Your country needs you: more British angel investors urgently required

Rich guy in his castle hoarding all his money!

I’ve been working on raising a seed round for my startup, Teamly, and it’s become really clear to me from my experiences and from speaking  to other entrepreneurs that the UK really lacks a culture of seed investing and this is starving potentially great companies from creating jobs and wealth. There’s no shortage of schemes to encourage and accelerate entrepreneurship, but what’s being done to get more people to get involved in angel investing here?

There’s dozens of campaigns, competitions, online resources and organisations all geared towards encouraging and supporting entrepreneurship. A handful of the more notable ones: StartupBritain, BusinessZoneBusiness Link / Business Gateway, Global Entrepreneurship Week, If We Can You Can, Entrepreneurs Forum, Smarta, Prince’s Trust / PSYBTSmallBusiness.co.uk, The National Enterprise AcademyStartups.co.uk, Shell Livewire, Entrepreneurs Business Academy, School for Startups and [LondonEntrepreneurial Exchange

But what exists to encourage angel investing? Should we be encouraging people to set up businesses when there is a lack of capital to help nurture and develop these new businesses?

Perhaps you’re an individual of high net worth and you’ve heard about the excellent Enterprise Investment Scheme (EIS) tax breaks, if you went on to the HMRC website you wouldn’t exactly feel inspired. Even if you manage to find the official British Business Angels Association you will find just a one page introduction to angel investing. Come on guys, you can do better!

I have an example of the type of person we should be encouraging to angel invest: he is the founder of a very successful online retailer who recently exited for multi-millions to a publicly listed company. After 15 years of hard work this entrepreneur has bought a million pound house in the countryside and is sitting on the rest of his money while he relaxes. This is someone who has valuable domain expertise, and could really play a part in funding and advising the next generation but has opted out from that. This wouldn’t happen in silicon valley, where money is far more likely to be recycled, and a new generation of entrepreneurs and businesses are created with help from the advice and money of those who have gone before. I know there are countless other examples of successful entrepreneurs that somehow get into angel investing. It’s definitely a virtuous circle, if you received angel funding you’re more likely to subsequently become an angel.

It’s not just that we need more capital in the system to seed companies, but we need better quality angels as well. One unintended consequence of the EIS scheme is that it perhaps encourages those who aren’t really cut out to be an angel to look at it as an alternative to a deposit account. Dragons’ Den is perhaps a double-edged sword, while it definitely raises the profile of angel investing and entrepreneurship I cringe at the thought of the imitators across the country trying to be all hard nosed and dragon-like. (I met one such individual… shudder… not a fun meeting).

The existing angels we do have are also spoiled for choice because they are getting the opportunity to invest for equity on deals which ought to be funded by bank debt. This is down to our non-functioning banks who won’t lend even to established businesses with proven track-records. If you are an angel, with limited resources (money) and limited capacity (time) for doing deals, which would you rather go for? The seed stage startup doing something new and innovative which could be huge, but so far hasn’t delivered any revenue, or the long established company in a traditional sector you understand which just needs some additional capital to generate more revenue and profits?

What about VCs, are they seed funding startups? According to BVCA figures quoted in Management Today, funding for startups declined from £125m in 2009 to just £46m in 2010. This is another area where our friends in silicon valley do much better as there are far more VCs doing seed deals, and some that specialise in only these type of deals. The underinvestment in seed stages though makes it less likely the VCs will find those juicy later stage deals, because less companies will get to that stage without an influx of early capital. Without an infusion of capital early on many great companies are dying before they’ve even had a chance.

What needs to happen:

1. We need to raise the profile of angel investing and share best practice.

2. We need to encourage more “smart” angel investors to enter the system.

3. We need to encourage newer investors and other sources of “dumb” money to invest alongside “smart” money so that the money goes further and can help more startups. 

4. We need to ensure the banks lend to the businesses that are bankable so that angel’s risk capital can be freed up for the deals it ought to be funding.

