Multitudes gather for angelic visitations

The increasing role played by private investors in funding Britain's start-up businesses has long been acknowledged, writes Roger Trapp. But nobody seems to have anticipated the level of activity unearthed by a study at Oxford University's Templeton College.

Not only does it appear that these individuals could together invest more than pounds 10bn in young companies, but each "business angel" puts up far more money than had previously been supposed - pounds 265,000 over three years, rather than the earlier suggestion of pounds 22,000.

Based on a survey of 389 angels taking part in 467 deals, the study, Business Angels. Tapping the Potential of Individual Investors in Britain, claims to be the most comprehensive undertaken. Originally the subject of Patrick Coveney's DPhil research, it has been expanded with the help of Templeton fellows Karl Moore and Janine Nahapiet.

But although there is much more going on than had been thought, the authors suggest that things can be done to make the phenomenon more effective.

Pointing out that angels can be divided into six categories, they say entrepreneurs looking for funds should pursue strategies that focus on the angel grouping most appropriate to themselves. They should also establish personal networks, identify individual targets within the grouping and then build long-term relationships.

The study found that the most important question angels ask is whether they can trust the entrepreneur, and they can only answer that if they know the person involved.

The exchange of information between angels and entrepreneurs can also be made more efficient. Angels say that 95 per cent of the proposals they receive are of no interest to them.

Moreover, for all the attention given to the various business introduction services, these organisations do not appear to be especially effective. Only 13 per cent of the deals analysed by the study came about through the involvement of business introduction services. The authors point out that this figure is particularly low, given that all the angels in the study were either current, former or potential subscribers to one of a group of introductory services.

Finally, there are tasks for the government. Arguing that existing efforts have been based on various false assumptions, Mr Coveney and his colleagues suggest that, since investors are less geographically restricted than previously thought, the emphasis should shift from encouraging local networks to developing national ones.

Second, there should be a focus on angels who invest substantial amounts often rather than on smaller, infrequent, locally based investors. Third, there should be encouragement for private bureaux to appear alongside the public-sector services. Finally, more should be done in the area of tax benefits for those supporting start-up ventures.

But the calls for improvements should not obscure the great contribution that wealthy individuals already make to high-risk young businesses by filling the funding gap left by banks and venture capital companies. Not that such people are as purely philanthropic as their nickname suggests. Although the risks are great, so too are the potential gains. The study found that the few ventures chosen for investment typically grow by more than 200 per cent over three years. Angels apparently enjoy returns well ahead of those expected and three-quarters say they are satisfied with the outcome of deals.

And, while they generally take stakes of about 35 per cent and provide more than one tranche of funds, angels also bring a lot more than money. In more than a third of deals, they make significant management contributions.