Published: August 2016
Business Angels are an important source of equity finance for new and emerging entrepreneurial businesses. Business Angels are individuals who invest their own money directly in new companies, often providing the first round of equity capital once the entrepreneur has consumed funding from personal savings, friends and family, and the public sector. Business Angels also provide ‘smart money’, taking a hands-on approach to investing, providing advice, insights, knowledge and contacts to entrepreneurs.
The island of Ireland has a significant and growing Business Angel market, benefiting from a well-developed support infrastructure, including tax incentives. Key to this infrastructure are established Business Angel groups and networks, notably HBAN, an all-island network which focuses principally on the Republic of Ireland, and Halo NI in Northern Ireland.
However, to date there has been limited detailed information on Business Angel investing on the island, in part, because of its intrinsic nature, where individuals often invest privately on their own or in small ad-hoc groups.
Against this background, InterTradeIreland commissioned SQW Ltd, supported by academic specialists, to undertake a study to provide evidence on: the characteristics, investment patterns, behaviours and attitudes of Business Angels on the island; the outcomes of Business Angel investing (particularly evidence on ‘exits’); and the role of tax incentives and other supports in supporting Business Angel investing. The study was also tasked with developing a series of recommendations to improve the market for Business Angel investing on the island.
The work drew on the views of over 100 individuals involved in Business Angel investing, via an online survey and interviews with Business Angels, and consultations and a workshop with economic development policy stakeholders and practitioners from across the island of Ireland.
Scale of the Market
A definitive assessment of the scale of the Business Angel market on the island of Ireland is not possible owing to the challenges in recording and tracking all Angel investment (with no formal obligation for Business Angels to report on their investments). Moreover, not all investments are made through managed Business Angel groups and networks.
However, data from HBAN/Halo NI (that is, Business Angel investment delivered via HBAN and Halo), and complementary estimates from the European Business Angel Network (EBAN), which draw on a wider range of sources of investment, suggest that the scale of ‘visible’ Business Angel investment is in the region of €10-20 million pa. Importantly, the HBAN/Halo data indicate that both the volume and value of Business Angel investments has increased over the 2009/15 period (see Figure 1 on page 9 of the report).
It is uncertain what proportion of the total Business Angel market this ‘visible’ investing represents. EBAN estimates that across Europe a 10% ratio applies (that is, visible investment accounts for 10% of the total market), but this will vary across places and may well be higher on the island of Ireland, given the well-developed nature of HBAN and Halo. Given this, if it is assumed that the ‘visible’ market accounts for 15% of the total market, Business Angel investing on the island of Ireland is estimated to be between €70m and €120m annually, with around 330 firms securing investment.
Characteristics, Investment Patterns and Approaches
On characteristics, the survey data suggest that the stock of Business Angels on the island of Ireland is largely male (over 90%), and generally middle-aged, with over two-thirds of survey respondents aged 45-64. The high proportion in this age group is not unexpected; Business Angels need money that they can afford to risk, business experience and know-how, and the time to provide support to businesses in which they invest, all more realistic for those in mid/late-careers.
This general profile recognised, Business Angels bring a wide range of experiences, with very different ‘backstories’ in terms of their own Business Angel journeys. Importantly, there are differences between those investing on a full-time basis and those investing alongside pursuing an active career. Put simply, there is no such thing as an ‘average’ Business Angel. Investing can also often be a ‘stop-start’ process, with other priorities (work-related and/or personal) impacting on the flow and scale of investing, alongside the need for time between investments to see how they develop and mature.
Across the island of Ireland, there appear to be a modest number of ‘serial Business Angels’ making multiple investments at high values, with a ‘long tail’ of those investing in one/two businesses, with lower investments. From the study’s survey cohort of over 50 Business Angels that had invested in firms, the ‘top five’ most active accounted for over a quarter of the investments, and two-thirds of the value of investments. Whilst this ‘shape’ of investment is a well-established feature of Business Angel markets, it does emphasise on the island of Ireland the need to increase the number of Business Angels with broader investment portfolios, where the chances of positive overall returns are enhanced.On patterns of investment and investment approaches, four key points emerged:
- Levels of cross-border investing on the island are, in absolute terms, modest, and within jurisdiction’ investing appears far more common. Possible explanations for this behaviour include the distance involved in cross-border investing, making it harder to engage physically with the entrepreneur, a lack of visibility of opportunities over the borders, a focus on ‘giving something back’ to their local area as a driver for Business Angel investment, and uncertainty over regulatory and tax considerations in cross-border investments.
