Business Angels - Summary Brief on Private Informal Venture Capital Players

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Business Angels


Summary Brief on Private Informal Venture Capital Players

Information for Public Decision-makers, Entrepreneurs and Virgin Angels

on the Role of Business Angels and their Networks

- European good practices -

EBAN – European Association of Business Angels Networks Avenue des Arts, 12/7 B-1210 Brussels T: +32 2 218 43 13 F: +32 2 218 45 83 E: W:


Foreword by Mrs Françoise Le Bail, SME Envoy and Deputy Director-General for DG Enteprise & Industry

Business angels cultivate the green shoots of firms' early growth. This work is essential if Europe is to achieve its targets in terms of GDP growth, and the European Commission would like to see many more business angels.

Europe is behind the US in terms of investors that are active in the early stages of firm development, including business angels. Angels are among the few active private early-stage investors and especially their personal experience is valuable for entrepreneurs who can tap this knowledge and increase their chance of success.

But the situation has improved. The number of angel networks and active angels has increased in Europe, with syndicated investment becoming more widespread in the most developed markets. But the picture is uneven, as many Member States need further work to attract more investors to become business angels and more entrepreneurs to become aware about the possibilities of business angel funding.

The Commission aims to help the Member States to create an environment favourable for investment in SMEs, including angel investment. The Commission also encourages angels and angel networks to increase their visibility and raise awareness among entrepreneurs and policy-makers. Further, increased cooperation between angel networks and other investors could bring valuable synergies to the provision of early-stage financing. The Commission will continue to make efforts to enhance this cooperation, and to identify and spread good practices. Many such projects are outlined in the Commission Communication Financing SME Growth – Adding European Value.

The Commission is also putting its money where its mouth is. The Competitiveness and Innovation Framework Programme (2007-2013) will provide financing totalling about a billion euros through its financial instruments, which are expected to leverage around 30 billion euros of new finance for SMEs. The new programme will offer flexibility in its venture capital investments, enabling it to be used in support of side-funds linked to business angels. In all, 350 000-400 000 SMEs are expected to benefit from the financial instruments between 2007 and 2013.

But we need the Member States onboard - to create an environment that favours investment. Many have already done a lot by introducing tax and other incentives. At regional level, the European Union will provide new possibilities for the regions most in need. Regional development in the EU is supported by the Structural Funds that for the period 2007-2013 have been allocated about €40bn every year. As part of this, the Joint European Resources for Micro to Medium Enterprises (JEREMIE) provides new opportunities for SME finance and business angels, when the Member States so decide.

Business angels are making a valuable and appreciated contribution to the growth and welfare of Europe, and I hope that this guide will be a valuable source of ideas for current and aspiring angels, and for angel networks in their work.


What is a Business Angel?

Business angels (BA) are individuals who invest in one or more high potential start-ups (becoming shareholders of the company) and also contribute their expertise in business management and personal network of contacts. Angel intervention is long-term and may take a variety of forms. Intervention by one or more business angels in a company takes the form of active involvement. Business angels generally invest €25,000 to €250,000 in individual businesses – up to €400,000 in the United Kingdom. On the more mature business angel markets of Europe, business angel investment per deal averages €80,000. In some countries, business angels may invest up to €2.5 million when operating as part of syndicates.

Below is the result of a 2005 study from Lund University1 on the distribution of the net worth of angels:

Business angels are typically 35-65 year-old men and women with considerable experience of the business world and the ability to invest time and money in companies. However, this activity is becoming more widely practiced and new profiles are emerging.

Business angels invest in a wide variety of industries, though it is worth recalling that they are looking for recent business developments with a strong potential for entrepreneurial growth offering the prospect of a very substantial return on investment, better liquidity (the growth of the company increases the chances of exit, which implies a strengthening and restructuring of the capital), and the chance of living a fascinating entrepreneurial experience.


”Business Angels in a Changing Economy” (N. Månsson, Lunds University, Sweden, 2005)

Other 2% Real estate 29% Insurances 7% Stocks in listed companies 27% Investments in unquoted companies without family connection 11% Privately owned companies 14% Art 2%Bonds 8%


The Role of Business Angels

Business angels play an important role as providers of venture capital and competences at the seed and/or development stages of the business lifecycle. This role is especially important in view of both the dwindling levels of venture capital industry investment at these stages and the growing average amount of individual deals.

