The current economic climate has put increasing pressure on young firms trying to raising money. With banks reluctant to provide loans to start-ups and venture capital firms preferring to invest in later stage companies, a growing class of experienced entrepreneurs and business people is stepping in to fill this funding gap. These angel investors not only provide finance but also leverage their expertise, offering mentoring to the entrepreneurial teams in which they invest.
In Europe, the number of angel networks is growing, enabling entrepreneurs to better identify and connect with these investors. At the same time, angel investors in Europe and around the world, are increasingly pooling their resources through groups and syndicates and are able to offer greater levels of funding for seed and early stage companies as a result. The European Business Angels Network (EBAN), for example, has played an important role in facilitating the development of the angel market across Europe over the past decade.
A new book from the Organisation for Economic Co-operation and Development (OECD), Financing High-Growth Firms: The Role of Angel Investors, looks at angel investment across the globe, and includes over a hundred interviews with entrepreneurs, policy makers and academics from 32 countries. The research indicates that angel investments are increasing around the world. While it is difficult to get precise figures, estimates of the total angel market in a number of countries shows these investors are putting in more money than traditional venture capitalists. This is particularly the case for higher risk seed and early stage financing.
A wide range of innovation
Angel investors support a much wider range of innovation than venture capital firms as they traditionally invest locally and in a wider range of sectors than venture capitalists. This means there is broader investment coverage both in terms of industry sectors and of geography (angels live everywhere, not only in the technology or science hubs where venture capitalists tend to be concentrated).
As a result angel investors are often involved in companies that are less technology-intensive or high growth, as well as in companies at later stages of development. Like venture capitalists, angel investors tend to invest in a portfolio of companies.
Start-ups from universities are often touted as an important source of deal flow for angel and venture capital investors. However, these firms tend to be more research- than commercially-focused and therefore find it harder to secure equity financing.
Disconnect between policies
This highlights a broader issue about a potential disconnect between innovation and entrepreneurship policies. As noted in the recent OECD Innovation Strategy, innovation policies tend to focus on R&D, rather than the broader definition of innovation. Meanwhile entrepreneurship policies focus on teams, culture and ecosystem, but not always on the translation of innovative research into companies.
Government policies to boost angel investment are becoming increasingly widespread, including tax incentive schemes such as those in the UK and France, and co-investment funds like those in the Netherlands, Scotland and New Zealand. The book discusses these and other policies in further detail, highlighting some of the pros and cons of each approach, while emphasising that any government intervention must be geared towards providing incentives for greater private sector involvement.
While policy makers and others tend to focus on the venture capital market, which is more visible than the angel market, data indicates that angel investors will continue to be critical in overcoming the financial and growth challenges facing entrepreneurs. This, in turn, will contribute to job creation and economic growth – greatly need today in Europe and other countries around the world.
Karen Wilson works in the Structural Policy Division of the Science, Technology and Industry Directorate at the Organisation for Economic Co-operation and Development (OECD).