It is well known that the toughest of economic climates can produce some of the best businesses, and this is exactly what we’re seeing today in the entrepreneurial community.
If you ignore the press headlines on the broader UK economy and look towards the enterprise space in the UK you see a market that is blossoming if not booming. It is consequently no surprise to see an increasing number of angel investors, individuals investing directly into small unquoted businesses, attracted to this space.
Angel investors can benefit from the tax benefits that come hand in hand with investing at this end of the market, such as the Enterprise Investment Scheme (EIS) which helps mitigate some of the financial risk of investing in early stage businesses. These business angels offer a critical source of financing for small start-ups and entrepreneurs.
All too frequently though the commentators wish to pitch the angel investor against the venture capitalist but there are more similarities and shared values between these two investors than many recognise. What’s more, a consideration of angel investing today provides a useful overview of today’s venture capital market and, more importantly, highlights how this landscape has changed over the last decade.
Rise of angels and the serial entrepreneur
What we are seeing today is a vibrant start-up scene with serial entrepreneurs successfully helping the next generation of entrepreneurs create and launch businesses.
With new enterprise hubs emerging in the UK like Tech City, and a growing number of incubator programmes being launched, it could be argued there has never been a better time to seek funding as an entrepreneur. Angel investors, particularly those who have built and sold their own business, provide ‘smart’ money to a business. Angels typically become personally involved, bringing their own experience to the table to help the entrepreneur and management team develop the business while avoiding some of the pitfalls that the angel themselves may have previously encountered. This additional non-financial support and mentoring can be invaluable.
However, one of the obvious challenges for angel investors is that they are likely to have a limited amount of personal capital to invest. What is encouraging to see today though is angels increasingly syndicating together to provide funding of £500,000 to £1.5 million – a sum beyond the reach of most single angel investors.
More on Octopus Investments:
- Video: Alliott Cole on cultivating a VC partnership
- Octopus Investments hits the slopes with backing of The Fashion Collective
Successful angel investors also have a route to raise additional funds alongside their committed capital through the Angel CoFund. So are these angels starting to replace the venture capital industry? The short answer is no. But, what the rise of angel investors is doing is highlighting how the venture capital industry has changed over recent years and why now, more than ever before, angels and venture capitalists share common ground.
Changing face of UK VC
Cast your mind back ten years ago and the UK venture capital market occupied a very different landscape to the one today. There are very few of the names that were around then that continue to invest in early-stage high-growth companies today.
The successful venture capital funds at the beginning of the millennium, the likes of 3i and Apax Partners, have moved upstream into the buy-out and private equity space, utilising cheap debt to manage greater sums of money focused on larger deal transactions.
Conversely, the smaller funds exposed to the dot-com boom have subsequently disappeared as a result of poor performance. This has led to a new breed of venture capital investor one born out of the entrepreneurial and angel investor market.
More on angel funding:
- Angel backers from B&Q and Multimap.com invest in Wazoku
- Betfair founder backs Footfall123
- Sherry Coutu joins angels at Duedil
The rise of the serial entrepreneur, those prepared to invest their own cash following successful realisations or, in some cases, to create venture capital funds, has brought a fresh approach to venture capital. These types of venture firms, rooted in a history of angel investing and entrepreneurship, have come to the fore in the last few years since the credit crunch. Many of today’s venture capitalists have invested their own money as angels before formalising their investment approach through venture capital funds – be it through Venture Capital Trusts, like us at Octopus, or other initiatives, such as the Enterprise Capital Funds programme.
The question is now whether these new venture funds can invest successfully, deliver good returns and raise further funds. Certainly this looks as though it will be the case with promising strong portfolios and headline exits being recorded. Partly as a function of timing and the credit crunch many of these venture firms have been investing through the recession.
As stated, historically, investing at a time of economic gloom has led to the best vintages of venture capital funds and greatest returns for investors. Add to this the gathering momentum in the entrepreneurial community that we are witnessing here in the UK, and there is potentially the perfect outcome for these funds with solid, well managed businesses developing at a time when there is the greatest amount of available talent to hire.
These firms are the new venture capital houses created by entrepreneurs who have a passion for supporting the next generation of UK smaller companies, who started investing their own money as angels before moving on to manage other investors’ money. They understand the entrepreneur’s needs and they understand the investor’s needs. Long live the angel investor, or should I say venture capitalist. Without them we would not have the start of what could become a dynamic venture capital market in the UK.