01/03/2012

By Modwenna Rees-Mogg, AngelNews

You know a market is getting interesting when an organisation such as the OECD deems it necessary to publish a report on the global market. So its newly published report on the role of angel investors in financing high growth firms and its findings are highly significant.

For those of you who are keen, the full report can be found here: www.oecd.org/sti/angelinvestors, but for those of you who are too busy to read the full version here are the highlights.

The report is based on research from Canada to New Zealand. In fact interviews were conducted with people in 32 countries. It can fairly claim to be the most comprehensive study of the global angel market yet undertaken and it was good to see that, inter alia, it calls for the established of standard parameters for research in the future. This is something we wholeheartedly endorse.

The report is packed full of tables about investment activity in different countries. One of the most noticeable factors is the differences in activity levels over time in different places, and also the volatility in activity year on year.

One of the most useful sections is on trends and developments in the market which highlighted the following factors for success in angel investing.

These are:

Being an experienced former entrepreneur when you become an angel investor with the ability to share your time as well as your money with a business; with the corollary that a private investor who simply invests for financial returns may not in fact be an "angel investor".

Due diligence prior to investment is much more important than some might think; ie the idea that you should invest as if you are going to the races is not a recipe for success

Invest in sectors you know; don't be tempted to enter sectors you do not understand unless you have a much higher risk appetite than the norm for angel investing

Create a portfolio of investments over time; don't put all your eggs into one basket on one day

As an investor take up opportunities to learn, to be trained and to be mentored; operating alone increases the chances of failure

Invest where there is a lively entrepreneurial ecosystem; entrepreneurship still comes first, not the money

Get up close and personal; angel investing works best in a local or regional environment where everyone knows each other; but be prepared to form national and international alliances to help support the growth of a portfolio company as it goes global.

The angel market faces challenges too according to the report. The issue of follow-on funding is well documented and does not need elaboration here, but it is highly pertinent that the report identified that the difficulty in getting exits for angel deals and therefore the lack of recycled liquidity in the market is suppressing its growth potential.

It is also extremely interesting to note that it raised the issue of financial sustainability of business angel networks (and indeed other intermediaries servicing business angels). If angels are better off working in groups and having access to information, networks, training, better deals and more, then the people who provide these services need to be able to operate sustainable business models, preferably paid for by the investors rather than the entrepreneurs.

We like the fact that the issue of market professionalization was also raised. We agree that until the market has clear quality standards and benchmarks, explosive growth will not occur as too many people become angels, invest, lose their money and leave the market. For the market truly to thrive we need to reduce churn.

The "Women" issue is also highlighted although in our view this will resolve itself over time as more female entrepreneurs build and exit from businesses.

There was an interesting observation that the online angel matching and crowd funding models, whilst they may be effective at raising large volumes of investment from hundreds of small private investors, arguably are not part of the angel world. EBAN is planning to redefine a business angel network as being an organization that facilitates face to face contact between investors and entrepreneurs.

You might enjoy the profiles of angel activity in different countries worldwide in chapter 3.

The author has cantered comprehensively and effectively through the issues relating to public policy approaches to supporting the angel market. If you did not know much about this issue before, you now only need to read Chapter 5 of this report to get up to speed.

In particular, we liked this quote on public funding of the angel market:

"Public funds should only be utilised where a tangible or imminent market failure in the private sector is evident. These vehicles should be designed in line with the market needs. Furthermore, in order to assess their accuracy and efficacy, a periodic review should take place and adjustments made as needed. At the same time, there should be a focus on development of the market, rather than solely on a provision of financing. This requires creating the proper incentives and supporting the development of the necessary quality, skills and experience in the venture firms to match international norms (Lerner, 2009)."

Overall the report makes it clear that understanding of the angel market from a statistical perspective is still in its infancy, even though many of the overall themes are well documented. For statistical information to be comparable on an international basis there needs to be a set of consistent standards for the gathering and interpretation of the data collected. However its final conclusion says it all:

Angel investment plays a critical role in early-stage financing, more so than venture capital, and therefore should receive increased focus from both the policy and the research community.

And of course it should also receive focus from private investors and entrepreneurs as there is a big opportunity out there for both of them to grab.

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