January 2015

Sponsored by Barclays, BVCA, Deloitte and ESRC

A report by the Centre for Entrepreneurs and the UK Business Angels Association

Research undertaken by the Enterprise Research Centre Centre for Entrepreneurs

Launched in October 2013, the Centre for Entrepreneurs think tank promotes the role of entrepreneurs in creating economic growth and social well-being. It is home to national enterprise campaign, StartUp Britain.

The Centre is a non-profit joint venture between FT columnist and serial entrepreneur, Luke Johnson and the Legatum Institute - a non-partisan charitable think tank best known for its annual Prosperity Index.

It is supported by a prominent advisory board including serial entrepreneur and investor Brent Hoberman, Dale Murray, Supper Club founder Duncan Cheatle, Betfair founder Ed Wray, and Smith & Williamson partner Guy Rigby.

UK Business Angels Association

The UK Business Angels Association is the national trade association representing angel and early stage investment in the UK (England, Wales and Northern Ireland). It has superseded the BBAA and was re-launched in its new strengthened role in July 2012.

Each year private investors account for between £800 million and £1 billion of early stage investment in the UK – the single largest source of early stage capital in this country. The angel community in the UK is also very diverse reflecting a range of different models and approaches including angel networks, small groups and syndicates; super angels; individual investors and new models such as accelerators.

The UK Business Angels Association represents and connects all those involved in the angel investment market, including early stage VC funds, Banks and also non traditional sources of finance, as well as advisers and intermediaries; policy makers and academics with a view to ensuring a coherent ecosystem for financing the growth of start-up and early stage businesses.

2 FOREWORD

Britain is becoming a nation of angels. As business formation rates continue to hit new records, more and more individuals are choosing to invest their capital in Britain’s engines of growth: entrepreneurs.

Anecdotally, the impact of recent market our online survey to share details of their developments and government policies portfolios. 42 angels engaged in in-depth have led to an explosion in angel investing telephone interviews to discuss their - particularly when examining the Seed investment behaviour and 28 syndicate Enterprise Investment Scheme or the and network leads representing 8,000 rise of . But until now, angels engaged in a separate online survey. research that examines the impact of such developments and the level of angel The resulting report, ‘Nation of angels: investing was lacking. assessing the impact of angel investing across the UK’ published by the ERC makes To fill that gap, the Centre for for encouraging reading. The findings - Entrepreneurs (CFE) and the UK Business summarised over the following pages Angels Association (UKBAA) partnered to - demonstrate the crucial role that angel undertake a major research project under investors are playing in the economy, the ‘Nation of Angels’ campaign banner. bringing risk capital, business experience Over the past nine months, UKBAA and and skills to support the growth of small CFE have worked with the Enterprise businesses. Research Centre (ERC) to understand the changing demographics and behaviour of We are grateful to Barclays, the British angel investors, the relationship between and angels and their investee companies, and Association, Deloitte and ESRC for the economic and social impact of angel sponsoring this project; to Prof Mark investing. Hart, Prof Mike Wright and the ERC for undertaking the research; and to Maserati Our research achieved unprecedented for providing prizes to incentivise angels scale. A record 403 angels responded to to engage in the survey.

Luke Johnson Jenny Tooth Chair, Centre for Entrepreneurs Chief Executive, and Risk Capital Partners UK Business Angels Association

3 COMMENT

TIM HAMES RICHARD HEGGIE Director General Head of Proposition and BVCA - The British Private Delivery for Entrepreneurs Equity and Venture Capital Barclays Wealth and Association Investment Management

This report is pioneering, encouraging and The UK business angel market is widely challenging. It sets out a very different recognised as one of the most mature landscape for angel investment than was globally. Its importance to overall economic true a decade ago and offers a clear sense growth is increasing and as the report of direction for what the angel arena will illustrates there is evidence to suggest that look like a decade hence. Its fundamental this trend is likely to continue. We believe message is change. Change in who angels one of the potential drivers of this increase are. Change in how angels invest. Change is a rising number of entrepreneurs who in whom angels invest with. Change, are going through a phase of wealth though, is both welcome and logical. Much realisation and their desire to pass on their of what angels like to support could be business expertise and invest in potentially described as disruptive innovation. It is high growth start-ups. rational, therefore, that the angel scene itself is open to both disruption and This is reflected in an overall rise of angel innovation. Change is our ally and not our investors with the population becoming enemy. more diversified with regard to regional location, gender and age. However, these There are important lessons to be learnt positive developments will need to be here for all of those who work with angels tracked in this changing market and and who want to see them succeed. This throughout the current economic cycle. is true for venture capital as well. Our sector needs to recognise the enhanced role that angels now have and ensure that our relationship with them evolves in a positive fashion. There are real similarities between the findings outlined in this report and those for venture capital uncovered by the BVCA’s own work on the venture space, Venture Evolved. I am convinced that through closer co-operation between angels and VCs we can create a far better climate for entrepreneurs and their ideas.

