When any group of angel investors get together what would you guess is the first topic of conversation? Had any good exits recently? Having problems with VCs, Government, Banks? No, in my 25 years’ experience it’s consistently “How’s your deal flow”. This is a totemic question. Nobody would ever own up to having poor deal flow into their fund, angel group or network.
And equity investing from private sources (angel and crowd) is certainly here to stay. According to Massolution’s annual report by 2016 crowdfunding will be a bigger source of funding than venture capital globally with an estimated value of $34 billion in 2015, which is a long way from just a few years ago when in 2010 it was less than $1 billion. In the UK, the equity crowdfunding market is small but growing rapidly by 410% CAGR between 2012-2014 and in 2015 is likely to hit £140m (according to AltFi, Nov 15). As final confirmation of this trend the latest statistics from HMRC show that the amount of funds raised in EIS schemes increased by 48% for 2013/14 and 93% for SEIS, over the same period.
Amounts of funds raised through EIS, 1993-94 to 2013-14
Source: HMRC Enterprise Investment Scheme and Seed Enterprise Investment Scheme Oct-2015
Private investors account for between £800 million and £1 billion of early stage investment in the UK – the single largest source of early stage capital in this country. They have eclipsed classic venture investors and there are many cases of sophisticated transactions i.e. over £1m with talented and experienced investors. Great deals are being done and excellent returns being generated.
Despite all this investment activity, we all know that we will end up doing a tiny fraction of all the deals we see. The ratio I’m used to in all of the early stage funds I’ve been involved with is around 1%. Deals are too early or too late. They’ve got weak management or ego-manic management. The proposition is in the wrong sector, needs too little / too much money or is just plain nuts. Meanwhile we spend prodigious amounts of time collectively working through each of the deals we see in order to determine that it’s not one for us. I know that this is part and parcel of professional VC investment, but I often wonder why and how angel groups can sustain and support this process.
Now think of it from the entrepreneur’s perspective. Fund raising is probably their most un-productive activity. Compared to the importance of finalising products and securing customers, fund raising is just wasted time. Trawling round angel investor groups making endless presentations to people who are probably not going to invest in your business is fairly soul destroying. More importantly it’s a major diversion from the key task of business growth. The fund raising process doesn’t generate a bean of revenue!
The irony is that most good deals will get funded, eventually (and indeed far too many questionable ones). For every half decent deal there is a funder somewhere willing to have a go at it. This suggests that most of us operate deal vetting systems that are profoundly fragmented and inefficient. The challenge is putting the right deal in the right hands.
This is not just a pre-investment issue it also affects what happens post investment. I think there is general recognition that successful investing is not just about finding a good deal, making the investment and then forgetting about it. In fact there is good evidence that post investment activity has more impact on success than just identifying good deals. Having co-investors with capacity to follow on, with sector expertise and the capacity to contribute actively to a deal can be every bit as important as deal selection.
Finding great deals, on-going investment capacity and sector expertise is a pretty tall order for any individual angel network, and indeed co-investing with your ‘competition’ has always been one of the paradoxes of the field. However mechanisms are emerging that can efficiently connect angel groups and other investors so that expertise and capacity can be shared on a national basis. Some investment platforms and certain angel groups can do some or all of this to varying degrees. Indeed my own firm Boundary Capital recently was one of the founding members, along with some prestigious angel groups, which launched a platform called AngelExchange that covers all these areas (funding, due diligence, sector expertise etc.) and operates on a not for profit basis for its members.
The benefit for Boundary Capital is that platforms like AngelExchange expands our capacity to join and offer great deals to other investors as well as expanding on the active investors ‘Venturer’ concept which is at the heart of the Boundary Capital proposition, providing expertise and money by obligatory mandate to every deal.
No doubt more platforms will emerge offering a similar proposition and this expansion of co-operation on angel deals (pre and post investment) can only be to the benefit of the angel industry as a whole. We need to mirror the innovation of our investees and use the best of modern technology to ensure that we make the best of our investments.
Ernie Richardson is Chairman of Boundary Capital