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As angel investors organise, they become more visible. This has prompted many people to ask, “Why are angels important?”
Angels are private people investing their own money and their own time (experience, expertise, networks) in high growth companies. The 2008 survey conducted by the Australian Association of Angel Investors Limited (AAAI) estimated that there are 16,100 Australians who can identify as active angel investors. Together those individuals, in 2008, invested an estimated $1.69b in over 5,000 entrepreneurial companies, which fuelled over 35,000 jobs.
I think those numbers answer the question of why angel investors are important to Australia.
To put this little-known group of investors in context, I will compare with the better known Venture Capital (VC) community in Australia. According to the Thomson AVCAL Yearbook 2008, produced jointly by the Australian Private Equity and Venture Capital Association Limited (AVCAL) and Thomson Reuters, Australian VC firms made 20 investments in 2008 for an aggregate investment of $57.8m. The Yearbook reports a peak in 2001 when VC firms made 122 investments for around $610m.
On performance, the Yearbook reports a -5.4 percent Average IRR for VC firms over the last 23 years. While there is no specific report, Yearbook data implies that Australian VC firms collectively have around $300m available for new investments.
While VC money comes mostly from superannuation funds, one should not ignore the more than $500m of support the VC firms have received from the Federal Government over the last 15 years or so, such as the $83m IIFF program announced earlier this year.
The Thomson/AVCAL data is drawn largely from institutionally-backed VC firms, as many smaller, privately funded VC firms do not report and, for the most part, are not members of AVCAL. For those firms, anecdotal data indicates a higher level of success, with 50+% IRR being a common outcome. Yet, even combined, all the institutional, private and government-backed VC firms represent a fraction of the quantity and quantum of investments made by angel investors.
This data should make it clear that angel investing is a not simply a stage in the VC pipeline – a popular misconception. If that were so, then the Angels would be throwing away billions of dollars. Is that really credible?
Some small number of the 5,000+ angel investments each year may be suitable for subsequent VC investment. Of those, some smaller number may be one of the 20-120 investments made by the VC community each year. Clearly, something else is going on here, and there are thousands of Australian enterprises that are funded and grow to market with angel backing. Some of those investors are enjoying ROI of one million times their investment!
The AAAI was formed to promote professional, ethical, organised angel investing as a distinct asset class. The VC community, for their part, mostly recognise the value and importance of the angel investors, and several VC firms have been active supporters of the AAAI. The two classes of investor can and should co-exist; they are complementary and mutually beneficial.
A key differentiator is that angel investment is all private taxpayers reaching into their own wallets and there are no fund manager intermediaries taking fees along the way. Angel investors establish a direct and personal relationship with the entrepreneurs and companies in which they invest.
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Angel Investors, to date, have received no government assistance, enjoy no special tax treatment and get no tailor-made government investment vehicles. The main reason for this lack of support has been the inability to identify and access the Angel community. The development of the AAAI and the growth of Angel Groups in Australia is changing that and the challenge now is for the Australian community, including governments, to support and encourage this key driver of innovation – the commonly accepted fulcrum for economic success in the 21st century.
According to The Atlantic Century report on innovation by the Information Technology & Innovation Foundation, Australia ranks 19th out of 40 countries in innovation-based competitiveness and only 32nd in that group for improving innovation-based competitiveness over the last decade. There are other international reports with similarly damning rankings, but the good news is we can do a lot to improve our position and thus benefit our community.
It is time for the Australian community to show some love to their fellow taxpayers, entrepreneurs and angel investors who are taking the risks to keep Australia at the forefront of global economic development.
The AAAI is a founding member of the World Business Angels Association (WBAA), a proud achievement exemplifying the Australian knack for initiative and getting things done on the smell of an oily rag. Yet, embarrassingly, AAAI is the only national angel association in the WBAA to have no sustained support from its own government(s).
Let’s be clear: this support would put more dollars directly in the hands of entrepreneurs, with the intellectual capital attached to those dollars to dramatically improve the chances of success for those enterprises.
All early-stage investing shares in the benefits of counter-cyclical strategies. Now is the time to prime the pump of Australian innovation so that, as the world economy turns up in the coming few years, we have a raft of world-leading, competitive companies to fuel the Australian economy.
Jordan Green is a serial entrepreneur, venture capitalist and angel investor. He is a founding director of the Australian Association of Angel Investors Limited, the founder of Melbourne Angels and an adviser and mentor to entrepreneurs, angels and other investors. For information about angel investing or to find an angel group in your area, contact Jordan [at] aaai.net.au.
Photo: Piermario
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