4 COMMENT

MARK DOLEMAN Head of UK Entrepreneurial Business Deloitte

As a leading global professional services However the survey throws a few provider working with many and varied surprises. Angels are getting younger and organisations, we are also determined to slightly less white and male. This can only have our roots well established in local be welcomed and we all have a duty to communities. The angel community has work together to find ways to accelerate developed into a vital cog within the this trend. What the survey does not give economic wheel. Entrepreneurialism is no us the answer to is the big question – EXIT. longer seen as a destination for eccentrics There is more liquidity in the market, but and drop outs. Society heaps praise on has it reached the normal range for an those prepared to take risk and reach for angel investee company? My experience is their dreams. The dramatic increase in new that achieving good value on exit for many start-ups, incubator hubs and alternate is still a challenge and options are limited. sources of finance reflect the change that It is vital that as a community we continue has occurred. At the source of this are to lobby relevant organisations to provide the angels that provide the much needed the platform for successful businesses to finance and mentoring. obtain development capital and enable angels to re-invest in their core market. The survey supports a number of intuitively known thoughts. For example, I would like to thank everyone involved the government tax incentives are in producing this report and the valued enormously helpful. The improved insight. economic sentiment is being reflected in the angel portfolios and that technology is a favoured area of investment probably both pull and push.

5 HEADLINE FIGURES

Fig. 1.0

30 UK business The profile of angels is angels by age changing, attracting a 25 more diverse group of investors, with more 20

women and younger 15 individuals becoming 10 angels.

5 Encouragingly, the proportion

of women angels at 14% is an 0 increase on the 7% observed in 2008. However, the UK still <25 years 65+ years ranks below the US where 25-34 years 35-44 years 45-54 years 55-64 years in 2013 20% of angels were women and there is still a long way to go to achieve a significant gender balance 14% of angel investors. 44% are young angels aged under 45 Female and almost three-quarters are aged 54 years or less. Fig. 2.0 In contrast, survey evidence from 2008 found the median UK business angels by age of angels was 53 years. gender

86% Male

2 “Wiltbank, R. E. 1 Sohl, J. (2014) (2009) Siding with The angel market the angels: Business in 2013: a return angel investing – to seed investing, promisingoutcomes Center for Venture and effective Research, University strategies, London: of New Hampshire. NESTA”.

6 15+ years experience Fig. 3.0 12.3% Investment experience of angels 11-15 years experience 11.4% 6-10 years experience 17.5% 1-5 years experience 58.8%

Fig. 4.0 UK business 1.0% White and Asian angels by 1.9% Chinese ethnicity 7.2% Other

0.5% White and Black African 0.5% Bangladeshi

4.3% White Irish 77.9% White British 6.7% Indian

CALL TO ACTION

Work to raise further awareness about angel investing to attract a wider range of individuals with the finance and experience to become angels, particularly identifying lead angels. Build capacity and professional skills through training workshops and online learning.

7 Fig. 5.0 Investment location by angels Angels are investing more widely and internationally, geographical distance seeming to become less important in the investment decision. 58% 86% Outside Inside Previous studies had indicated that home region home region angels tend to invest in businesses (in the UK) (in the UK) close to their home base.

Fig. 6.0 Investment location by angels

Alongside the changing demographics of angels, they are making more investments than ever before.

