Innovation & Technology Transfer

Business angels are vital in the early stages of high-tech start-up companies. They are therefore a key component of Europe's knowledge-based economy. Business Angel Networks are helping to link investors and entrepreneurs - and to spread good practice between regions, and between Member States.

"In today's fast-moving high-tech markets, time is of the essence," according to Johan Konings of Pythagoras, a private, Belgium-based network with a Europe-wide portfolio of software and IT companies. "The speed and flexibility of business angel investment buys entrepreneurs valuable time. When the chemistry is right, investor and entrepreneur create value by working together to realise a common vision. To us, it is a question of passion."

Konings was speaking at the conference of the European Business Angels Network (EBAN) in May, which brought together nearly 300 delegates from 20 countries to exchange ideas and experiences about informal investment.

Missing link?

Business angels are wealthy individual investors - usually, people who have made their own money as entrepreneurs. Better-equipped than banks and most venture capital funds to assess the potential of very young businesses, they contribute not only equity but also much-needed business expertise, offering company founders hands-on support and advice.

Angels bridge the gap between the personal savings of entrepreneurs and their families and friends - often an important source of seed capital - and the 'second-round' financing which venture capitalists are able to offer. In the United States, they have helped to fuel the remarkable self-sustaining innovation and economic growth of the past decade by recycling entrepreneurial wealth and talent locally and regionally.

Though still at a much lower level, investment of this kind is now growing rapidly in Europe, in large part thanks to regional and national Business Angel Networks (BANs), which stimulate the flow of informal risk capital to start-ups with high growth potential. Generally funded by public money, BANs have proved to be remarkably effective - raising awareness among potential investors, providing an independent and confidential matching service, and training entrepreneurs to prepare and present the information that angels will require.

But activity is not evenly spread across the European Union. The United Kingdom still accounts for over half of all European business angel activity, while as recently as 1998 there were no BANs in either Italy or Germany, with correspondingly low levels of informal investment. Yet the potential is truly enormous. EBAN estimates that EU-wide there are at least a million potential angels, compared with the 125,000 currently active - representing a total investment pool of 10-20 billion.

EBAN was established by the European Association of Development Agencies (EURADA), with the support of the European Commission's Directorate-General for Enterprise, in June 1999. It provides a platform for the exchange of experience among the 80-90 existing European BANs, accelerating the spread of good practice and the extension of the BAN concept to new regions. It runs awareness-raising seminars, has developed a directory of European business angels and a website, and is preparing a code of conduct for BANs. In parallel, the Enterprise DG has funded a number of feasibility studies, which have already helped to establish six new regional BANs.

A new market

Why are business angels so important for Europe right now? According to one of the speakers at the EBAN conference, Professor Colin Mason of the University of Southampton, the nature of the 'new' economy has profound implications for the way business is financed.

Estimated number of active Business Angels, by country, 1999

Business Angel Networks are helping to increase the number of active business angels, and to stimulate informal investment in a growing number of Member States.

"Knowledge-based companies have special characteristics," he explained. First, they are harder to assess as investment opportunities than conventional firms, due to the speed of technological development and the central role of people and ideas. Second, costs tend to be front-loaded. In the fields of biotechnology and electronic commerce, for example, it is necessary to invest heavily in development long before any revenues are generated. Third, growth capital is required at an early stage, in order to access global markets from the outset - retained profit is seldom sufficient to finance growth.

"All this makes debt financing totally inappropriate," said Mason. "Banks are unwilling to lend against intangible assets and are not equipped to assess these new business models, while the companies do not have sufficient revenues to service loans. A knowledge-based economy needs equity finance."

Equity financing conventionally follows a trajectory from 'friends, family and fools', through venture capital, to an initial public offering (IPO) on one of Europe's new high-tech stock markets. "But as more and more money flows into venture capital, creating ever larger funds, they are increasingly looking for bigger, later-stage deals," said Pierre Hochuli of German venture fund adviser, Polytechnos. "This creates huge opportunities for business angels, who are also able to inject a healthy dose of 'old economy' business skills."

Beauty and the beast

Like a number of other speakers, Hochuli hopes that BANs will increasingly streamline the flow of high-quality deals to venture capital funds. "High-tech start-ups go through multiple funding rounds," he told the conference. "To ensure seamless integration of financing through the life cycle of a company, good relations between the business angel and venture capital communities are essential."

Konings' view is more radical. "In the experience of many entrepreneurs, the venture capitalist is the guy who squeezes them on the way in, squeezes them on the way out, and between times turns up occasionally to eat lunch," he joked. "Business angels offer smart money. Traditional European venture funds are not sufficiently specialised in particular technologies, and will be progressively displaced by mega-angels, syndicates, and structured networks of business angels operating as venture capitalists."

Summarising the policy implications of the two-day conference, Albrecht Mulfinger, head of the Enterprise DG's Access to finance and Community programmes unit, called business angels "the Cinderella of the innovation financing market". Differences between the fiscal regimes of the Member States still made cross-border business angel investment difficult, he said. But he pointed out that the new European Regional Development Fund (ERDF) programme for 2000-2005 allows for support to be given to BANs in less developed regions.

"The Commission's goal," said Mulfinger's colleague Rudy Aernoudt, "is to bring informal investors into the mainstream of SME finance. We want to make it possible for certain types of business project to choose business angels as the most appropriate source of finance, rather than as funders of last resort."

Contacts R. Aernoud, European Commission Enterprise DG Promotion of entrepreneurship and SMEs Directorate Access to finance and Community programmes Tl. +32 2 295 9186 Fx. +32 2 295 2154 E-m. rudy.aernoudt@cec.eu.int

C. Saublens, EBAN Tl. +32 2 218 4313 Fx. +32 2 218 4583 E-m. info@eurada.org Web www.eban.org/

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