This realisation is rooted in the following facts:

- Due diligence costs are the same regardless of individual ticket amounts and estimated return on investment;

- Formal venture capital operators invest a minimum of €2.5 million in companies, which leaves a market gap or failure in smaller amounts of equity. Individual business angels invest between €20,000 and €250,000 and up to €2.5 million as syndicates. The average amount of individual investments in Europe is €80,000 and up to €250,000 per angel in the Barcelona and London areas, depending on the business type.

There is ample evidence in literature of the essential role played by business angels in supplying equity for EGCs, including in publications of DG Enterprise and Industry of the EU Commission (“Benchmarking Business Angels”, Best Report nr 1, 2003).

There is a structural need for business angel intervention because:

¾ It takes place in the range of equity amounts that is covered by no other source of finance – as illustrated in the graph below;

¾ They contribute to the successful build-up of projects by bringing to entrepreneurs having innovative ideas of services or products things that they generally lack; money, experience, contacts…they are in fact co-creators!








Business Angels

Formal Venture




These are, by way of example, the findings of a survey of BAs conducted in Denmark on “Danish

Investment Fund in the study Business Angels in Denmark” (R. Kjaergaard, G. Napier, J. Nordstrom Borup, 2002) Computer Software Comp. Hardware Internet related Communication /media Other electronics Biotech/medical Medical/healthcare Energy/environment Industrial other


¾ They are far more reactive than most other financial operators.

Key differences Business Angels Venture Capitalists Personal characteristics Entrepreneurs Financial managers

Invested funds Own money Fund investors’ money

Investees High potential start-ups

and early stage

Medium-sized to large growing companies

Due diligence Experienced-based

Lower cost

More formal Expensive

Geographical proximity Important Less important

Form of contract Simpler deal structures with emphasis on fairness

Complex and demanding

Post-investment monitoring Active, hands-on Strategic Involvement in management Important Less important

Exit route Less important Very important

Return on investment Important, but probably less demanding overall because of lower costs of the investment process

Very important

Ten benefits of business angel investment have been identified in the US2:

1. They prefer smaller tickets compared to venture capitalists and may therefore be a better match for SMEs needs;

2. They generally invest in start-ups and early growth businesses without demanding proven revenue (though a nice cash flow is always appreciated);

3. They invest in almost all kinds of growth industries;

4. Their decision-making procedures are more flexible than Venture capitalists’; 5. Raising funds does not involve high costs;

6. Most angels are “value-added” investors in the sense that they contribute their experience in addition to equity;

7. Being geographically more scattered, they have better contacts with venture capitalists who tend to concentrate in regions including the Silicon Valley, Boston or New York; 8. They can leverage additional equity from other sources by adding their prestige to the

attractiveness of their investees;

9. They often provide loan guarantees even when they do not invest cash directly; 10. They are not scared away by the prospect of financing a wide variety of technologies. The activity of business angels in the US in 2005 represented 49.500 projects financed by 227.000 BA, for a total amount of $23.1 billion, so an average of $480.000 per deal. This

represents a larger volume of investment than that of the formal US VC industry, which invested the same year $22.1 billion in 3.008 companies, with an average investment of $7.4 million. Business angels invest in investee companies. Entrepreneurs must therefore be fully aware of the fact that they will open the shareholding of their company to one or more third parties!


Ron Peterson, “When Venture Capitalists say No – Creative Financing Strategies & Resources”; Comanche Press MD 2003.


Business Angels Networks

Business angels networks (BANs) play a prominent role in matching the demand (entrepreneurs) and supply (business angels) sides of equity. Actually, they are a

marketplace for these two categories of economic operators. Entrepreneurs and investors cannot, in general, establish the relationships leading to fruitful contacts at an acceptable cost.



