Angel Investors Spread their Wings
Referred to as “mentor financing”, business angels continue to make great contributions to startups. Last week, I talked with some of them in Washington, DC, about the latest trends in angel investor pools outside the United States. Encouraged by improving policy frameworks, I found that they are now spreading their wisdom and seed capital to new parts of the world.
I was the final speaker at the closing lunch for the world's largest gathering of angel investors for the 2014 Angel Capital Association Summit in Washington, DC. This offered me the chance to have the last word before the group spread their wings and went back to work. Participating in the Summit also offered me the chance to learn about the changing environment for this sector, as well as angel investors’ power to rapidly boost entrepreneurship ecosystems in two vital ways – funding and mentorship.
There is no doubt that there is a gap in experienced angel investors relevant to the amount of opportunity in most startup ecosystems. There are also significantly more venture capital firms than there are angel investor networks in almost every entrepreneurship community. However, there are many business angels around the globe who were doing “mentor financing” in isolation and are now beginning to form formal angel networks. In Europe for example, there are 260,000 business angels, which altogether in 2012 invested 5.1 billion euros in early stage companies. Venture capital investment levels were at only $1.9 billion euros. Policymakers have taken notice.
Take Portugal, where the work of angel groups such as Faber Ventures, Eggnest and Busy Angels, entice the government to also undertake co-investment with angel networks, as the Financial Times reported last week. In Turkey, the Treasury implemented tax incentives specifically for angel investors in February 2013. As Hakan Erturk explained at the Global Entrepreneurship Congress last week during the meetings there of the Startup Nations Policy Advisors, the new framework provides tax incentives to licensed angel investors, allowing them to deduct up to 100% of their investment amount from their personal income tax bases. Before the end of the first year of implementation, over 100 investors had already received licenses.
Data and anecdotal evidence both suggest smart policymaking is vital to enlarging the pool of angel investors. For example, according to the EBAN --the European Association for Business Angels, Seed Funds and other Early Stage Market Players -- angel investors in Europe are sensitive to incentives. Five to seven years ago, there were only three noticeable, well performing markets for business angels in Europe: the United Kingdom, France and Germany. All three of them offered fiscal incentives. The situation has changed since EBAN’s start in 1999. It now boasts at least 100 members in 28 countries across Europe, with activities ranging from research publications to the setting of professional standards and lobbying.
In the Southeast Asia region, the 2010 survey conducted under the Business Angel Investing in Emerging Economies research project revealed that, when asked about how to improve investing, many business angels cited “government leadership” as the most important factor in providing institutional support to improve the investment climate. Angel investors in some countries, such as Vietnam, also believe education about private equity is needed at the high school and university levels. The survey also revealed how angels operate in the face of institutional weaknesses: they develop informal institutions by co-investing with family members, other investors and networking with government officials. For example, Australian individuals interested in investing in startups based in the Philippines partnered with the local startup community stakeholders to form the Manila Angels.
The most common types of policy or regulatory approaches are fiscal, and facilitating market transactions. The former refers to tax breaks (e.g. United Kingdom and Turkey), and the latter to mechanisms for co-investment with angels (e.g. Portugal and the Netherlands). Both types of policy approaches diminish the risk of the activity, and tackle risk-averse cultural preferences.
Another type of support can be seen in Singapore, where in recognition of the growing professionalism and catalytic role of BANSEA (the Business Angel Network Southeast Asia), the government agency in charge of the promotion of start-ups (SPRING Singapore) has offered public funding support for BANSEA’s operations, under a scheme called the Incubator Development Program (IDP).
Strong angel networks do not develop immediately, but rather over time. BANSEA started activities six years prior to the government’s recognition and investment. Inspired by the professionalism of angel groups in Silicon Valley, BANSEA members had the vision to foster the development of a professional angel investment community in Singapore by providing a platform for deal-syndication among investors and for matching start-up deals with investors. Of course even in Singapore, a city-state known in so many ways for its sophisticated support of startup dynamics, there is always room for improvement. Female business angels, for example, are still underrepresented in business angel networks and investment deals.
Alongside policy incentives, an expanding global accelerator and incubator network has also boosted the development of formal angel groups. In the Middle East, Oasis500 in Jordan and Flat6Labs in Egypt, both established in 2010, paved the way for angel connections and more accelerators across the region. For Jordan's Oasis500, King Abdullah invited Usama Fayyad, a former executive vice president at Yahoo to help develop a blueprint for the accelerator. "This region is a desert when it comes to early-stage investment," said Mr. Fayyad, now the CEO at Oasis500. He cautioned the King that no one would invest a penny for the first year, but the King was confident that the ecosystem could prove him wrong – and he was right. Five of the six companies that presented pitches at Oasis500's first angel-investor dinner got investments. To date, 28 startups fostered by Oasis have made pitches and 22 have gotten investments.
Another example of the co-development of angel and incubator communities comes from two people I met with last week from Ghana, where Hub Accra partners with a new Slicebiz angel platform. Hub Accra increases startups’ chances to get funding to scale up through business training, help on prototype design, pitch and leadership workshops, and more. When ready, participants seek funding through Slicebiz, a unique hybrid investment platform to fund innovations with a mix of angel investors and a wider pool of smaller investments from the African investor community. From the investors’ perspective, Slicebiz offers the opportunity to create an “angel investor” account, and mitigates risk. SliceBiz uses accredited investors in angel networks to validate ventures by allowing angels to first provide part of the startups funding before turning to the larger middle class group to ask for smaller investments. For startups, this means they can get access to a whole new funding source.
This “democratization” of investments in startups is also visible in India, where we observe large angel investments from successful Indian Diaspora entrepreneurs who are eager to capitalize on opportunities in their homeland (e.g. Vinod Dham, father of Intel's Pentium chip; and Vinod Khosla from Sun Microsystems, Inc.). They are all widely known for investing their time and money in numerous startups. However, at the same time, local angel investors have set the trend of investing smaller amounts in early stage ventures.
Experienced angel investors have thus, indirectly, been widening pools of startup funding in many entrepreneurship ecosystems. “Mentor financing” not only increases the chances of scale-ups but also the critical mass of angel investors that can grow the sector stronger in their startup ecosystems, allowing new waves of startups to emerge.
When talking to those new to startup communities, I often discuss the values I now find in nascent entrepreneurs and new founders who are starting and scaling new firms. Generally speaking, I find them curious, committed, global, and drawn to this world more out of an interest in conducting experiments to help them eventually find a winning formula for a success, rather than simply starting a business that might fail or succeed. I also find them more generous, looking to do a little good rather than just do well financially. Such wisdom and balance can also be found in aptly named angel investors - something we would do well to remember as we all rush to welcome in crowdfunding of our new makers and doers of things.
Image: Photo credit Toni Blay