Overall, the findings indicate a much higher rate of investment activity than a 2008 survey, which showed a median of 2.5 investments.3 20% 22% Both inside and Outside the UK outside the UK

3 Wiltbank, op. cit. 60% 53.3% Fig. 7.0 Fig. 8.0 Number of 50% Number of investments by investments by angels last year 30% angels 40% 25.7% 25% 24.3%

30% 20% 16.7% 15.7% 20.7% 15% 12.4% 20%

10% 10.1% 11% 5.2% 10% 5% 4.4%

0% 0% 0 1 2 3-5 6-10 11+ 0-5 6-10 11-15 16-20 20-50 Number of investments in 2014 Number of investments

8 However, the market remains less CALL TO ACTION developed outside London and the

South East. Increase efforts to build angel capacity in the regions Additionally, London and the South East outside London and South appear to be attracting newer, younger East, building effective hubs angels more so than the rest of the UK. for angel investment.

All the rest of the UK London / South East 100%

Fig. 9.0 80% Location of business angel investments by 60% sector 44.4% 50.0% 56.7% 57.7% 60.7% 61.3% 61.5%

40% 63.2% 62.9% 62.8% 64.4% 67.9% 67.6% 70.0% 69.0% 70.6% 70.6% 72.1% 71.4% 76.9% 77.4% 77.8% 78.6%

20% 81.8% 85% 15% 27.9% 28.6% 29.4% 29.4% 30.0% 31.0% 32.1% 32.4% 35.6% 36.8% 37.1% 37.2% 38.5% 38.7% 39.3% 42.3% 43.3% 50.0% 55.6% 0% 18.2% 21.4% 22.2% 22.6% 23.1%

Film Other Gaming Security Leisure

Social Media Food ICT& Drink Software Other Creative Fashion & Design Finanical Services Mobile & TelecommsFinancial Technology TransportConsumer & Logistics Electronics Energy & Environment ManufacturingHealthcare Biotech (other)& Meditech - Life Sciences Digital Media & ContentPaper, Print Publishing Advanced Manufacturing Property & Construction Retail / e-comm / m-comm

Professional & Support Services

1% 14% 31% 28% 19% 8% London / South East Fig. 10 Angels by age and location 2% Rest of 10% 25% 31% 21% 10% the UK

0 20 40 60 80 100

<25 <25-34 <35-44 <45-54 <55-64 <65+

9 Angels are co-investing with a wide range of sources, especially crowdfunding. Crowdfunding Other Angel 43.3% Syndicates Angels have been shown to be 36.5% co-investing with a range of different finance sources including VC and debt finance.

However, it is clear that a considerable proportion of angels and especially younger ones have responded to the opportunities offered by online platforms and Loan / Debt VC Funds crowdfunding to source deals and co-invest. In fact, London is the 23.1% 23.6% world leader for raising capital through crowdfunding platforms, beating cities like New York and San Francisco.4

Grants Angel CALL (e.g. TSB) Co-Investment TO ACTION 20.2% Funds

19.2% Work with key finance players to ensure that angels can connect with all relevant sources of co-investment, including crowdfunding, to address entrepreneur funding requirements from start-up None Alternate to exit. 17.6% Finance 12%

4 Crowdfunding Centre

10 Angels are increasingly investing in businesses 1 in 4 that achieve a social angels (25.7%) have impact. invested in ventures that They not only bring risk capital, business experience and skills have a social impact. to support the growth of small businesses, but also create social impact through their investments. One in four angels (25.7%) have CALL TO ACTION invested in ventures that have Work with all key players to build greater a social impact. Social impact awareness and opportunities to invest investments account for almost in social impact businesses. 23.8% of total investment deals of the angels in the survey.

SEIS and EIS tax breaks have played a big role in encouraging 21% investment. 55% EIS None 9 out of 10 angel investors report using the SEIS/EIS schemes, and almost 80% of all investments were made using EIS 24% (55%) or SEIS (24%). SEIS

CALL TO ACTION

The next government should ensure the continuation of the EIS and SEIS. They should engage with the angel and entrepreneur communities to address any challenges or make any improvements relating to the operation of these schemes.

11 Angels provide Fig. 11 - Growth status of current investment portfolios by angels ongoing support to scale and grow their Likely to exit investee businesses. in next year 22.8%

Angel investors were also Negative asked the growth status of growth current investments and 31.2% about likely returns on the investments. This allows for No Real an assessment of the likely growth 57.9% impact angel investments will have in the future. Reasonable growth 63.9% Angels identified significant growth in their portfolio High businesses and low negative growth, and are confident they growth 45.0% will see higher than expected returns and lower levels of negative returns than seen in previous studies.

