Much has been written about how angel investors can help entrepreneurs, but who do business angels turn to when they need help?
Business angels are seen as the amateur cousins of professional venture capitalist investors in much the same way as the blue chip business sector is often seen as the core value sector of any economy. In fact, blue chips represent less than 2% of businesses in terms of volume and less than 50% in terms of value.
The same could also be said for the business angel sector, if only the potential of this type of business investment could be realised and better organised. However, as we have seen with the unfavourable changes to capital gains tax thresholds, business angels suffer from the same lack of government support as SMEs who are forced to operate in difficult market conditions with little in the way of help in comparison to larger blue chip companies.
Business angels tend to invest their money in SMEs which means they will need to work harder to achieve the profits they set out for. This is not so for VC investors working with blue chips like for example Goldman Sachs, JP Morgan. They will benefit from advice, and substantial support to help them understand the risks of investment and the risks involved in realising their profits. Their business angel counterparts often only have their intuition to rely on. Business angels simply don’t have the benefit of unlimited access to detailed reports on aspects of the industry they invest in.
So is it possible for business angels to adopt the same techniques and down size them for SMEs?
The answer is no and this is a common mistake business angels make. The SME sector has a different set of dynamics to contend with and different management models to rely on to achieve growth. Business angel relationships with management teams also by their nature tend to be more personal. If things are going well, these relationships can produce great results, but all to often they can be hard, particularly when things go wrong, as they often do.
The trouble is when things do go pear-shaped for business angels there is little support available. The only real support is comes from organisations like the British Business Angels Association. This is a start, but having just a few organisations serving the entire business angel community in the UK is a reflection of how much more support is needed to help business angels to build and nurture their interests in what they do. In my view this current lack of support is reflected in the poor success rates business angels tend to have.
These failure rates tend to be in excess of 50 %. This high failure rate can be lowered and more business angels can see a higher ROI on their current investments if more support is made available. Unfortunately until the situation changes the failures will continue to outweigh the successes.
Yet if you looked at any industry where the failure rates are in excess of 50% chances are you would see investors fleeing it in droves, this is not so with business angels. They are a resilient bunch who are keen to help companies provided they get a decent return on their investment.
SMEs would love to gain access to more of this type of funding and grow themselves into small then medium and eventually large companies. But to help them business angels shouldn’t have to reinvent the wheel – they need guidance, support and access to skills and expertise and they need it on the same scale available to VCs.
Post by Zulfiqar Deo, SME specialist and Strategy Implementation expert.