In June 2018, the British Business Bank (BBB), along with the UK Business Angel Association (UKBAA) published The UK Business Angel Market report. In it, Keith Morgan, CEO of the BBB states, “angel investors play a vital role in the economy, bringing patient capital, business experience and skills to support the growth of smaller businesses.” Jenny Tooth OBE, UKBAA Chief Executive, goes even further, “Business Angel Investment is the most significant source of risk capital to support the early growth and scale-up of small businesses in the UK.”
Impressive Contribution to UK Economy
Some might think this is overstating, but the statistics are impressive: Over five years to 2015, there were 15,000 UK angel-backed businesses with a turnover of over £9bn, contributing £4.5bn to GDP and creating 69,700 full-time jobs in the UK economy (Oxford Economics). And the current indications continue to be positive; the report, based on research gathered from surveying over 650 angel investors, finds that almost 8 in 10 angels see employment growth in their current portfolio (of which 45% see significant growth of more than 20%, 24% modest growth of 5 – 20% and 10% low growth of up to 5%).
The Importance of Syndicates and Co-Investment
The conclusion is that the UK has the most mature business angel eco-system in Europe, although it continues to trail the US. One of the hallmarks of this maturity is increasing investment through networks or syndicates and co-investing, with 79% of angel investment taking place as part of a syndicate and over a third of angels having co-invested alongside venture capital funds.
This is hardly surprising when considering the benefits, whether it be formal syndication or tacit co-investment. The collective bargaining power and greater weight of money enable investors to pool their risks, knowledge and skills and to access deals with minimum commitments they couldn’t match on their own. Additionally, higher overall investment amounts per deal might give them the opportunity to agree better investor rights. Meanwhile, investee companies benefit from higher capital commitments and don’t have to deal with numerous and different investors.
Why and Where to Invest
Certainly, from a venture capital perspective, the factors influencing the investment decisions of angels are very much in sync with Oxford Capital’s Ventures team; the report states, “for most angels, it is essential that the entrepreneurial team demonstrate the relevant skills and experience. 93% said the entrepreneurial team having the right experience or skills is important. Many angels emphasised the character, connection and relationship with the founders as vital. Unsurprisingly, the potential for growth was also seen as core to the investment decision, with 89% viewing that as important.”
There is also considerable consensus in terms of where the most interesting investments are; “the top five sectors business angels invest in are Healthcare, BioTech, Fintech, Software as a Service (SaaS) and E-commerce, all of which are tech-intensive sectors.”
Patient Capital
The value of angels extends beyond investment amounts. In fact, perhaps surprisingly, the median initial investment made by angels during the 2016-17 financial year was £25,000, although the range of investment amounts is wide – from less than £1000 to over £1m. More importantly in the context of recent government reviews of the UK start-up and scale-up landscape, “angels are a source of patient capital and help provide finance for scale-ups. The average duration of an angel’s investments is six years.” And the exit statistics suggest, in some cases it could be a lot longer.
The finding is that angels are naturally aligned with the company’s long-term success and less likely to seek an early exit. They are also unlikely to seek a clearly defined exit route before all the variables are clear. They are looking to make the most of their investment opportunities and this is also evidenced by angels use of SEIS or EIS investment opportunities with nearly nine in ten angels using these schemes.
Performance
The overall picture is that angels are doing well; the survey shows for the exits the angels have had, a third reported rates of return 1 to 5 times their initial investment. And 14% achieved a multiple above 5. In terms of turnover, two-thirds have seen growth in their current portfolio of investments of more than 5%.
Future Challenges
Angels indicated that their main challenge in the next 12 months is the difficulty of identifying good investment opportunities. In fact, concerns about deal flow and investment activity – notably growing the businesses, generally come well above worries about the political and economic environment.
Oxford Capital views it’s Co-Investor Circle (CIC) as an ideal antidote to these concerns. The CIC leverages Oxford Capital’s significant deal flow and due diligence process, beneficial deal terms, and the active role it takes in the companies it invests in. For more information on the CIC, go to