In the early stages of starting a company, entrepreneurs often rely on precarious financing streams, such as personal credit cards, cash from family and close contacts, or second mortgages.
For investors, it’s a dicey business. Alongside the headline-grabbing success stories, many a start-up languishes, never really taking off, or attracting professional investment. In an environment where a lack of knowledge can permeate, Herwig Rollett, CEO of online travel comparator business Xohana, saw an opportunity to turn an art into a science.
Business angels are often called upon to ensure new companies do not fall into the equity gap between the very early seed funding raised from friends and family, and the capital needed to scale and grow. These well-off backers usually have business experience and are prepared to invest in a risky venture. Major recent technology successes, from Skype to Facebook and LinkedIn, had angel investment in their early days.
Would-be angel investors need help with interpreting unproven business plans Rollett believes, and this means more education and training. “We wanted to professionalise the business angel experience,” he told Science|Business. He co-founded the Business Angel Institute in Vienna a little over a year ago with fellow entrepreneur Berthold Baurek-Karlic, to coach investors and try and reduce the risk currently attached to trying to pick winners.
Entrepreneurship as a discipline is still an immature subject, Rollett notes. “We’re filling a gap. In the business angel scene, there are plenty of people doing matchmaking sessions, but in the research and education field, there was little to nothing being done in Europe.” Demand for courses has been strong with almost 200 people passing through the Institute’s doors in its first year.
In a market where roughly a fifth of investments are made off the back of a personal recommendation, would-be investors need the knowledge to evaluate whether they are on to a good thing. There is a dearth of commercial disciplines for prospective angels in Europe. “It’s not a money issue – there’s plenty of that – it’s a knowledge issue. It’s entirely rational not to invest unless you know about what you’re investing in,” Rollett said.
Europe trails behind the US. “In the US, there’s a bigger critical mass of angels, so the peer-to-peer learning effect is greater,” said Rollett. However, comparing Europe with the US is not always helpful. “America is not the same everywhere. There’s a big difference between Silicon Valley and the mid-west.”
The potential to increase the contribution Europe’s business angels make to getting the innovation machine rolling is underlined by current activity. Last year, 271,000 angels across Europe invested some €5.5 billion in new companies and products, a record year, according to research by the European Business Angel Network (EBAN). The amounts raised through early-stage venture capital and crowd-funding were much smaller, at around €2 billion and €80 million respectively.
Despite the growing popularity of crowd-funding, Rollett does not believe it will usurp or diminish the relevance of business angels. “It’s not either/or: both angel funding and crowd-funding can have a positive effect together,” he said. But unlike going to business angels for money, crowd-funding is not suitable for all sectors. “If you’re doing complicated things like underwater drilling maintenance, it’s unlikely you’ll get all the support you need from online groups.”
Giving investors wings
The topics on offer at the Institute are not new: anyone who has been to business school will have encountered them. “But the way the topics map onto start-ups is new,” Rollett explained. “The rules for analysing start-ups are different [from those] for medium-sized or large companies. You can’t do a discounted cash-flow analysis, for example, on something as new as a start-up.”
The institute has a staff of 30-35 accredited lecturers with angel, legal and consultancy backgrounds, who teach the basics in six three-day modules: how to find evidence of a market opportunity with growth potential; what to look for in a strong management team; and advice on exit strategies. “While we do invite entrepreneurs to come and talk to our groups, we don’t try and go deal-to-deal,” said Rollett. “We are more interested in giving people the criteria for checking the quality of a deal themselves.”
The most popular sectors for angel investors in Europe are in ICT (30 per cent), followed by biotech (10 per cent), mobile phone (10 per cent) and manufacturing (10 per cent). Rollett expects this is roughly the pattern of interest for those who come to his courses.
The profiles of those attending the Institute are mixed. Some people already have five to ten investments under their belt, but they have not had an exit yet, while a recent student had thirty years’ experience in banking, but wanted to know more about early-stage equity.
In common with business angels as a whole, hardly any women are enrolling. EU research shows only around 3-5 per cent of angels in Europe are women. “That’s the unfortunate reality with business angels,” Rollett said. “A bit more balance would be healthy.”
The Vienna Institute is not the only place in Europe providing business angel courses. There is also the UK Business Angel Institute. Rollett claimed the main thing setting his institute apart is its international aspiration. “We are looking to roll our courses out in Germany and we’ve had interest in collaboration from people in Switzerland and Spain.”
More info on the Business Angel Institute here.