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Posted on August 4, 2004 @ 06:37:18 AM by Natasha Zuccolo Rawdon-Jones
They may not match the selfless altruism of traditional angels, nor the glamour of Charlie's Angels , but anyone professing to be a business angel is proving mighty popular at the moment. 'I get about 400 emails a day from dying dotcoms,' says one high-profile angel, who preferred to remain anonymous to restrain the growth of his inbox.
For thousands of early-stage businesses caught up in the funding euphoria that accompanied the tech-stock boom, cash piles are now running dangerously low. These 'Zomb-e' or 'living dead' companies know they will soon be running on empty, but equally that the prospects for funding in current market conditions are bleak.
Business angels, normally the first resort for early-stage finance, have become the last resort now that the funding plug has been pulled by venture capitalists. A report last week showed the total value of private equity deals in Europe fell by 70 per cent over the first three months of this year. Venture capitalists are, for now, quite content to sit on the huge cash piles already raised for investment.
But do current conditions scare off even the angels? Yes and no is the unhelpful answer. Clearly there are fewer individuals around willing to risk their hard-earned entrepreneurial wealth on the exuberant whims of a 22-year-old web programmer. Then again, those people who got sucked in by tech-stock euphoria were probably not real angels anyway.
Serious, season-ticket-holding business angels are not so fickle as to be controlled by market fashions. They are in for the long haul. Julie Meyer, co-founder of First Tuesday, the high-profile networking organisation, says: 'They are very market-neutral - they don't go on about where the Nasdaq is.'
Ryan Prince agrees. He runs i-gabriel, a syndicate of high-profile angels, including Charlie Muirhead, Esther Dyson and Paul Myners (chairman of Guardian Media Group), who invest in 'enabling technologies'. 'From a number of perspectives angel investment is where you want to be right now. The IPO (initial public offering) window has closed, but angels typically invest two to four years before an IPO, and in this market valuations are more in line with fundamentals. It's a great opportunity,' he says.
So, it appears that genuine business angels have a protective halo that insulates them from the waxing and waning of stock markets. Academic studies of the informal private-equity market in the UK show that angels invest over a longer-run.
'Most angels are serial investors. Macroeconomic fundamentals - the stock market, inflation, the interest rate - do not register as a significant influence on angels' invest ment behaviour. The only factor that did affect things was the tax regime,' says Professor Colin Mason of Southampton University, who has carried out numerous surveys of angel investment.
The issue in the current market is more that there was a glut of over-investment in companies with flaky business prospects. This means angels have had to be more circumspect about the quality of early-stage companies that had already secured funding in the past. This may have changed now.
A lot of the frothier business plans, the me-too con cepts, have sunk. The quality of businesses and of intellectual property being built is now far better and more bankable,' says Prince.
Mason estimates there are 20,000-40,000 business angels investing £1 billion in up to 6,000 companies a year in the UK. This funding plays a vital role in giving the initial impetus to early-stage start-ups, which tend to be overlooked by venture capitalists. Precise figures are impossible to obtain because many angel investors do not want to volunteer their status. But it is clear they are a vital cog in the workings of an entrepre neurial culture. 'The average entrepreneur doesn't need £5 million to get an idea off the ground - it's, say, £100,000,' says Meyer, who now runs Ariadne Capital. And if they don't happen to have a rich uncle, many good ideas can go unfunded.
Unsurprisingly, angel investment culture is very different and more developed in the US. Some $40 billion is estimated to be invested by angels over there.
'Europe is dominated by families who made it in the old economy,' says Meyer, who has toured the Continent looking to connect businesses. 'They will invest if they know one or two things about it, otherwise they won't touch it. Then they give the nod to a whole network of friends across Europe and they'll all come in.
'In the US there are these under-35 year olds, as new money as it comes, who are driven by recycling entrepreneurial wealth and know-how, as well as making more money,' she says.
Indeed despite the cash crunch, this passing on of know-how and contacts often proves more important than the funding itself. In the US there are formalised mentoring groups from which angel investment may sprout organically. The Indus Entrepreneurs (TiE) is one such group, originally focused on Silicon Valley's South Asian technology immigrants, but open to all.
Charter members offer mentoring sessions for young entrepreneurs with ideas and business plans. For older members who have already made their millions, it is a chance to replay the entrepreneurship game by proxy. Young entrepreneurs get advice, access to valuable contacts, potential clients, suppliers or partners, and possibly a slice of investment.
'We're not doing it fundamentally as a favour,' says Kanwal Rekhi, TiE's president. 'If you invest, it can be a lucrative activity.'
But there is an all-pervading spirit of community entrepreneurship. And TiE has just opened in London. The organisation stresses that mentoring, not angel investment, is its primary purpose. But the scheme, which begins next month, will offer aspiring entrepreneurs a helping hand.
Angels ganging together are not a new concept. The caricature of British angel investors is a network of Hertfordshire gentlemen farmers who will all pile in on the nod of one of their members. Syndicates such as i-gabriel promise to bring a more formal edge to the UK.
The real benefit from angel investment is that such investors are in a position to take greater risks because it's their own money, and they have a genuine understanding of the sector. Out goes ghastly due diligence and in comes gut feeling, and a few rules of thumb.
Those risks don't always pay off, though. According to Mason's survey data, angels in the UK lose their money in around 40 per cent of investments and make high returns - of 50 per cent or above - on under a quarter.
'It's vital for entrepreneurial culture,' says Meyer. 'Take Stockholm and Copenhagen. There's a massive difference in entrepreneurial culture in these two cities, and it's all because generations of Stockholm people made their money in technology and digital media and then reinvested it in this community.'
So what are the tricks of the trade for tempting an angel to invest?
'You wouldn't speak to an angel unless you knew it was a good idea because your credibility is at stake,' says Charlie Hoult, an entrepreneur who relied on angels for his Metrocube incubator. 'The first question they ask is "Is it Eis-able?",' he says, referring to the special tax advantages on offer to serial investors under the Enterprise Investment Scheme. Should an investment go bust then it can be reclaimed against a tax liability.
Entrepreneurs who make the effort to go to TiE's London meetings will also discover that they can get into legal difficulties by soliciting investment on spec from more than 50 angels. But if it's the cash you're after, there's plenty out there.
'The problem is not the supply of funds, there's simply not enough investable opportunities,' laments one angel. 'The entrepreneurs who come looking are not investment-ready; they don't know how to make a business plan or to make a pitch.' And angels are unlikely to bail out the living dead.
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