Fig. 12 - Growth status of current investment portfolios by investments CALL TO ACTION Likely to exit in next year 5.0% Negative Work with the growth entrepreneur 9.0% community and those advising No real and supporting growth 33.0% entrepreneurs on how to successfully Reasonable attract angel growth 34.0% investment to accelerate their growth. High growth 19.0%

12 CALL TO ACTION

Facilitate access to liquidity to enable angels to re-invest in the next wave of UK entrepreneurs.

24% 4% <1 x >20 x 3% 15-20 x

Fig. 13 Growth status 5% of current 10-15 x investment portfolios by investments

19% 6-10 x 44% 1-5 x

Fig. 14 Expected returns on investments made since January 2012 by angels >20 x 15-20 x 10-15 x 6-10 x 1-5 x <1 x

44% 70% 45% 18% 12% 15%

13 Fig. 15 - Growth status and sector (% of investments)

100 3% 3% 2% 100 3% 4% 2% 4% 4% 4% 4% 4% 5% 6% 5% 6% 5% 5% 4% 5% 4% 6% 6% 7%

8% Negative

9% growth 35.6% 12% 12% 13% 13% 16% 15% 16% 15% 12% 15% 15% 15%

16% 80 80 18% No real 17%

20% growth 20% 19% 21% 24% 22% 22% 21% 20% 28%

Reasonable growth 60 60 26% 26% 28% 20% 32% 33% 24% 27% 34% High 23% 33% 29% 31% 33% 32% growth 38% 31% 43% 33% 39% 42%

41% 40 40 35% 31% Likely to exit

40% in next year

20 20 26% 32% 32% 37% 26% 34% 35% 33% 32% 36% 46% 37% 28% 47% 26% 41% 42% 31% 34% 45% 42% 38% 37% 45% All of the survey 47% results in this report are from Wright, 9% 8% 12% 10% 4% 12% 10% 15% 11% 12% 10% 8% 14% 8% 9% 8% 6% 5% 17% 7% 10% 7% 5% 7% 10% 0 0 M. Hart, M. Fu, K.

Film (2014) Nation of Other Leisure Gaming

Security Angels: Assessing the Impact of Angel Social Media ICT Software Food & Drink Other Creative investing across Financial Services

Fashion and Design the UK, Enterprise Retail / e-commerce Mobile & Telecomms Financial Technology Transport & Logistics Consumer Electronics Manufacturing (other) Biotech - LifeSciences Healthcare & Medtech Energy & Environment Paper, Print, Publishing

Digital Media & Content Research Centre. Property & Construction Advanced Manufacturing Professional & Support Services

14 METHODOLOGY

UKBAA and CFE commissioned the Enterprise Research Centre to undertake the Nation of Angels research. An online research survey ran between June and October 2014 receiving 403 responses - making it the largest survey of business angels in the UK.

Alongside the online survey of individual angels, an additional online survey was launched in October 2014 to known angel syndicate and network leads in the UKBAA Membership, covering 8,000 investors.. Finally, a series of telephone interviews were also carried out with 42 angels who had participated in the larger online survey and had agreed to be contacted to share further detailed information on their investments and their role within the business. The responses are from wide cross-section of angels across the country and a range of sectors.

The Enterprise Research Centre (ERC) was established in 2013 to answer one central question, ‘What drives SME growth?’ Our mission is to become the focal point internationally for research, knowledge and expertise on SME growth and entrepreneurship. ERC develops and brings the evidence base on SMEs and enterprise together, and works with policy makers and practitioners to ensure research shapes better policies and practices to help ensure SMEs grow. The centre is a collaboration between 5 University Business Schools: Warwick, Aston, Birmingham, Strathclyde and Imperial College and currently receives funding from the Economic & Social Research Council, the British Bankers Association, the Dept. for Business, Innovation & Skills and Innovate UK.

15 Centre for Entrepreneurs UK Business Angels Association 11 Charles Street, 5th Floor, Chancery House, London, W1J 5DW 53-64 Chancery Lane, London, WC2A 1QS

@CFEntrepreneurs @UKBAngels Email: [email protected] Email: [email protected]