It was difficult for investors and for companies seeking to raise finance in 2009 – 10, with economic conditions deteriorating significantly following the financial crisis of 2008, and big declines in private sector consumption, manufacturing production and capital expenditure, accompanied by increases in insolvencies and unemployment.
Sharp reductions in early stage venture capital investment and bank lending resulted in increased demand for business angel funding and required angels to provide greater financial support to their existing investee companies.
But at same the time, the recession severely curtailed angels’ exit opportunities and hence their capacity to recycle investment into new ventures, according to the second annual report on investment activity by business angels in the UK.
The result was a decline in investment, with business angels in the UK putting in a total of £60.5 million in 2009 – 10, a decline of 3.7 per cent compared with 2008 - 09.
The study, Annual Report on Business Angel Activity in the UK 2009 – 2010 is based on data from the British Business Angels Association (BBAA) survey of its member networks. However, many angels operate privately, it is not clear what proportion of total angel investment is covered by the BBAA.
Not all registered angels are active
The BBAA’s data show networks that were active in 2009 - 10 had 4,555 members. By no means all of the angels registered with the networks are actively investing, with the networks estimating that fewer than 1,800 of their registered angels were active, or 37 per cent of the total.
Even fewer – less than 500 (10 per cent) - made investments through the network during 2009 – 10, although this does not preclude the possibility that they made investments independently of the networks.
The networks received 9,640 business plans in 2009 -10. This was an increase of 955 (+11 per cent) on the 2008 - 09 figure. The networks put forward 764 businesses to their investors, or just 8 per cent of the business plans received. This is 60 fewer businesses than were presented to investors in 2008 - 09 when 9.5 per cent of received plans were put forward.
In total, 238 businesses raised finance from these networks, a marginal increase on the 2008 - 09 number (+2 per cent). These companies raised £42.3 million through from angel investors in 2009 - 10 compared with £44.9 million in 2008 - 09, a decline of £2.6 million (-6%). In addition, business angel groups in Scotland made 78 investments involving a total of £27.5 million, of which £18.2 million was contributed by business angels.
Contradictory trends
Comparing 2008 -09 with 2009 -10 therefore reveals two contradictory trends. On the one hand, the proportion of businesses presented to investors has fallen. On the other hand, for those businesses selected for presentation to investors, the probability of raising finance has increased. In other words, ‘good’ investment opportunities did not find it any harder to raise finance from business angels during 2009 -10.
Business angels have long been recognised as an important source of finance for entrepreneurial businesses, particularly at their start-up and early growth stages where the amounts required are too small to be economic for venture capital funds to invest.
Given the importance of business angels as a source of funding for entrepreneurial businesses it is important that their investment activity is documented and changes in the market are tracked. However, this is extremely problematic. Investing in unquoted businesses is a private activity, the market is largely unorganised, lacking a single access point, and there are no directories of business angels.
So, to all intents and purposes, neither the number of business angels, nor their investment activity can be measured comprehensively nor can investment trends be accurately tracked.
The approach established in the first 2008 - 09 report on the UK business angel market was to focus on the visible market for which comprehensive data can be collected, meaning that this segment of the market can be measured accurately. The reports are commissioned by the UK government.
The visible market comprises networks and syndicates, which organise and help new and young businesses to raise finance from angels. In practice this market is defined for England, Wales and Northern Ireland as comprising those networks that are members of the British Business Angel Association (BBAA) as they were the only networks that provided data.
In Scotland, where the market is organised differently, the visible market comprises angel syndicates that are members of LINC Scotland.
Annual Report on the Business Angel Market in the United Kingdom: 2009/10
By Colin M Mason, Hunter Centre for Entrepreneurship, Strathclyde Business School, University of Strathclyde and Richard T Harrison, Queen's University Management School, Queen’s University of Belfast
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