5. We need to encourage more VCs like Passion Capital to be set up and invest at earlier stages.

But who can make any of this happen? Fortunately this Government is listening and responding to matters involving the economy and job creation. Last night at an event organised by SkillsMatters I put some of these suggestions to Eric van der Kleij, the head of Number Ten’s new Tech City Investment Organisation and I was delighted with his positive response: He genuinely loved the idea to encourage more angel investing and said it’s going to the “top of the list”, and seemingly reading my mind said “there must be a TV show in this!”

Do you have an idea for how we can encourage this new wave of seed investing in promising UK startups?

Please contribute in the comments!

Here’s 3 ideas of mine to get the ball rolling:

1. Reach out to high net-worth individuals you know and ask them to consider angel investing.

2. Encourage smart, experienced angels to register on AngelList.

3. Start an angel syndicate (Eric called out for someone to create the Tech City Angels – great idea!).

Advertisements

27 Responses to Your country needs you: more British angel investors urgently required

  1. Rose Lewis says:

    Make angel investing of the moment – existing smart angels should tell their stories, the bbc should make a tv programme about angel investing and why more people should do it

  2. Dug Campbell says:

    An interesting read – you’ve made some good points there Scott and great to hear that Eric van der Kleij is listening…

    To be fair, the BBAA has (fairly) recently carried out a successful campaign of travelling across the country (specifically south of the border) in an attempt to raise the profile and awareness of angel investing. Part of the difficulty (as I see it) is the fact that only a certain percentage of high net worths appear to have the necessary risk tolerance to get into angel investment – being able to balance the much-publicised odds of a successful outcome (2 in 10?) against the requirement for sufficiently deep pockets to enable a portfolio approach to investment (i.e. investing in a number of companies) and being able to support each company with future follow-on investment.

    The EIS scheme, for all of its shortcomings, has been excellent at attracting capital to the early-stage market – not least because of the tax benefits enjoyed when those investments don’t unfortunately make it.

    Part of the reason why Passion Capital (and some of the other Enterprise Capital Funds) are so important is due to their scale because of the government money that is successfully leveraged in setting the funds up. Just look at the success of matched funding in the Scottish angel investment market, specifically from the Scottish Co-Investment Scheme.

    Regardless, anything that can be done to increase the flow of investment coming into early-stage companies is of critical importance here and your point is well-made. It’s fascinating to see how AngelList is developing in the US and any further efforts on this side of the water should be supported. I have no doubt whatsoever that there are many individuals in the UK with the means and risk profile to invest who are simply unaware of how to go about it. In approaching and ‘educating’ (patronising tone not intended) those individuals – particularly those with sector-specific experience – I’m sure that we’re all agreed that we hope it leads to a clearer path for the ‘smart’ money to reach the best startups.

  3. Amanda Boyle says:

    That’s an interesting contribution to the debate about startups and seed money but is doing more of the same the answer? Or is it time for a new model?

    15 years ago, the Angel approach was largely unknown and untested. Today crowdfunding is leveraging Internet 2.0 to plug the gap and engage everyone in supporting new ventures.

    Wedbush recently published a pretty compelling analysis of the future of crowdfunding. The US may be a couple of years ahead, but it’s up to us to start catching up – and soon.

    • I definitely think crowdfunding has a role to play and I hope what you and others are doing succeeds! Regardless of the success of crowdfunding though we still need more angels, as they can offer additional help and support which you may not get from a crowdsourced investment (or donation).

      • Amanda Boyle says:

        Haha… I guess that depends how it’s set up!

        Personally, don’t think that more of the same is the way to make to progress so new models are needed. From high risk Y Combinator to low risk crowdfunding, the sums are genuine seed money; that’s where the bottleneck is and where real impact can be made.

        Not all Angels have the time to spend on the detail of the individual investments (despite what Dragons’ Den promotes) – that’s why they join syndicates. And, in my experience, there is a tendency for investee companies to see Angel money as a magic wand.

        So new, better, different? The entrepreneurial ecosystem needs to grow and become more sophisticated… and the more discussion and debate we have the more likely that is to happen.

    • Nice blog Scott and good post. I am new to the start-up market in the UK as I left a corporate job a few months back but since then I have been quite active advising a few start-ups and have mentored at both Seedcamp and Springboard.