Business Angel

Contact of BAN Business plan evaluation and validation Drafting of business plan

summary Investment readiness programme Preparation of a presentation Identification of the business angel Training Identification of investment priorities BA added to database Investment forum/club Confronting offer And demand Circulation of Business plan MATCHING Leverage funding Co-investment funding opportunities Syndication opportunities


Networks are providing a growing number of complementary, strong value-added services for both business angels and entrepreneurs, including:

- Business angel schools/academies that aim to boost the confidence of potential angels in the venture capital market segment;

- Investment readiness programmes to improve the quality of demand for equity (support for drafting or improving business plans, submission of business propositions to different kinds of investors, etc.); - Improving the conditions of angel syndication (investor groupings) to build up the volume

of investment and consequently finance larger business projects as well as concentrate on and capitalise upon available expertise in management and market knowledge;

- Co-investment fund development and management, whereby public partners invest in funds under the same conditions as business angels; National federations bringing together national or regional networks exist in most European countries

(,,,,,, etc.). They are not in direct contact with entrepreneurs or investors. Rather, their main mission consists in advertising the economic role of Business Angels and their networks with public authorities and collecting information about the informal venture capital market.

Worth noting is that the average annual operating cost of a successful BAN is between 50.000€ and 250,000€, a comparatively modest amount of money in the context of business support services.

By way of illustration of the strong leverage provided by BANs, the French BAN Invest’Essor 92 helped business developers secure roughly €3.5 million in equity from public subsidies totalling €50,000 between June 1998 and May 2001, providing a return on local government spending of more than 70 to 1.

>It is worthwhile noting that due to the informal nature of theses activities, it is difficult to collect accurate figures about business angel and investee numbers.

EBAN is the European Association of BANs. Based in Brussels, its current membership includes over 50 regional networks and national federations from some 20 different European countries. Its main objectives are to:

• Encourage the exchange of experiences and transfer of best practices among business angels networks;

• Promote the recognition of business angels networks and of the economic role played by business angels;

• Contribute to the development and implementation of local, regional and national programmes with the aim of stimulating the emergence and reinforcement of a positive environment for business angel activities.


The Economic Model of Business Angels Networks

Most business angels networks are private initiatives, sometimes receiving public financial support. Out of 228 operating in Europe in 2004, 35 were commercial networks. Private networks operating without public support in Europe find it difficult to turn a profit due to substantial fixed operational costs and the volatile and unstable nature of the informal venture capital market. Public support may take the form either of an annual subsidy or of a fee per business project submitted to the member angels of a network. This public support is vital to help regional and local BANs build business angel awareness and activate them as well as attract talented business developers looking for equity.

Some networks are integrated in organisations providing a range of financial and non-financial services for start-ups at the seed and development stages of their lifecycle (including notably incubators, science parks, entrepreneurs’ clubs and business schools).

Business Angel Participation: A Reality

Below are a few examples of widely known companies that enjoyed business angel support.

Some links to other companies partly financed by business angels:

Framework Conditions Supporting the Informal Venture Capital Market

To grow, the informal venture capital market needs:

- Awareness campaigns focusing on potential angels and companies having

successfully attracted business angel stockholders (for instance, half of Nebib’s €300,000 budget ( ) is dedicated to awareness campaigns and in Spain, 10% of BAN’s €130,000 budget ( is earmarked for awareness initiatives);

- Awareness campaigns by public authorities on the economic role of business angels and the need to support their networks – notably with financial resources;

- An attractive tax environment for investment in unlisted companies. Taxes can be modulated upon either equity investment or exit through preferential arrangements regarding taxes on capital gains or losses;

- Targeted efforts to recruit angels, namely in the direction of entrepreneurs who have sold their business and potential investors with new and emerging profiles including women, former high school students, managers of large companies, etc.;

- Setting up regional chains of access to finance for newly-developed businesses, providing a range of instruments including notably guarantee schemes, co-investment funds and public or private venture funds and improving entrepreneur awareness of and


access to all types of financial tools available to them at the different stages of their businesses’ lifecycle;

- Angel syndication opportunities, to give them access to investment in sectors with comparatively more substantial equity requirements (e.g. biotech and nanotech) and enable them to pool and provide their expertise to individual companies;

- Incentives for large companies, where management quality and financial leverage is concentrated: large companies need to inform their executives of opportunities to invest as angels and possibly in seed capital funds;

- Appropriate training of angels, entrepreneurs and network coordinators (in France, BAN manager training and of the BANs main partners);

