Bank equity products capital ventures basic information and tutorials This market consists of high-net-worth individuals – ‘business angels’ – willing to invest risk capital in small unquoted companies. In addition to capital, business angels are able to provide expertise and advice to assist the investee company in return for their equity stake.
They play an important role in filling the gap between debt finance and the formal venture capitalists whose attention is focused on larger deals. With a lower cost base and different objectives, business angels are more comfortable investing smaller amounts and are more orientated towards start-up or early-stage funding.
With its comparatively low visibility, business angels’ activity is probably underestimated. The 1999–2000 edition of the BVCA directory lists 48 business angel networks and research by Southampton University,1 which the BVCA commissioned, concluded that 280 registered business angels invested £20 million in 1998–99 through 192 investments in 185 companies.
Based on the limited sample of BVCA registered angel networks, the same survey found that 51 per cent of business angel investments were for amounts of less than £50,000 and only 24 per cent of investments were over £100,000, compared with 86 per cent of formal venture capital investments.
Some 60 per cent of the business angel network investments were focused on start-ups and early-stage financing and only 11 per cent on MBO/MBI investments.
It was estimated in 1999 that the United Kingdom had approximately 18,000 business angels and that they invest about £500 million annually.2 If this is true, the informal market would appear to provide some £300 million each year to start-up and early-stage finance, which puts it on an equal footing with the formal market in the provision of such funds.
Business angels bring other benefits to the businesses in which they invest. In particular, they can generate additional financing; banks are said to contribute to 86 per cent of businesses receiving finance packages from business angels, and venture capitalists to 25 per cent.
Business angels that play an active part in advising or managing the companies in which they invest tend to act as magnets to more formal investors and give credibility to an enterprise among its customers and suppliers. Indeed, through the media of the banks and the Small Business Service (SBS), encouragement is being given to business angels and formal venture capital funds to co-invest in SMEs.
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