2011 – Year of the Business Angel?

Will this be the year of the business angel or is this just a sign of early New Year optimism?

2011 will be the year of the business angel as all the latent angel investors who didn’t bother risking it in 2010 decide this will be the year to jump in and live dangerously.

At least this is what we are led to believe from one pr story doing the rounds. Unfortunately it’s usually around this time of year we see an endless stream of articles written about what’s going to happen in the year ahead some more convincing than others.

The story has been put out there by the Angel Investor Network citing research from the University of New Hampshire which found that 65% of business angels in the US are considered “latent angels”. These angel investors have apparently been kicking their heels waiting for the economy to shape up before they make their move. But is this the only reason business angels have held onto their cash this past 12 months?T

It might be a tad cynical, but it is hard to accept that ‘news’ such as this comes without an agenda. Being a network that thrives on business angels investing, it doesn’t take a great leap of imagination to conclude that this sort of propaganda might just coax a few more ‘latent business angels’ out of their comfort zones.

Let’s look at the economy picking up in 2011 theory to begin with… All the indications are that there will be little to get excited about in 2011 (unless you live in Singapore or Qatar). In the US, Europe and the UK, the downside risks are very real and according to one headline today ‘2011 is a year of substantial economic risks’.

Austerity measures in the UK will really begin to bite in 2011 and recovery in the US will be strongly influenced by factors such as their ongoing currency war with China and (Germany apart) weak recovery in Europe. The Spanish economy is also still teetering on the brink, threatening to trigger an even larger economic crisis than in 2008.

While Spain is one economy that cannot be allowed to fail it takes a large dose of optimism to predict things picking up in 2011 when the more likely scenario is more of the same i.e. continuation of slow recovery with a few scares threatening to throw a spanner in the works.

Business angels will be aware of this economic backdrop. Slow growing or struggling economies don’t provide the ideal conditions for fast growing businesses and therefore the decent returns on investment they require. Their aversion to risk taking in 2010 was probably due in no small part to concerns about economic recovery. These concerns are likely to persist in 2011.

But by the same token many will be looking at the other side of the coin. What will happen in the longer term?

Warren Buffet offers a simple rule for investors, be greedy when others are fearful and be fearful when others are greedy. Talk of the economy picking up prompting a stampede of latent business angels looking to risk their cash in promising start-ups may be a little premature, particularly when it’s based on the flimsy premise that the economic outlook will improve.

If we are likely to see more business angels investing in 2011 it won’t be down to short-term thinking. Those who do decide will be hoping they have taken the plunge early enough to reap the rewards later rather than being greedy when others are greedy.

The problem, at least in the US, is we are seeing the risk of a tech bubble developing with valuations of pre-revenue companies rising to extreme levels, this already started to happen in 2010 as business angels have entered into the sector looking for the next big money spinners.

If this does prove to be the year of the business angel, let’s hope that three years down the line they will be exiting with a decent return.

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