Michelle Rodger: Startups reap benefits of being watched over by angels

Published on Saturday 21 March 2009 12:57

AN ONLINE spin-off of the popular Dragons' Den series begins this month. Featuring one of Scotland's youngest millionaires, technology entrepreneur Shaf Rasul, the programme will feature budding startups aiming to secure up to £50,000 in investment.

The original BBC programme, with gruff Scots entrepreneur Duncan Bannatyne and excitable Cypriot Theo Paphitis, made great television, but more importantly introduced the concept of the 'business angel' to a wider audience.

Whether you like the "I'm in" / "I'm out" approach or not, divine support is big business. The UK angel market is growing rapidly despite the credit crunch. Today, there are almost 30 professional networks of angels investing between 800m and 1bn a year; it's the single largest source of early-stage capital in the country.

In Scotland, where we are recognised as having the most advanced and most sophisticated business angel network in western Europe, investment appears to be defying the effects of the economic downturn. By July last year 12m worth of deals had been struck, compared with 14m for the whole of the previous year. And by the end of December 72 deals were concluded, the total value reaching a record 21.49m.

Signs so far this year show that 2009 could be another healthy year for investments. According to David Grahame, chief executive of Linc Scotland, early indications are that Q1 of 2009 is holding up. Not least because investing now generally means you will get a lot more for your money.

If you are an investor and you are still liquid, this is a very good time to invest, Grahame says.

While some network members are not liquid because they are holding their wealth in the stock market, there is an astonishing proportion of Scots business angels who actually invest from income, and many are still in that position.

Since emerging in the early 1990s the angel market has grown, and publicity generated by television programmes such as Dragons' Den has clearly increased enthusiasm for this type of investment.

But the recession has had even more of an impact, and business angel networks are now filling the hole left by increasingly cautious venture capitalists, and shoring up businesses whose banks have refused them credit.

Linc Scotland, traditionally supportive of very early-stage companies seeking funding, is now seeing more mature companies approaching them for help. Businesses with 2m to 3m of turnover looking for a half-million facility are being turned away by their banks and are forced to search for alternative funding schemes.

Grahame says there is no way Linc Scotland can ever be a substitute for banks, but he believes that if the banks don't begin to play their part and start lending again, his members will spend this year reinvesting in existing portfolio companies who would, in normal circumstances, have received that necessary funding from banks. And that will suck money away from those startups seeking seed funding.

Balancing that, however, is the increase in cash-rich potential investors who don't bear the burden of an existing portfolio. They are looking for investment opportunities, and angel networks across the UK are intent on capitalising on that willingness. Linc has a target of securing three new groups a year, but in the first few months of 2009 there are already seven in the pipeline.

In addition, a raft of online angel networks has sprung up, offering divine inspiration. One, the angelinvestmentnetwork.co.uk, boasts available capital of 16,548,597,538 – if that's true, and not just a typo on the home page, then the opportunities are massive. I for one will be honing my elevator pitch.

Another, Angels Den, started by Glaswegian entrepreneur Bill Morrow, signed up 268 angels, each with a minimum of 250,000 to invest, in December alone. And 400 small business owners signed up – at a cost of 500 each – in the same period. According to Angels Den, more than 200 deals were signed last year, with an average investment of 220,000.

Having experienced funding challenges himself, Morrow is a sympathetic entrepreneur. He launched Angels Den two years ago after he failed to secure funding for his own venture, a website for golfers to book tee-off slots at leading courses.

If you and your business fit the criteria, then angel investment brings much more added value than a traditional bank loan or overdraft facility. Angel investors are patient, and are generally happy to put their time and money into promising ventures with the opportunity of a lucrative exit strategy in three to five years' time.

Unlike bank managers, angels are experienced business owners and entrepreneurs who can bring specialist technical skills and industry-specific knowledge to your organisation, and they often act as a mentor or sounding board for young or inexperienced directors and business owners to discuss strategic direction.

Many of them will have experience of both success and failure, and many will have survived previous recessions. That commercial common sense and a cool head in challenging circumstances could prove invaluable, particularly over the next year or so.

You may have to part with more for less in the current climate, but don't be afraid to release equity in your company; remember 50% of something valuable is better than 100% of nothing.

A share in a successful, profitable business with an exciting future could offer you the ultimate opportunity to become an angel yourself in the future.