      I absolutely agree with your points that the financing channels for early stage start-ups is quite limited and there are few Angels. The weakness I see is in the ecosystem here, i.e. that there have not been enough successful tech exits here to create a critical mass of wealthy/knowledgable individuals who have become the cornerstone of the tech scene in Silicon Valley. Having said this the evolution of the angel scene in SV is relatively new and only with the launch of Angel’s List has the transparency increased.

      It appears the UK govt is committed to help overcome this maturity in our ecosystem through LP investments in funds like Passion Capital. It is a good idea to marry public funds with professional investors as it hopefully will return capital and produce profits that are reinvested in future startups. I also think the tax incentives are quite attractive and frankly most entrepreneurs at the early stage are happy to accept inactive investors as it is much easier to find advisors versus funding.

      I am intrigued by Amanda’s idea with Bloom Capital. One of the issues I have found with investing in start ups is that it is that it is very in-efficient, i.e. high costs both in sourcing and closing investments (i.e. finding companies and legal costs for terms sheets, contracts, etc.) This combined with the illiquidity of the investment makes it very difficult for casual investors and would be active angels invest. I would love to know more about Bloom as it could provide an interesting model for raising money especially if it can provide tax incentives as well.

      I think the great news is that there are a lot of smart people talking and doing something to try to support the growth in the tech scene in the UK. The momentum is real and if it is sustained we hopefully can create a new ecosystem that helps support and sustain innovation in the UK.

      • Amanda Boyle says:

        Thanks Sunil, I’d love to take credit for the idea but agree crowdfunding addresses a lot of the issues involved in seed funding.

        My starting point was simply recognising the problems, asking what can practically be done to address these and Bloom Venture Catalyst is my answer. We’re not quite ready to release the beta, but information is at http://www.bloomvc.com.

  4. Excellent post, it certainly feels like there’s a shortage of people willing to put money into startups; the UK investors who talk about funding startups seem to really mean companies that are already going but will grow faster with a cash injection. But startups by definition means companies who are, you know starting up, not ones with lots of customers, income, or proven products.

    And if I knew high-net worth individuals I’d already have got them investing in a startup. Mine 😉

  5. Luke Lang says:

    Great post Scott,

    We couldn’t agree more with your sentiments. The task of raising business finance in the UK is widely acknowledged as being one of the biggest challenges facing most start-up businesses today. Getting more people to become business angels and recycle their wealth is key to help stimulate innovation and entrepreneurship.

    Crowdcube has developed a hugely disruptive new model that challenges existing preconceptions using crowdfunding to democratise business finance. We make it far easier for anybody people to become a business angel – coining the term ‘Armchair Dragon’. It is our view that to some extent little has changed since the 18th century where entrepreneurs with bright ideas went cap in hand to wealthy individuals. This model is broken and nowadays, innovative start-up enterprises are increasingly looking to find new ways to raise capital. The Internet enables them to bypass traditional models of business finance and Crowdcube gives them this platform. Crowdfunding is the next generation of business finance.

  6. Fred Destin says:

    Hit the nail on the head.

    You need high velocity investing from people who actually understand technology. I personally do not expect much from traditional angel groups not from government initiatives.

    The two most promising efforts out there are probably
    (a) http://www.seedsummit.org and
    (b) the mighty Angellist coming fast to the UK: http://angel.co/

    • Yup, AngelList is the real disruptor in this space. And it’s beginning to get real traction with UK angels.

    • Do all net start-ups need investors who understand technology? For example if your product or service is targeted at a very mainstream audience (think Apple) then maybe an investor who understands technology is not as important as it would be with a product more culture changing; the Twitters of the world needed somebody who’d been there and done it with blogs, forums and emails to get what Twitter was about.

      But a service aimed fair and square at a none-tech audience?

      NB Really I’m agnostic. Someone wants to fund us, then whether we get along is going to be the only criteria. And if they’re offering us money, we’ll probably get along…

  7. Scott,
    Good post and I agree with much of it. Your example of “the type of person we should be encouraging to angel invest” is a good one. I think there is a big cultural difference between the UK and Silicon Valley regarding successful technology entrepreneurs recycling their capital. Last November I attended the excellent “Silicon Valley Comes to UK” event and met angels, VCs and entrepreneurs from the Valley. One of the key learns for me was about the propensity of SV angels to invest enough capital to give the start-up or early stage business the chance to really get somewhere before needing to raise another chunk – as opposed to the drip-feed approach that seems more typical here. Another was about the SV attitude to risk and valuation – if sold on the idea, the market, the opportunity and the people then the rest can be worked out; as opposed to getting stuck on agreeing “realistic” (i.e. low) valuation first, followed by exit size, before moving on to talk about what is actually going on under the hood.

