The global financial crisis and the resulting recession made a deep impact on seed funding

New venture funding is the lowest it’s been for a decade according to Nesta’s July report; Venture Capital Now and After the Dotcom Crash and that’s not all…

The BBAA’s glittering annual awards dinner and conference took place last Wednesday providing an  opportunity for business angels to meet up and share their experiences over the past 12 months. I wonder how many of those attending had read Nesta’s report on VC funding. Ok so we haven’t really witnessed the end of seed stage funding, but there has certainly been a huge decline.

The findings of this latest report which follows Nesta’s business angel report last year will likely have provided a sobering topic of conversation. What is interesting about this latest report is that it takes us back to the Dot Com crash of 2000 and compares it with 2009. It makes three alarming conclusions :

•    Fundraising in 2009 is the lowest in the past decade.
•    The situation now would be far worse without public funding.
•    It is taking longer for investors to see returns on their investment.

You could say this is all about VC investments and not really indicative of the likely performance of investments made by business angels. You might also think that it is understandable given the scale of the financial crisis and a deep global recession that there would be a temporary loss of appetite for risk – considering the millions rather than thousands VCs tend to invest.

But this report suggests something more than a temporary blip. It highlights a longer term decline in the performance of VC investments made in the past decade. It is worth remembering that 2009 was the start of recovery when most countries were beginning to move out of recession. Yet fundraising was also lower than it was in the last recession.

What is also alarming is that it was investment in seed and start-ups which suffered most between 2007-2009 dropping by 58 per cent. And this is an area that would be of concern angel investors who use their own money to help those early stage businesses.

Looking at these figures there appears to have been a marked loss of confidence amongst VCs and a dramatically reduced appetite for the risks involved in early-stage investing. So will business angels be filling in those funding gaps? Possibly, but rather than dive in and exploit all those growth businesses the VCs are missing out on it might be worth finding out why VCs have seemingly abandoned seed stage businesses.

Correct me if I’m wrong but I’m guessing the biggest reason lies in the time taken to exit. I recently read with interest a blog which talked about angels finally getting in on the act with all those seed stage businesses, however it won’t be a simple as a VCs out, business angels in scenario.

Owners of those businesses shouldn’t get their hopes up. The reason VCs are pulling out of investing in seed stage businesses is down to the time it takes to exit. Typically the patient investor would want to see a nice return on their cash and an exit in three or four years.

What this report tells us is that exit is more than likely going to come in seven years or more. Seven years is far too long. While not all exits will take this long, clearly there will need to be a considerable commitment. The landscape appears to have changed dramatically in the 10 years since 2000 when it took on average three years less to exit a company in the UK.

More worrying still is that the report says there is greater uncertainty now about the time taken to exit and there are likely to be more funding rounds now before flotation than ever before.  So more money is being pumped in than ever before and it takes longer to get your money back out again, if you make any at all and that is far from guaranteed according to last year’s report. This doesn’t sound attractive. The impact on those promising growth companies that should be helping to boost economies should also be considered.

On this evidence things can only get better and at that glittering awards ceremony in Manchester there was much to celebrate, but this latest report from Nesta certainly provides some food for thought.

Less than 5 per cent of the UK’s angel investors are female and Women into Investing is a series of training events and investment opportunities to increase their numbers.

The organisers believe that breaking down the barriers in male dominated investment communities will increase the flow of equity to ambitious businesses as well as giving female investors the potential for substantial returns.

Women into Investing is launching at The Roof Gardens, Kensington, London on the 9th June from 12 till 2.30pm. Attendees will learn about the background to business angel investing and hear first-hand accounts from experienced female investors.

The FSE and the BBAA’s joint initiative will also include a member-led female investor club later in the year.  Sally Goodsell, CEO of FSE said: “I have always believed that business angels are the lifeblood of early stage businesses, investing some £800m-£1bn annually across the UK in growing young companies.

However, despite the high number of successful women in the UK, with women accounting for nearly half the millionaires in Britain, currently only about five per cent of business angels in the UK are women. We want to change this figure for the better which is why we have joined forces with the BBAA to engage more women in this interesting and potentially highly rewarding activity.

Women are in a great position to bring both their financial capacity, business skills and experience to support the growth and success of innovating SMEs, offering the potential for significant returns.”

Finance South East has a unique business model. Whilst its funds are managed on a commercial basis to meet investor requirements FSE is a not-for-profit entity that does not distribute surpluses. The organisation has offices in Camberley and Ipswich, and works across the South East of England and surrounding areas. The team has won many awards for its innovative approach to funding SMEs.

