Kingdom has one of the most mature and researched angel environment in Europe. Almost half of all the companies existing in Europe are in the United Kingdom (more than 270,000). It is hard to know how big the business angel market is in the UK, due to the informal nature of the business angel environment. However, the UK has encouraged the business angels to start investing more formally by introducing a tax relief scheme called Enterprise Investment Scheme (EIS). With EIS, investors have a tax relief as high as 30%. The government encouraged, even more, investing in companies at an early stage by introducing another scheme (Seed Enterprise Investment Scheme) offering a tax relief of 50%. With EIS and SEIS, angels are taking more risks. The sectors these angels invest in are mostly technology, healthcare, and digital media. Also, investing in fintech is emerging in London. The Business Angel environment is becoming more important than other financing vehicles: In 2013, the angel market was 2.5 times bigger than the Venture Capital market, enhancing their importance.
To pool risk, bring more expertise, and invest higher amounts, co-investment funds saw the light. Business angels use syndication, investing alongside venture capital or private equity firms.
“7 out of 10 deals are done using syndication”
Jenny Tooth, CEO of UK Business Angels Association
According to Nesta, 41% of investments done by VCs have angels in their deals, which show their importance. Angels are not only co-investing alongside VCs and PEs, but use other ways of financing. In fact, these angels use mostly crowdfunding platforms to invest (43,3%) but can also invest alongside banks or grant giving bodies.
Challenges of UK business angels
“The exit route and its timing were the major influence on the decision to invest in the first place”
Business Angels still have difficulties to find the right time to exit, considering that they tend to take too long and miss out on their profit. Liquidity is also an issue for these angels, finding it difficult to reinvest the money earned and organise follow-on rounds. Considering exits, the only way to exit better is with experience. A survey made by UKBAA, considered to be the biggest and most researched survey about business angels in the UK, found that there is a high correlation between a high return and the number of years of experience of the business angel.
“Having a very long experience as an angel investor (over 20 years) does appear to be associated with a substantially higher expectation of a very high return on their current portfolio.”
The same survey provided what defines a successful deal from an unsuccessful deal. The most important factor that made a deal successful is the alignment of the management team and investors about planning and executing the growth plan and exit. Even though there are these challenges, they are not as important as the team itself. The main challenge of investing in seed stage companies is not access to financing, but the personality of the entrepreneur and its team.
Even if the UK business angel market faces challenges, it is considered to be the best in Europe and countries could consider it as a threshold to address their issues and improve their market.