Smaller Companies: Baronsmead on the side of the angels

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BARONSMEAD, the venture capital firm, is tapping the estimated pounds 2bn pool of risk money owned by wealthy entrepreneurs to back British industry.

It is one of the first concerted attempts in the UK to harness the resources and expertise of 'business angels' - successful entreprenuers keen to plough back some of their wealth into other ventures.

The company, which has close links with Barclays Bank, is in advanced talks with about a dozen wealthy individuals and several intermediary firms to set up a fund to provide development capital for growing business.

The aim is to raise a modest pounds 3m initially, but some industry experts believe it could trigger similar attempts, providing new hope for small unquoted companies which have long complained about lack of equity finance.

The fund is being launched partly due to heavy demand from potential investors. Garry Sharp, a director, says: 'We often get letters from potential angels asking us about ventures.'

Although the fund will be managed by Baronsmead on a discretionary basis it will allow investors - who are expected to put in at least pounds 100,000 each - to choose the ventures they wish to back.

Separately, the firm is setting up a register of investors who also want to take an active management role in companies they back. In such circumstances Baronsmead would consider coming in as an equity partner.

Business angels, named after investors who traditionally back film and theatrical productions, are an important source of risk finance in the US.

According to industry estimates, angel funds control up to dollars 20bn and have played a crucial role in supporting high risk projects, notably in the computer and biotechnology sectors.

Such funds are virtually unknown in Britain, where venture capital firms usually invest on behalf of institutional clients in return for a management fee. Nevertheless, British angels are thought to be pumping in vast sums of equity finance at an informal level through direct personal contact.

Two years ago a pioneering research study by Colin Mason, a senior lecturer at Southampton University, estimated that the total capital pool represented by angels could amount to pounds 4bn compared with about pounds 1bn a year invested by institutional venture funds.

Most British angels are over 45 and have founded one or more businesses, according to the study. The majority are comfortably off rather than super-rich and put their net worth at below pounds 500,000. The average sum invested over a three-year period amounted to about pounds 22,000.

'Business angels would appear to represent a significant and under-utilised source of finance for small business in the UK,' the study concluded.

One problem is marrying a business looking for equity to a suitable entrepreneur with cash, doubly difficult to achieve. Although many databases have been set up to address the problem - National Westminster Bank established one last week - such marriage bureaux have limited appeal.

However, they play a vital role in bridging the so-called 'equity gap' for start-up, high-risk companies or those looking for equity finance below pounds 150,000. Many experts say the British venture capital industry has failed to meet the needs of such businesses.

Their prayers are more likely to be answered by an angel.