09/09/2011

By Michelle Williams, Marketing Manager, AngelNews

The second annual report on investment activity by business angels in the UK prepared by Colin Mason and Richard Harrison has been released examining the 2009/2010 market.

Small proportion of the market

Business angels are vastly important for the growth of entrepreneurial businesses and we are always interested in identifying changes in the market. It has been a difficult couple of years for everyone following the recession, including entrepreneurs and investors. With increased demand for angel funding, competition to raise funds amongst entrepreneurs has been vast and equally exit opportunities have been severely reduced for angels. Therefore any findings derived from industry research in 2009/10 are of huge interest and highlight what life was like when times were particularly hard. Hopefully we won’t go there again for a while, but understanding the low points helps everyone to understand how to go up.

The historic nature of these reports prepared by Mason and Harrison of course only allow us to speculate where we think we are today and the data has its limitations because as the authors acknowledge, the report merely analyses a small part of the market and there are inconsistencies in the recording of information, so the results have to be taken into context. It’s nice data to mull over, but not necessarily to be used as the basis for policy decisions being made today, when the national and global economies are at a different stage of the cycle.

Limitations in the data

The 2009/10 report focuses on networks and angel syndicates of the BBAA and LINC Scotland. Interestingly the BBAA membership seems to represent a subset of the angel market, focusing on London, the South East and parts of the Midlands, as 14 of its 20 members are based in these regions. The report itself acknowledges that limitations arise from the fact that some networks invite potential
investors to events and therefore can only report approximations, others that do not charge success fees have no financial interest in the outcome of introductions that they make and so fail to log them, and there can also be a time-lag between the point of introduction and when an investment is made.

Bearing this in mind, the report highlights that angel membership has, in all probability, remained static from 2008 to 2010, with 4,555 member angels of the BBAA at the end of 2010. But the networks estimated that less than 37% of their registered angels were active and only 10% made investments during 2009/10. Unsurprisingly 9,640 business plans were submitted in 2009/10, an increase of 955 from 2008/09. However, out of these a mere 764 were put forward to their investors; we don’t envy the networks having to scour through all those plans. Out of these, 238 businesses raised finance — an increase of 2% on 2008/2009 — so although the proportion of businesses presented to investors fell, the amount of businesses invested in increased, proving that a great business plan will receive investment regardless of market conditions.

However the amount invested by business angels throughout the UK did fall in this part of the visible market (angel networks) by 3.7%. This seems like a small decrease considering the country was in the midst of a financial crisis!

Increase in the number of investments

The BBAA networks provided detailed data on 245 investments in 2009/10. These companies raised a total of £98.3m of investment through the networks. Scottish angels made a further 78 investments, involving a total investment of £27.5m. Amongst BBAA member networks there was a 9% increase in the number of investments, while Scottish angels investments increased by 5%. Overall reported angel investment activity accounted for £50.5m; significantly this was a 13% drop from the previous year. This particularly reflects activity in the BBAA networks, where angel investment fell from £39.9m to £32.3m, a 19% fall. The overall amount invested from all sources remained virtually static, due to activity in BBAA networks which increased non-angel investment. The majority of investments were in the £50,000 to £500,000 range. Less than half of BBAA investments were above £200,000 (slightly higher in Scotland.) 55% of investments reported only involved angels.

Investments were largely focused on the early growth stage and start-up stage - only 25% of investments were in established companies seeking development capital and Scotland focused on early growth — this is reassuring news for small companies and aspiring entrepreneurs! In fact, just over half of the investments by BBAA investors were in small companies (5 or fewer employees) and 78% have 10 or fewer employees. Angels invested across a wide range of industries, but somewhat stereotypically with a strong focus on technology sectors.

Active investors use the EIS

The report also highlighted individual angel activity; however it only had 147 responses to work on, so we can’t derive too much from this analysis as it only focuses on a tiny proportion of the market. Out of these 147, 67% were members of angel networks that were members of the BBAA and 49% were members of angel syndicates. A noteworthy finding was that 70% of active investors used the EIS and 38% of those used it for all of their investments. The report went onto conclude that active investors were more likely to use networks and thus angels who were members of networks were more likely to invest — it states 'Both findings point to evidence of a ‘network effect’ — based solely on this analysis, it seems a sweeping statement to make due to the small proportion of responses received.

Summary — Exciting times for the angel market

To be honest, it is difficult to conclude much from this annual report, because a lot of the findings cancel each other out — there was an increase in the number of investments, but a decrease in angel investment activity — more business plans were received, fewer businesses were presented to investors and yet the amount of businesses invested in increased — and overall angel membership has
remained static. The report itself says that its overall estimate for angel activity in the UK in 2009/10 was £317.7m — a decline of 25% but admits that this contrasts with other indicators of market change, which suggest that angel investment activity has remained remarkably stable between 2008/09 and 2009/10.

So what exactly are we to conclude from this report? The report is a great reference source of a time gone by and offers interesting statistics, but it focuses on a small part of the market and even that is difficult to monitor; so not much, is the answer. However, it would appear that overall the market remained relatively robust in 2009/10 despite the financial crisis and in our view; it has never been a more exciting time to be in the angel market.

Everyday a new online network springs up; existing people in the visible part of the market (as defined by Mason and Harrison) are definitely stepping up to the table and working hard to remodel themselves to respond to the current market environment. Entrepreneurial activity is as vibrant as ever and long may it continue.