Global investment occurs at varying degrees of size, as not all investments consist of large sums stemming from private equity firms. Business Angels is the sector of investment that involves the individual and the Small and Mediums Enterprises (SMEs) at the start-up and early stages. Within Europe, it is the European Trade Association for Business Angels, Seed Funds and other Early Stage Market Players (EBAN) that is the voice, advocate and information supplier. As it is the aim of InKITE to feature all types of investors and integrate all sizes and scopes of investment opportunities, KITE Invest recently had the pleasure of interviewing Luis Galveias, in order to showcase this ever-growing investment sector of Business Angels.
KITE: To begin with the background of Business Angels, we know that the term ‘Angel’ was only coined a mere 30 years ago and now in Europe alone, Business Angels make up over a $5 billion sector. Within Europe, Business Angels do vary from country to country, to which we are interested to know why there are these differing levels of activity, investments and deals?
EBAN: That is a very relevant question, because there has been an evolution in Europe. If we go back 5 – 7 years ago, there were only three markets for Business Angles in Europe: the UK, France and Germany. What you can learn from this is that this sector is new for many economies and societies in Europe. This is a traditional sector for the US, whereas, in Europe it is something that is continually gaining traction. It is not necessarily only a matter of culture, but it is also a matter of incentives. In Europe we work by incentives, usually offered by the governments and central authority. As a result, in these more developed markets of the UK, France and Germany, there were already instruments in place to stimulate investors to enter this area of Business Angel investment. Meanwhile in other countries, there were no incentives, but primarily obstacles to enter this sector, because it is a risky business. Traditionally, Venture Capitals were not investing, because it was deemed too risky and too early. These investments opportunities need a different type of investor, one that is more hands on – not a risk taker, because they aren’t risk takers – but one who has the belief that they can control and mitigate the risk. This is why Business Angel investments are not about the money, but rather, it is about smart money, the culture of the company, and about guiding the company.
What we have been observing in Europe is that several countries have created those incentives, which can be either tax breaks for companies to deduct from their annual income statements or mechanisms of co-investing with Angels, both which diminish the risk of the activity. One can see these incentives working very well in the UK, where almost 99% of them take advantage of such mechanisms. It’s a matter of incentives, and in many countries there hasn’t been the incentive, but through the work of EBAN and organizations in local communities, the environment has changed in the past years and we are seeing a rise of investment.
The other reasons for the growth of this sector, is attributed to the rise of many successful entrepreneurs in the late 1990’s, early 2000’s from IT companies. These entrepreneurs became investors and as investors, they wanted to give back to the community, and because they knew how to be successful at the process.
KITE: While the European Business Angel sector has been making remarkable strides, the United States’ Business Angels sector is over $17 billion. What reasons would you give for the discrepancy between the two regions?
EBAN: The activity of Business Angels was integrated into the economy early on. While in Europe, Business Angels were considered to be something rather awkward and unknown, in the US, on the other hand, there isn’t this gap. In the United States, it is a single market that is more liquid, more fluid and it is easier for investors to exit.
KITE: Business Angels, generally speaking, invest in the technology field. Has the interest always been in the technology sector and does EBAN anticipate any other sectors of interest in the near future?
EBAN: Traditionally, ICT takes a considerable share between 1/4 and 1/3 of investment. Amongst the other sectors, investment is generally evenly distributed. The focus has been on ICT, because it’s where investors can typically see fast-growing performance. For instance, with industry companies such as chemicals, the process is very long. It can take years to make the investment, start selling, to have a good market position, and overall it is a long-term investment. Whereas, with ICT an investment can take a long time but it can also take a short time. It is also one of the areas where business can be more scalable internationally. Ultimately, they are high scalable businesses that are global by nature and with only a few resources these companies can grow relatively fast in a few years. It is naturally an area that attracts more investors.
We have also been observing more interest from investors in impact investing, specifically in business that are more mindful of non-financial purposes and gains. Focused on people and the planet, as well as, at the same time a focus on profit.
KITE: In respect to the stage of investment, we see that investments often occur in either the expansion or idea stage. This seems interesting in the fact that this is prior to the stage when companies are generating revenue. Is this a result of sectors, like ICT, that are able to grow more quickly and more easily?
EBAN: You can hardly get an investment for an idea, unless that idea is based on a strong patent, strong intellectual property. What investors need isn’t necessarily a profitable company, but they need traction. That traction can be having significant contracts with clients or what a lot of investors are doing now is asking a company to go to Crowdfunding platforms and to sell their products before they go market. As a result, this will give investors some perspective of the possible traction of the company, as there must be a demonstration factor or achievement that the investor can evaluate.
KITE: You’ve just mentioned Crowdfunding, a recent development over the past few years that is gaining momentum. What is you opinion of Crowdfunding and in relation to the Business Angel community?
EBAN: There are different kinds of Crowdfunding, three of them have to do precisely with Business Angels. The first is the reward-based kind of Crowdfunding, as I just mentioned. This is when someone or a company has an idea of a product and they can market the prototype and sell it once it is ready. The second type is lending Crowdfunding and this is becoming increasingly popular. This form is particularly useful to SMEs (small and medium enterprises) during the moment when they are looking for money, and are having difficult times getting credit from banks. The last is the equity form of Crowdfunding. EBAN is seeing that this equity form is truly integrating into the sector. In my opinion, it is fitting very well, because it is allowing Business Angels through platforms to profile their deals and taking more leadership in the deal. Business Angel Networks are also taking advantage of these platforms to facilitate their processes internally, as it allows them to interact better with their community. These platforms allow Business Angels to make investments more easily, and even make the payment through the platform. Moreover, Business Angels can expand and diversify their portfolio; they are exploring platforms as a new source of deals and a new source of investors.
KITE: EBAN does numerous activities to engage the Business Angel community such as the Annual EBAN Awards, the EBAN Institute, and the European Business Angels Week. EBAN also produces a monthly newsletter in order to further promote this sector. Would you say that there is still a lack of information about the sector in the mainstream?
EBAN: Yes, indeed, there is a great lack of information. We need greater information outlets, because the Business Angels community needs role models and demonstrations of investments working and of investors exiting business successfully. We see this happening in a few countries in specialized magazines and on online websites dedicated to start-ups, which provide a lot of information; however, there isn’t anything that is taking a holistic approach on Europe and the early-stage investment market. I would like there not to be such a focus on the successes we see in the United States, but rather a better view of the success that are happening in Europe as well, because there are successes that are happening in Germany, in Croatia, in Finland . . . The publications today are very national based, there aren’t publications taking a European approach.
We need a single market for early stage investment. We need information flowing. We need Spanish investors knowing what is taking place in Sweden, for instance. Making cross boarder investments in a single European market; this is the only way Europe can reach the level of the United States.