After entrepreneurs develop an opportunity, and use up their own resources, they often turn to business angel investors for early investment to keep the venture growing.
At this point in the development of new ventures the risk of failure is significant; many aspects of the business including customer relationships, pricing strategy, talent, and other key factors are quite unclear. Yet there are a growing number of investors known as 'business angels' willing to invest at this point.
They have become an increasingly important source of equity finance over the last decade for new and nascent businesses1 as venture capital investors are not able to accommodate a large number of small deals with their attendant due diligence and oversight needs.
Business angels are now prominent coinvestment partners in the early-stage market. Understanding why investors would involve themselves in anything so risky is important, given the contribution of innovative start-up businesses to the economy.
Although there is no comprehensive survey of business angel activity available, an estimated 4,000 to 6,000 business angels were investing up to £1 billion annually by 2000. Despite their increasing importance, little is known about the outcomes of business angel investment and returns in the UK.
Mason and Harrison conducted the first attempt to identify the returns and characteristics of the UK business angel investors, pointing out the lack of evidence on the outcomes of investments by business angels.
They suggested that this "represents a significant gap in our knowledge and understanding of an important segment of the venture capital market".
This research addresses three questions:
- What are the investment outcomes to business angel investing?
- What are the characteristics of UK business angel investors?
- What strategies and practices are related to improved investment outcomes?
The data in this study is drawn from a survey of 158 UK-based angel investors in late 2008. They have invested £134 million into 1,080 angel investments between them, and have exited 406 of those investments ('exit' in this study refers to any termination of an investment, including a venture going out of business, being acquired, or going public).
The sample is limited in its size and its focus is entirely on those who are members of groups. The conclusions drawn throughout the report need to be understood in light of these sample limitations. There are three central implications from the study, as follows:
- Business angel investing is risky, but overall appears to generate attractive outcomes.
- Key strategic choices are significantly related to better investment outcomes.
- Tax incentives appear to have a material effect on encouraging business angel investing, and some details may help refine existing policy.