Beating the Business Angel Investment Odds?

We are living in risk-averse times and “Cash combined with courage in a crisis is priceless” according to Warren Buffet.

But when does courage cross the line into gambling territory? Or to put it another way what if you had say, £50,000 to invest, and someone said you have a 20% chance of a return on it, would those odds appeal?

With a failure rate in the region of 80% if you look deeper into the stats, the odds are pretty well stacked against any kind of successful outcome. But there are ways to lessen those odds and increase your chances of success by following the advice of experienced business angels.

The latest instalment of the BBAA angel investor evenings held in Manchester provided an opportunity

to listen to the advice of seasoned business angels who have been there, made the mistakes and learned from them.

56% of exits failed to make a return according to the Robert E Wiltbank’s 2009 report on angel investment, a figure based on a sample of UK Angel investors – more than 50% of whom had yet to reach for the exit! Hardly a USP, and an unacceptable risk for those seeking a decent return on their investment.

The panel of seasoned business angels briefly removed their halos to provide insight into why indeed would anyone want to be business angel let alone in a crisis!

Robert Heise an angel investor with over 40 years of  business and technical experience to call upon described being a business angel as an “onerous task” but one that can be worthwhile with the right approach.

His pointed out that to get the most out of your experience as a business angel, you need to be altruistic to some extent. Investing in an early stage enterprise is also a two-way process which is unlikely to bring a successful outcome without a large degree of cooperation between the management team and the investor. When things get tough, which they inevitably will, be sure that you know the management team well enough to weather the storm.

A business angel should also be prepared to act as both teacher and mentor to the company they invest in, by bringing expertise in areas such as sales or the technical side of the business to the table. There is little point in simply writing a cheque and stepping back (a point I will return to later). Active involvement leads more often than not to better outcomes and more profitable exits.

Aside from increasing the chances of success, active involvement, from the point of view of the investors themselves, can also be more rewarding; providing a sense of achievement as well as an opportunity to have some degree of control over the direction of the business. .

Unlike other asset classes, investing in an early stage venture brings with it an opportunity to shape, create and drive forward ideas which brings a greater sense of satisfaction for your average business angel.

While it may provide a rewarding venture for some investors, the panel put forward some good reasons not to become an angel:

•    Angel investing will not bring a regular source of income.

•    An early stage business will generally take years to begin showing real profits with the average exit feasible in just under four years.

So what about those who are thinking of becoming a business angel, have money but no time to devote to the business they invest in?

The experienced angel investor practices ‘business be awareness’ which means you should have at least some active involvement in the business you invest in; this may only be a place on the board even if you simply choose to observe.

This will at least ensure your cash is being put to good use and tip the odds in your favour. It is no coincidence that, statistically, businesses where a business angel has taken an active role are more likely to achieve a profitable exit. If you only have money to offer without time or expertise then angel investing probably isn’t for you.

For those who still believe angel investing is for them, it can be an extremely rewarding and profitable experience as long as you’re prepared to exercise patience choose your management carefully and, importantly, get involved!  That way you can beat the odds against a profitable exit.

Quoting new research from Nesta, Mogwenna Rees-Mogg stated that a ‘56% failure rate for Business Angel investing is not good enough’.

This means that for every £1 invested by UK Business Angels, 56p will be lost out right and the remaining 44p will have to grow considerably to make up for the loss and return the business angel with a sufficient return to justify both the money and the time invested.

Discussing the Nesta research in more detail, the panel members expressed the view that it is likely that perhaps 10 or 20% of Business Angels do considerably better than the remaining 80 to 90% and therefore, in order for angel investing sector to grow, more investors need more support, training and help to make better investments.

John Huston, Chairman of the US equivalent to BBAA, Angel Capital Association, confirmed that the results of the Nesta survey into UK business angel success rates mirrors the experience in the USA.

The event is sponsored by Advantage West Midlands, the redevelopment agency for the West Midlands.

It will include both an opportunity to recognise key contributions made to this growth sector during the year at the annual awards dinner as well as create a platform for discussion about how this new sector should grow during the conference session on Thursday.

Many business angel networks and agencies have seen an increase in activity in 2009 as a result of high net worths looking for greater influence over how their money is invested as well as more business start-ups turning to business angels to provide initial funding.

However, converting interest into actual funds invested; and, funds invested into business success is where the industry still needs to prove its mettle.

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