Investing: Europe's angels get down to business

Venture capital firms used to moan that business angels were unprofessional and hard to work with. But the new breed of angel investor networks appears anything but that. To meet the gap created by venture capitalists moving upmarket, angel networks are increasingly becoming organised and structured. Some even look like VCs, says Mary Lisbeth D'Amico.Christophe Guisset recalls why the business angel network he runs in Louvain-la-Neuve, Belgium, recently decided to form a fund. “When you’ve seen 10 to 15 angels work together, and everyone is equal, it doesn’t work very well,” says Guisset, now one of four professional managers of the soon to be launched €8 million BAMS (Business Angel Matching Service) fund. “You need someone managing the deal to lead the group.” The new fund pools the financial resources of 25 private investors from within the BAMS network to make investments, and is modelled after a similar fund in the US, called Hubangels.

Not all angel networks choose to register a fund as BAMS is doing. But increasingly, private investor networks around Europe are becoming more formally structured - either launching funds, forming syndicates, or simply professionalising their organisations. Long considered little more than hobbyists looking to validate themselves, business angels are becoming an increasingly important force to be reckoned with in the early-stage investing market.

Unfortunately, there are no official data available from the European Business Angel Association (EBAN) on what percentage of Europe’s roughly 228 angel networks work in a more formalised manner, according to Claire Munck, deputy director at the Brussels-based organisation. What is clear, says Munck, is that the number of networks across Europe has now begun to stabilise after a period of initial growth, and the focus now is on becoming more professional.

In Scotland, the Local Investment Networking Company (Linc), an umbrella organisation for Scotland’s business angel activities, reports that whereas previously it had roughly 400 individual investors and several structured syndicates as members, today it has only 200 individuals, but as many as 14 structured groups.

Business angels funds in England run by the likes of the London Business Angels and the Oxford Capital Partners are already well established, but now angel networks are even planning to take on investing on behalf of the government. Angel networks in Cambridge, Bristol and Oxford have applied to manage one of the government’s new Enterprise Capital Funds for small companies, in which two-thirds of the funds will come from the government, and the remainder from private investors

Signs of light in Germany

In Continental Europe, the business angel culture is not as developed as in the UK. But there are signs of light in Germany. For example, the Business Angels Club Berlin last year launched a €500,000 angel fund (although it has yet to make an investment) and other German groups are discussing the possibility, including the Venture Forum Neckar in Heilbronn and the Munich Business Angels. In Sweden, where the number of business angel networks has mushroomed over the past three years, a handful of angel groups are also seeking to launch funds, emulating Stockholm-based STING Capital. (See Science Business, 8 December, “Investing: An Ecosystem for Young Companies”[[[link to http://bulletin.sciencebusiness.net/ebulletins/showissue.php3?page=/548…]]].)

Why are angels getting more organised? Banding together makes for a more efficient market, enabling investors to pool their resources and speed the due diligence process for one, while entrepreneurs avoid a long search among dozens of potential individual investors. More formal investing structures have also enabled angels to meet the new demands being placed upon them since many venture capital firms deserted the seed funding market over the past five years. “Institutional VCs retreated up market [after the technology crash] and angels have to now fill that funding gap,” says David Graham, executive director of Scotland’s Linc.

How formal?

Yet each network decides for itself how formal it wants to become, based on the goals of its members. Angel networks members concede that it is not an easy thing to strike the right balance of autonomy versus efficiency among the participating business angels.

For example, if in the interests of democracy, too many fund members insist on signing off on a deal, that can slow the investment process.

Generally, most networks with fund structures expect to have several angels take on the role of leading a deal, on behalf of other passive angel investors. Yet some require majority decisions among numerous angels before they can invest. At Bams in Belgium, for example, the angels fund will make an initial investment only if two-thirds of its 25 fund participants agree on the deal, says Guisset. After the deal gets the go-ahead, the angels have the flexibility to decide whether to co-invest additional funds.

At the Business Angels Club Berlin, a small team of two to four people does the due diligence on a company and then makes a recommendation to the entire group of 15 angels, who are expected to give a thumbs up or down almost immediately, says Holger Morbitzer, one of the fund’s founding members. The group has come close to making a first investment, but could not get majority agreement, he notes. Still, Morbitzer says, the group is committed to doing about three deals per year.

On the most formalised side of the spectrum come groups such as Braveheart Ventures, based in Perth, Scotland, where a group of five professional managers makes all the investment decisions on behalf of some 100 private and even corporate investors. Founded in 1997 as a small syndicate of private investors, Braveheart has since evolved much closer to the venture capital model. Regulated by the FSA, it is even shortly planning its own AIM listing.

“Until you grow more formalised, the financial industry simply doesn’t take you seriously,” says Geoffrey Thomson, chief executive of Braveheart. The company’s investments so far have included Wolfson Microelectronics, Clapham House Group, MicroEmissive Displays, and Vibration Technology. “We never had a really great business plan, we just found opportunities to invest passive money alongside our own,” says Thomson. Braveheart also recently set up a small early-stage fund for university spinouts from Edinburgh and Glasgow Universities that have already received support from the Scottish government.

Not all angel networks will want to take their focus that far. Indeed, many largely government-sponsored entities across Europe may well be content to operate more as local investing club than as serious financial organisations. Still, with the direction that many networks are moving, they are clearly a force to be a reckoned with.