A new report into Business Angel investing on the island of Ireland has been unveiled by InterTradeIreland. The research into this important source of equity finance for new and emerging entrepreneurial businesses provides a first assessment of this type of funding and creates an evidence base for the further development of supports for the market.
As Business Angels are individuals who invest their own money directly into ‘high-potential’ companies, it has historically been difficult to track this market. However, investors within the Business Angel networks, principally HBAN, organised on an all-island basis and focusing on the Republic of Ireland market, and Halo NI, active for the most part in Northern Ireland, as well as those outside formal networks, have participated. The resulting unique study details the characteristics, investment patterns, behaviours and attitudes of Business Angels, and offers a series of recommendations for market improvements.
The ground-breaking report was based on the views of more than 100 individuals involved in Business Angel investing. Grainne Lennon, operations manager for InterTradeIreland, explains: “This comprehensive report strengthens our understanding of this complex market and its vast scale. While its ‘visible’ market value, where Business Angels have openly invested in opportunities, is in the region of €10-€20 million annually, this is likely to account for only 15% of the total market. The remaining 85% of the sector may take the total market value to between €70 and €120 million annually, with approximately 330 firms benefitting from Angel investment.
“While there is no ‘typical’ Business Angel as each investor’s background to investment is different, it has been found that most Business Angels across the island are male and middle-aged. This is not unexpected as those within this demographic have often cultivated successful careers and may be in a better position to be able to afford to ‘risk’ funds to invest. In the majority of cases, they are also offering ‘smart money’ to growing businesses. By taking a ‘smarter’ investment approach, being more hands-on by providing additional business benefits, such as advice, insights, knowledge and contacts, Business Angels are reaping greater, faster rewards.
“Investments are usually made in industries relevant to the Angel’s own background and interests, with ICT and digital industries found to be the most common sectors. Interestingly, there appears to be a modest number of ‘serial Business Angels’ across the island making multiple investments at high values. Of those surveyed, the top five most active Angels accounted for more than a quarter of investments and two-thirds of the value of investments.
“Angel investing is a risky business but, encouragingly, almost 30% of Business Angels surveyed are generating positive exits from their investments. Patience is a necessary characteristic for investors as it can take a number of years before returns are even possible and loss-making investments are likely to emerge before profitable ones. We take the view that the number of positive exits may increase as live investments start to realise exiting gains.”
Grainne continues: “It is clear that tax incentives are a crucial investment benefit, forming a key part of the case for involvement in this form of investing. Almost half of the Angels surveyed reported that they would halt Angel investments if all tax incentives were removed and a third stated they would scale back if this were the case. However, there are cross-border differences between the Employment and Investment Incentive (EII) in the Republic of Ireland and the Enterprise Investment Scheme/Seed Enterprise Investment Scheme (EIS/SEIS) in Northern Ireland, with the latter consistently seen as more attractive to those in the Business Angel community on the island.
“We would take the view that while dealing with these differences in tax incentives is important, tax is not the be all and end all of investment decisions. The quality, viability and commercial potential of the entrepreneur and the business idea; mitigating risk and maximising returns should also be taken into consideration.”
Each jurisdiction has its trends and general characteristics and the report shows how the level of cross-border Business Angel activity is modest. Grainne adds: “Investing ‘within jurisdiction’ allows each Angel easier access to entrepreneurs and logistically is seen as a simpler approach. At present, it is not clear if tax incentives and advantages are transferable across borders in this augmenting sector. Greater clarity is most definitely required in this respect. In addition increasing the visibility of investors and opportunities across the border may lead to a potential increase in the level of cross- border investments.
“The report has drawn additional recommendations for the market, such as the need to increase the number of business Angels with broader investment portfolios as well as enhancing the quality of start-ups seeking finance. Strategically, positive advancements in this funding chain can be progressed if Business Angel investing is placed at the core of enterprise and economic development thinking by increasing the profile and policy-leverage of the topic, along with building cross-border opportunities and support structures around these.
“InterTradeIreland will work with all relevant parties across the governmental and non-legislative spectrum to assist the realisation of this report’s recommendations. Through successful delivery, the Business Angel community can become a more transparent source of equity finance for even more flourishing firms and individuals seeking to take their business to the next level.”
The full report can be found at http://www.intertradeireland.com/researchandpublications/