    Chris Puttick’s point re “do investors need to understand technology” is well made. Seems to me that most tech angels one reads about or who speak at events etc tend to be focused on consumer/ecommerce/mobile. And most angels who have attended networking groups and pitching events etc that I have been at tend to have become wealthy through non-tech routes (property and banking typically), so can relate to consumer-type propositions much more easily than, say, “enterprise software”. Furthermore, I think the average individual angel investment is in the £10-20k range which means you need to build a syndicate with all the time and difficulties that entails. Crowdfunding may help here although I believe it tends to be at smaller levels. Finding the angel who will write a cheque for a 6-figure sum is much tougher. One often hears that there is “plenty of money out there looking for a good home” but the heavy-hitters don’t tend to go public like a Ron Conway or Andy Bechtolsheim etc.

    So, I think it comes down to the soft stuff. As an angel investing your own money, are you going to invest in something you don’t understand, or don’t have any personal affinity for / experience in, or which has not been recommended to you by someone you trust and who has also invested his/her own money? In short, no. So, for example, how do we encourage those people who understand software and enterprise sales and who have made money to come out and play angels? Yes, there are many fewer of those sorts of people in the UK than there are in SV, and the amount of wealth accumulated may be smaller but they do exist (don’t they?). The culture of recycling capital into new ventures does not seem to exist to anything like the same degree here. We need more advocates with personal experience of investing and covering a wider range of technology interests to encourage the others to come out from the shadows.

  8. Adrian Reeve says:

    Scott
    Nice post with some great comments. I’m especially interested in the question as you and I have connected via AngelList.

    At the risk of being a little controversial, I’m of the opinion that there isn’t a shortage of Angel investor funds for UK start-ups. (I agree the market is far smaller and less sophisticated than in the US). I think the issue is around the phrase used in your question “….promising UK start-ups”.

    In the eyes of the founders their start-up is more than promising, it’s a slam-dunk investment proposition. However, from the investor’s perspective not all start-ups are equally promising because Angels have different objectives, strategies and investment criteria.

    I’m not speaking from vast experience, as we have only made 13 investments in the past 18 months, but I have seen an awful lot of start-ups and most of them, according to our guidelines, are NOT promising. But for other investors they may well be.

    What I have experienced is that when both investors and founders are able to agree that the start-up is really promising, the funds tend to flow.

    • Adrian,
      Good point.
      I would think that 13 investments in 18 months puts you on the list of “most active” which is to be applauded.
      Your website talks about rounds of £100-500k typically and a preference for companies “that companies are able to reach break-even rapidly and “bootstrap” themselves thereafter”. Does that limit scope for the investee to grow big? Or is the early exit you seek likely to be to a VC or a trade buyer before more funding is needed?

      • Adrian Reeve says:

        Philip
        Possibly.
        I’ll have to let you know when we are further along the investment cycle and have more data to work with!

    • @Adrian

      Blueray thoughtfully provide their investment criteria for perusal. I’m surprised to see that it includes the criterion of patent protection – as patents for software are not allowable in the UK this must limit your choices for investment in this high-growth area considerably; further, as fighting patent infringements is way beyond even those start-ups with 7 figure backing, I’m struggling to see how it is a useful criterion.

      I’ve looked at a number of possible sources for funding in the UK and US. It seems the difference between the US and UK approach to providing funding is this sort of criterion. Twitter doesn’t have any patents. Facebook had no patents when it got Accel backing. Union Square have come out against patents. LinkedIn bought patents *after* it got funded purely to prevent the sillier broad patents getting into the hands of predators.

      Which brings me to the question: is that criterion as strong a prerequisite as Bluray’s site implies?

