Angel funding starts to slowly roll again

One of the major casualties to become very badly burned as a result of the last tech crash was the angel investor – especially the ones that invested their own hard earned cash. Some of their investee companies simply folded due to lack of follow-on funding, and those that managed to survive had their equity holding grossly diluted by the bigger larger VC funds. This resulted in angels curtailing their investment appetite and spending time nursing a few remaining portfolio companies. But now with some notable and successful exits, the picture is beginning to change.

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Xenos, the Welsh angel network, is reporting that over £1 million was invested via its network in 10 new deals, an increase of over 50% over the last two years. According to Leanna Jones, the Xenos network manager, “The figure indicates that the confidence continues to return to the Welsh business angel community and across the Welsh small caps market.”

She added that ‘the amount of investment per deal has also gone up, as well as the number of syndicated deals’. Syndicated deals allow a group of angels to co-invest in a single deal to minimise risk and share costs of due diligence and legal paperwork. The angel investment activities are also helped by recent changes in finance promotion rules, which allows for self certification, with the higher amounts qualifying for EIS tax relief (Enterprise Investment Schemes, which provide 20% income tax relief).

The trend was further corroborated by the recent announcement from OION (Oxford Investment Opportunity Network), which reported £2.5 million investment in 13 companies in 2005 via its network. The success of its model is being repeated elsewhere as it tries to repeat the experience in the Reading area via its Thames Valley Investment Network (TVIN), Southampton and Hampshire via its Solent Investment Opportunity Network. It recently separated out the really early seed stage network as Oxford early investment, which will helps companies raise up to £150k.

The positive news flow is also encouraging from other areas: the Yorkshire association of business angels is reporting an investment of £477k in 10 companies, which leveraged a further £1.7 million in matching and co-investment funds. Of the 10 companies, three were new start-ups and four were early stage S3/R1. It looked at around 67 opportunities in 2004. Various other networks and small investment corporate finance houses are reporting similar trends.

The Chilli perspective
Although the total amount may look like a small trickle compared to VC investments in R1 and R2 stages, it must be remembered that the average amount raised for S2, S3, USO3 and 4 are usually in the range of £50k to £200k. The trend of rising angel investment is heading in the right direction, after an almost complete absence for a few years. These small amounts are used as anchors to leverage more funding for the companies via loans, matching funds and co-investments to raise the total amount to double the initial amount. This would provide enough fuel and sufficient cash for a start-up to put enough tangibles on the table (initial IP protection, prototype, model or customer demonstrator, two or three staff) for a proper R1 VC round.

From an angel’s point of view, being a lone angel investor is becoming quite tricky due to the resources required for adequate, good quality deal flow, networking time, risk sharing, due diligence, legal paperwork and precedence in angel market terms and conditions. Angel networks that can source good quality deal flow and support services can be very useful armour in the selection and filtering process.

Having said that, angels, whether through a network or by themselves, still face major issues – like gross dilution as the companies raise further rounds and brings in new investors, information rights, regular management reports, board representation, decision on exits and being locked in through lack of liquidity or unwillingness by original founders and shareholders.

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