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Angels and Matchmakers
This
page looks at business angels and matchmaking schemes.
It covers -
introduction
Business Angels are individuals who invest directly in
a small number of unlisted companies (rather than indirectly
through a venture capital
fund). They tend to identify those enterprises through
personal networks or other less formal means than VC funds.
They typically identify fellow angels and investment opportunities
through offline 'soft' networks - word of mouth - rather
than in institutional settings or a website. One contact
thus commented that
you
will discover your fellow angels over the bridge table
or late at night during a wedding reception. You will
find your backer through a helpful word from a cousin
of your friend or the sister-in-law of your lawyer,
not by looking in the classified part of the phone book.
Angels are about relationships, not about databases.
Some of the best angels don't go near Collins Street
The name derives from the 'angels' that funded Broadway
(and off-Broadway) theatrical productions in the US. Business
Angels should not be confused with philanthropists: most
case studies suggest that they are interested in substantial
returns and often endowed with considerable ego along
with the expertise that is attractive to many new enterprises.
MIT's Entrepreneurship Center has differentiated four
Angel groups -
Guardian
Angels with entrepreneurial and industry expertise,
often in the same sector as the new enterprise.
Entrepreneur Angels with experience starting
companies in another industry sector.
Operational Angels bring industry experience
and expertise from large enterprises (and may therefore
lack experience about startups)
Financial Angels typically invest solely for
the financial return
Angel
syndicates (aka angel groups) or networks - which in some
locations, such as parts of the US, occasionally use shopfronts
- enable individual Angels to -
- pool
money and thereby invest in larger deals
- diversify
across multiple investments
- leverage
network contacts and investment expertise (such as screening,
valuation, and monitoring)
- add
follow-on rounds to existing investments.
In
2006 the Angel Capital Education Foundation and Ewing
Marion Kauffman Foundation reported that the number of
angel groups in the US had risen to 250, up from 150 in
2002. The average US angel group supposedly had 41 members
and an aggregate investment of US$1.45 million (some US$266,000
per round and US$387,000 per company) in 2005. Groups
made an average of 5.46 investments in 4.49 companies,
with group members investing US$33,236 per deal. Around
45% of the reported angel group deals involved co-investment
with venture capital funds.
in Australia
The private nature of Angel funding means that much information
about activity in Australia is anecdotal.
It appears that most investors are worth upwards of $10
million, often have an entrepreneurial background and
take stakes of between $250,000 to $4 million. Equity
investment generally concerns small or medium sized enterprises
(SMEs).
Some Angels also provide loan finance, independently or
as part of packages from lending institutions.
Some government and industry studies suggest that the
size of the local Angel market is 35% to 50% of VC investing,
significantly lower than that of Canada, the US and UK
where Angel investing is greater than the total of formal
venture capital funding.
In the US it is estimated that angels made 250,000 equity
investments (worth US$20 billion) in 60,000 enterprises
during 1998. During that year US venture capital funds
invested US$16.7 billion in 2,859 enterprises. A study
by the Center for Venture Research at the University of
New Hampshire estimated that 50,000 enterprises in the
US received US$40 billion in angel funding in 2000.
Investment criteria appear to be similar to those of VC
funds (eg rate of return, cash flow, capital growth and
time to exit). Most Angels, in contrast to VC fund managers,
appear to be averse to publicity - one reason may be wariness
about approaches by entrepreneurs - and limited requirements
for public disclosure of investments means that information
about the sector is problematical. They appear to be biased
towards early stage and start-up enterprises rather than
management buyouts.
Angel investing reflects consumer ignorance, expectations
and fashion. By 2002 it appears that Angel funding in
Australia had returned to the traditional emphasis on
property, finance, manufacturing and business services
after a bout of interest in biotechnology and the ICT
sector.
An overview of "the Business Angel Market in Australia"
is provided in a 2006 report (PDF)
from Michael Vitale, Belinda Everingham &
Richard Butler under the auspices of the national industry
department.
Halos
The millennium saw a proliferation of angel sites and
facilitation services, most of which proved to be short-lived.
That is unsurprising. Networks with an online presence
got bothered by people wanting easy money and went offline,
relying on word of mouth (and indicators of credibility
from people that the Angel trusted) instead of solicitations
via HTML. Commercial facilitation services often found
that they could not make enough money at the bottom of
the food chain.
Sites as of 2004 (some of which are now moribund or have
disappeared altogether) were -
Australian Business Ltd (ABL)
BizEquity Ltd (Bizequity)
BSX (BSX)
Business Angels Pty Ltd (BA)
Corporation Builders Pty Ltd (CB)
Enterprise Angels (EA)
Entrex (EX)
Founders Forum (FF)
Netequity Pty Ltd (NE)
North Coast Business Angels (NCBA)
Private Equity & Entrepreneur eXchange (PEEX)
Satcom Pty Ltd (E-Match)
TiNSHED Corporation (Tinshed)
Venture Capital Market Place (V-Capital)
MINE
(Mentor Investor Network Events) for Business Angels
The
report by Vitale, Everingham & Butler cited above
notes that 12% of the Sydney angels, none of the Melbourne
angels, all the ACT angels and 88% of the Queensland angels
were members of formal angel networks.
matchmaking
The informal private equity market has been characterised
as a "giant game of hide-and-seek with everyone blindfolded",
with participants and observers expressing concern about
the invisibility of business angels and about the inefficiency
(in time and money) of searching for angels or for investment
opportunities.
One response has been the emergence since the early 1990s
of professional matchmaking services, often operated on
a for-profit basis and sometimes tied to particular venture
capital funds or commercialisation service providers.
Those services typically use a 'black box' arrangement,
receiving information about investment opportunities and
about potential investors, who as appropriate are then
introduced to each other.
The effectiveness of such services is uncertain, with
suggestions that some have exhibited conflicts of interest
and that in practice they have been bypassed by 'mature'
angels who prefer to use personal soft networks for identifying
and assessing new investments.
Mentoring schemes
In the US mentoring services are a growth industry, reflecting
perceptions that the greatest need of some new enterprises
is human capital rather than cash. VC
Mentors is one of the local operators.
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