- Clear, quality and accessible model contracts between business angels and entrepreneurs;

- Setting up co-investment funds, i.e. funds investing alongside angels to build up total investment volume (,


Below are a few examples of best practices promoting the development of the informal venture capital industry in different European countries:

- Enterprise Investment Scheme (UK), releasing investors from payment of the capital gains tax – on condition that they own the stock of investee companies for a minimum of five years – and offer them a 20% income tax cut;

- Cooperation between Walloon business angels networks and Belgian guarantee company Sowalfin to offer guarantees on a sliding scale on investment by business angels – between €25,000 and €300,000 per company;

- Ile-de-France Regional Council pays networks operating within the region a €1,000 fee per investment project submitted to a regional angel, with a ceiling of €30,000/year, i.e.

30 projects annually.

- In Germany, BAND offers its networks and members information on the investment process, including a broad range of model contracts.

- For several years now, LINC Scotland has been developing schemes to stimulate syndication or joint investment among its angels, notably via the Scottish

Co-investment Fund (a £45 million fund set up by Scottish Entreprise and part funded by the ERDF – European Regional Development Fund – to invest £10,000-500,000 in business deals amounting to a total of £20,000-2 million).

- Catalonia Innovation Agency and CIDEM (the regional association of business angels networks) frequently launch awareness campaigns focusing on entrepreneurs and investors as well as network managers. For instance, CIDEM launched a call for tenders last year for the supervision of the development of a small number of networks in Catalonia.

- Exemplas, a business angels network operating in Hertfordshire, England, offers its entrepreneurs a three-step investment readiness programme called Fit4Finance: first, different categories of equity suppliers (bankers, venture capitalists, business angels, etc.) explain to entrepreneurs what they expect in a business project (business plan),

entrepreneurs then present their project and practitioners debrief them providing

criticism/advice. Between these two stages, entrepreneurs and practitioners hold individual consultations to fine-tune business plans and allow the former to seek advice.

Further European good practice examples can be found in the EBAN publication “Compendium of BAN add-on services”, available at the EBAN Secretariat.


European Momentum

Below is an overview of the data collected by EBAN on the activities of European networks in 2004:

Among the 111 interviewed networks (out of 228 in operation in 2004): - Total number of active business angels: 12,773;

- Total number of business projects submitted to investors: 9,471; - Total number of deal closures: 580.

Trends: Key Facts about Future Developments on the Informal Venture Capital Market

• Start-ups find it increasingly difficult to secure funding from the venture capital industry, notably due to the burst internet bubble. Therefore, turning to business angels emerges ever more clearly as the only financing alternative available to entrepreneurial growth companies at the seed and start-up stages of their development that can boast

neither the guarantees required to secure a bank loan nor the kind of attractive ROI prospects needed to attract venture capitalists;

• It should be possible to remedy the lack of information symmetry between business angels’ expectations and entrepreneurs’ perceptions of investors’ role and requirements by implementing investment readiness programmes;

• Co-investment funds aiming to supplement the equity contributed by one or more

business angels are an essential tool to improve companies’ access to venture capital and address the existing equity gap (in amounts ranging between €250,000 and €750,000); • Angel syndication is an adequate response to the needs of innovative businesses in

terms both of equity volume and sophisticated expertise;

• The development and implementation of legislation governing business angel activity as it grows. Since March 2005, English business angels are requested to sign an official document certifying their capacity as “sophisticated” or “accredited investors” as well as their understanding of the risks associated with their investment. This kind of waver is increasingly being demanded upon signing deals with entrepreneurs to guard the latter against any legal action by disgruntled investors;

• The implementation, as the economic role of wise informal venture capital investors becomes more generally recognised, of guarantee schemes allowing business angels to hedge part of their risk. This should not mean poorer assessment and decision making on behalf of angels;

• Fluidity funds which help BA to exit their investments, as formal VCs do not always buy off angels shares, who therefore see their financial contribution being stuck in a phase where it is much less useful.

For more information on the activities of business angels and their networks in Europe, visit Several documents are available, notably regarding detailed aspects of the activities of networks and federations as well as published surveys on informal venture capital (codes of conduct, shareholders’ agreement, confidentiality agreement, entrepreneur/investor contract…).




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