It has been noted, somewhat dryly, that to accurately gauge business angel investment dealflow one would have to frequent every café and backstreet bar in the country. In Australia, angel investors inhabit the frontier terrain that lies between the three ‘F’s – Family, Friends and Fools – and serious early-stage venture capital. With rich returns to be found currently in lower-risk investment sectors such as property and commodities, entrepreneurs seeking capital could be forgiven for thinking that angels are as elusive as the Tooth Fairy. We tracked down three professionals who connect angels to investment opportunities and asked them about the state of play.
Rick McElhinney is sick of angel investors going it alone. He believes angel investment in Australia is only now maturing because angels are learning to collaborate on the investment process, boosting investment acumen and diminishing risk.
Over the past decade, business angel dealflow and sophistication have increased significantly. I still think we’re in the dark ages, but we’re way beyond where we were eight years ago.
We want to graduate Friends, Family and Fools to something more sophisticated. A significant amount of investment money is wasted. What we’re trying to do with the Angels Institute is get these angels together in groups and develop a like-minded, collaborative approach, so they reduce their risk. Maybe they’re more likely to say no to a deal, but, as a result of that, they are more likely to find a deal that actually suits them.
There are very few investors who continue investing over a long period of time. Educating them, therefore, is not that easy. We need good investors and average investors. And we need mentors, because they are the ones who nurture the slow process of getting a company investment-ready.
With an angels group, you might have seven people investing, three or four of them actively investing, and a mentor or two sticking their nose in and keeping an eye on it. So you have seven people potentially losing sleep over the deal, all with different experience. That’s a much more powerful tool than one investment manager who is worrying about five other deals.
If you can get investors, mentors and entrepreneurs all on the same team, you reduce the risk, you can keep egos in check, you can put reasonable milestones in place and you can build a stronger company. You can also raise a lot more money. The money is out there, but if you can’t put a decent business plan together and convince angels to invest, then you are obviously not going to get the investment.
The dealflow success rate is improving, and it will continue to improve as long as we move away from throwing money at entrepreneurs and telling them what we think they should do. We are much better off educating the entrepreneur about why angels think the way we do, and then building people around the individual to the point where the investment is safeguarded.
The stock market is highly priced at the moment because there’s a lot of money going into it through super. If you can remove a lot of the risk from early-stage ventures, it’s like the stock market was in the early days – it’s the place to be. Early-stage investment is a great space to be in. If we can reduce the risk further, we can build an industry that can really make a difference.
As founder of the oldest business angel matching service in Australia, Christine Kaine thinks the industry still has a long way to go. She has described the process of angel investors andentrepreneurs finding each other as a giant game of hide and seek, with both parties blindfolded.
I’ve been involved in the angel investment process in Australia for 15 years and it has barely matured. The venture capital industry has matured greatly in comparison. I think it’s very sad.
Most of the “angel investors” who don’t want to be found aren’t real angel investors. They’re just playing a game. I think a lot of angel investors are interested in the thrill of being involved in a creative venture. One defining characteristic of an angel investor is that they are as passionate about a project as the entrepreneur. I think the investor should be very connected but should not interfere with the creativity of the entrepreneur. In fact, think there should be other mentors involved. Perhaps there should be three mentors – one for the angel, one for the entrepreneur and one for the relationship between them. At the angel level, it’s all about personality. That’s why I’ve placed focus on the human resource match. Venture capitalists are always saying how important people are in the decision to invest in a company, and then they get rid of them and put their own in.
I certainly think that angel investors need to be better informed. They don’t give up control of their money very easily, and that’s a problem for an entrepreneur who has the vision. The value we place on money and the value we pace on creativity are poles apart. We have to try and bring them together.
I actually think there’s a lot less business angel activity in Australia than we might think. People come to me with amazing innovations, but many of them don’t get the investment backing they deserve.
I think there is a skills shortage in Australia, and that comes back to the value we place on money versus the value we place on innovative, creative people. We need to cultivate new ideas and establish a new culture around the returns for supporting our innovators. People with a lot of money should be motivated by more than just return on investment.
BUBSINESS STRATEGIES INTERNATIONAL (BSI)
BUBSINESS STRATEGIES INTERNATIONAL (BSI)
Ivan Kaye remembers well the dark days following the dot-com crash, when Australian investments of between $200,000 and $2m were thin on the ground. Kaye assists innovative SMEs attract angel and early-stage VC investment through his business services company BSI, which hosts investors’ forums both in Australia and the US. He is also an angel investor through Australian Distributed Incubator (ADI), a $7 million fund that invests in ICT companies.
When entrepreneurs come to us initially, their expectations are pretty rosy. They think their technology is worth hundreds of millions of dollars, but the reality is that people will only pay what they think it is worth. By the time they’ve gone through the process, they are pretty much on the same page as what the angles are prepared to invest.
The angels I know understand exactly the risks they are taking. As for Fools, Family and Friends, they are an absolute necessity for many businesses. We wanted to provide the cocktail of accessing government grants, raising capital and helping companies get their pitch together. That’s why we started the investor forum – to bring structure to a very unstructured angel community in Australia.
One of the defining characteristics of angel investors is that they are strong mentors. They need to be there riding with the venture every step of the way.
We focus on companies that have export potential, and the biggest market is obviously the US. We set up an office there in January, and we’ve aligned with a number of events, including AlwaysOn. We hold boot camps for Australian companies looking to enter the US market. We recently hosted our first investors’ forum in Silicon Valley, where 136 VCs and Angel investors came to listen to eight Australian companies.
I think the angel community in Australia has become a lot stronger over the past year. And it’s only getting stronger. The property and share markets are at an all-time high, so investors looking for exponential returns will have to look to the early-stage angel space.
We should be looking at tax and other incentives to encourage angel investment. Can we set up a secondary market, like a stock exchange, where people will be able to take punts in these innovative companies? That would be a great way to both promoting investment and distribute the risk. Australians like gambling. Look at how much money is wagered on the Melbourne Cup. Imagine if we invested even some of that in start-up companies.