      • Adrian Reeve says:

        Chris
        Agreed. If there is an infringement it is not likely to be defensible, but it may open other opportunities.

        We’re just trying to highlight the factors that give us additional confidence and, hopefully, reduce risk. Not all our investments have IP protection, so clearly it’s not a deal breaker.

  9. Colin Hayhurst says:

    You said the problem is largely cultural, so if you are right and I think you are partly so, it’s going to hard to change this quickly.

    What would help would be publicity for success stories from early stage investors. Suggestions anybody?

    I’m not convinced by the syndicate idea. My experience of syndicates is that they usually evolve into risk assessment and management vehicles. I wonder is this where a large part of our cultural problem is nurtured?

    • Do syndicates tend to = herding cats?

      I agree – it would be good to hear about more angel investor success stories, particularly from a wider pool than the few that are always quoted and covering a wider range of tech than just consumer related.

  10. Jeff Lynn says:

    Great post, Scott, and I couldn’t agree more with your views. I’d add a few quick thoughts of my own:

    – The best way to get more angel investing is to emphasise that the returns from seed-stage businesses can actually be extremely good — much better than many other asset classes. The distribution of returns is highly skewed of course, but people often get a high failure rate conflated with net returns: more startups fail than succeed, but because the winners and be so huge, a broad portfolio can have great overall returns. And what little data on angel investing exists confirms that portfolio returns do tend to be great: in the BBAA/NESTA study, “Siding with the Angels,” that was released in 2009, the average angel investment yielded 2.2x over 3.6 years with a 22% IRR. Those are very encouraging numbers, and as people come to understand how the performance of startups can outperform asset classes like public equities, property, etc., I think far more will be encouraged to allocate some of their capital to them.

    – I agree entirely with the positive discussion on crowdfunding. There’s a lot more to come in that space in the near future, and while it won’t address all seed-stage funding needs by any means, I am confident that it will make a meaningful contribution to closing the gap that now exists.

  11. […] But remember this is in Silicon Valley: I don’t see that problem in the UK and neither does Scott Allison of […]

  12. John McNicol says:

    Scott

    I too am frustrated by the problem outlined. I started a new angel syndicate in Scotland 2 years ago. Some comments:

    Angels in the UK are less tolerant of risk than in the US, and move much slower.
    Angels in the UK are probably less wealthy than those in the States and perhaps this is why they are less tolerant of risk.
    The professions, in general, do not contribute to the culture as they do in the US.
    There is a hunger to do business in the US on all sides which is absent in the UK.
    Starting an angel group takes a huge amount of effort in respect of screening deal flow and finding angels.
    There are very few private vc funds doing seed (or any!) investments unlike the US (q1 2011 vc investment in the US was £3.7bn!)
    Those people advising high net worths are, in general, steering them towards “safe” investments in bonds, shares, PE funds rather than angel investing or VC funds.
    It is easier making money on growth capital for existing profitable business (replacing banks previous role) than venture capital.
    Capital Gains Tax whilst not high at 28% should be lower for angel investing.

    There is no one answer to this problem.

    You are right in terms of publicity. I know of one angel who had a 70,000 times return and a few more stories like that in the press would be helpful!

    John

  13. Taking a bit of time in London to connect Angels and VCs at Irish themed gatherings (The Guinness seems to help) as highlighted on http://www.wildirishguy.com The challenge generally is for start ups outside the inner game to be able to find the Angels even if they do exist as most don’t want to be on a database. Even in a relatively mature market like London the sharing of people’s investment experiences are important, Angels meeting other Angels that may be at different points on the curve. Building relationships with the VCs for future deals and learning from their wider perspective also important. If you are an Angel or a VC that wants an invitation to future events just let me know, my contact points are on my site. There will be no start ups or pitches at these, just a relaxed convivial setting to encourage dialogue.

  14. […] in Orlando, FLSeed Capital From Angel Investors: David Rose, Founder and CEO of Gust (Part 5)Your country needs you: more British angel investors urgently required // // 0) { //0==expires on browser close var cdate = new Date(); […]

  15. hipaa says:

    hipaa…

    […]Your country needs you: more British angel investors urgently required « Scott Allison's Blog[…]…

%d bloggers like this: