The latest report on Angel Activity in the UK is a massive 102 pages in length. In my last blog entry I gave a quick summary of the facts and figures – it was interesting to discover that the Angel Investment in the UK is about £426M in the year 2008/09. There is one glaring omission from the report. It is alluded to just five times…
Colin Mason (University of Strathclyde) and Richard Harrison (Queen’s University Belfast) have just completed their 102 page annual report on the Business Angel Market in the UK 2008/09.
Consider the classic model: wise Business Angels investing in companies, get a great return through exits on some of them and re-invest in more companies. The failures will be more than compensated by the massive returns on the successes. This is a virtuous circle creating cash and new companies driving the economy forward.
Investing money is easy – there are 102 pages of the report about this. What can we find out about the exits? Mason & Harrison mentioned the word “exit” just five times (emboldening is mine):
- “exit opportunities have been limited by the scarcity of IPOs and reduced M&A activity.”
- Business Angels “experience a lack of exits from their current portfolio”
- Anecdotal evidence “it suggests that there is a major change of investment strategy in the business angel market, with organised groups of angel investors acting more in line with VC investors in funding portfolio companies all the way through to exit”
- “follow-on investing as a proportion of all investments has increased from 10% to 68%, and has been over 50% since 2006-7. This reflects that there is an inevitability that over time angel groups make more follow-on investments and fewer new investments, reflecting the increase in the number of firms in their portfolio and the absence of exit opportunities.”
- “Angels are making bigger investments and investing in more rounds because of a combination of the apparent break down of the ‘relay race’ model of investing in which angels pass on their deals to venture capital funds and the lack of exit opportunities.”
In other words:
- Exits are getting harder. It is more difficult to get your money back through trade sales, IPOs and future funding rounds where a VC picks up the challenge.
- It is taking longer to get to exit. Your money is locked up for longer increasing the risk of unexpected future events causing complete failure. We are already talking more than eight years.
- More Angel rounds are required. Angels are investing more in rounds in the hope of reaching an exit (or put another way, investing to keep the companies afloat in the hope of an eventual exit). Incidentally, NESTA’s report suggests that follow-on investing correlates to higher investment failure.
So if you’re a Business Angel, expect it to be harder to get your money out than ever before and allow for an increased number of failures.
If you were looking for x10 return over 3 years to cover business failures, what must this now be to take into account the harder operating conditions? If it was difficult finding companies matching the x10 return criteria, how much harder will it be now; if you’re looking for x15?