“Venture Capital funds available for start-up and growth businesses has dropped 70% since 2000”, said Anne Glover chief executive of Amadeus Capital Partners at the BBAA Annual Awards Dinner.
This means that businesses seeking new capital that are unable to raise bank finance (and who is able at present?) will need to increasingly turn to Business Angels.
In the view of Anne Glover, this represents a huge opportunity for Business Angels as the Venture Capital businesses will not be able to take all the best deals and leave the angel investors with the left-overs.
In fact, a theme that developed during the recent BBAA event was that Venture Capital firms want to work with Business Angels.
A number of VC firms, such as Catapult, look to invest alongside Business Angels. Rob Carroll, managing director of Catapult said “investing alongside experienced entrepreneurs and angel investors increases our chance of success.”
However, when VC firms invest alongside angel investors two key issues arise. Firstly, VC firms want to purchase preferential shares, whereas angel investors look to take ordinary equity as this is often suitable for the tax reducing EIS (enterpise investment scheme).
The other issue that arises is that an experienced angel investor will often invest his time and expertise into the start up or growth business whereas the VC will not.
However, Catapult solve this issue by ensuring that the angel investor buys his shares at a lower price than the VC, in return for agreeing to act as a non-executive (and unpaid) director.
The pay off for the angel investor is that he gets to influence his investment and increase the likelihood of success. The benefit of this structure for the VC firm is that experience is brought to bear on the fledgling firm AND that neither is the cost base increased by the non-executive director nor does the non-exec receive a salary.
Instead, the non-exec will see a return on his time and money investment when the business succeeds.
This structure ensures that the interests of the VC firm and the angel investor are aligned and that the risk of the non-exec drawing a cosy salary for NOT challenging the management team is significantly reduced.
As an investment strategy, this structure can ensure a much higher chance of success as well as encouraging both parties to work together with the management team.