- Investments are generally made in a number of related industries, although rarely one single industry. Although ICT and related digital industries were the most common sectors invested-in by survey respondents, Business Angels indicated they invested typically in a number of related industries. Angels not focusing on specific industries were likely to be from a Professional Services background, bringing less industrially-specific sets of experience and expertise to the investment table.
- Investing in groups and syndicates is increasingly common, but sole investing remains important. A high proportion of Business Angels surveyed indicated they were a member of a network or syndicate, reflecting in part the distribution and promotional channels used to advertise the study’s online survey. However, individual investing remained an important part of the mix, even among individuals who were parts of a network or syndicate.
- Engagement and involvement with equity crowdfunding among Business Angels on the island of Ireland is currently low. A small proportion of Business Angels on the island of Ireland engaged by the study had invested via an equity crowdfunding platform, but this was not regarded (presently) as a ‘serious’ alternative to traditional Business Angel investing. In part, this arose because the modest scale of investment was not attractive in providing potential returns on investment. The evidence also suggests that the equity crowdfunding market is regarded as too early-stage, with inexperienced individuals on both the demand and supply-sides. While some Business Angels are getting involved, the majority are waiting for the market to mature and ‘find its level’ and, in the case of Republic of Ireland in particular, for the regulatory landscape to respond as that jurisdiction currently has no legal framework for equity crowdfunding.
Behaviours, Attitudes and Exits
On behaviours, Business Angels on the island of Ireland demonstrate mixed levels of engagement with firms’ post-investment, reflecting their different characteristics and investment approaches, although consistently the ‘offer’ is more than simply a financial investment. A majority of the Business Angels surveyed self-identified as ‘active’ investors, and qualitative interviews indicated that support provided typically included industry- and business-related knowledge and expertise, advice on strategy and brand development, technical assistance, and
providing advice on treasury management e.g. cash-flow, follow-on funding etc.
Factors influencing the level of engagement included the specific context of the individual investment, including whether this was a single investment or via a group/syndicate (in which the role of Lead Investor was important); the maturity of the investment; the number of other investments in the Business Angel’s portfolio, and relative priorities; and the level of need/ demand from the investee business. Taken together, the evidence suggests that Business Angels on the island of Ireland are committed to providing ‘smart money’, however, the intensity and nature of post-investment behaviour is tailored to each individual investor.
On attitudes, feedback from Business Angels was that the volume and flow of opportunities had been building over recent years, consistent with evidence on the increase in the scale of market cited above. Whilst the quantity of opportunities was not acting generally as a constraint on investment, the quality story appeared rather more mixed, with some evidence that the quality of opportunities was acting as a barrier to investing. Recognising that significant variation in the quality of opportunities will always be an inevitable part of the mix, the study’s view is that there may be a case to consider how the consistency of quality of opportunities can be enhanced, particularly around the investor readiness and realism of the entrepreneurs.
The literature on Business Angels has focused traditionally on characteristics and the level of investment into businesses. There has been very much less focus on the outcomes of Business Angel investing, and particularly the extent to which ‘exits’ are achieved, that is, when the financial value that has been created by the investment in the business is extracted, or the Business Angel secures a capital return on their investment. But exits matter fundamentally; no exits mean Business Angels have no cash to reinvest, and no (or few) exits means no positive or demonstrator signals to attract more individuals to become Business Angels. Moreover, a lack of exits means there are likely to be limited economic impacts from the companies that have been funded by Business Angels.
This recognised, the study’s research indicates that Business Angels on the island of Ireland are generating positive exits from their investments. As set out in the graphic above,(see page 11 in full report) of the 54 Angels responding to the study’s survey that had made an investment, 14 identified positive exits.
Loss-making exits were more common than positive exists, but this is not unexpected; angel investing is a risky business, and the number of positive exits may increase as live investments start to realise exiting gains. Loss-making investments are also likely to emerge before profitable ones. Indeed, the survey data indicate that it takes time for exits to be realised: 70% of Business Angels making their first investment before 2011 had realised at least one positive exit by the time of the survey in late 2015, compared to 15% of Business Angels that had made their first investment after 2011. This demonstrates the need for ‘patience’ in Business Angel investing, a characteristic that, helpfully, was evident in the majority of the Business Angels on the island of Ireland engaged in the research.
Incentives and Support
The tax and regulatory landscape for Business Angel investing, be this in terms of personal and/ or business regimes is complex generally, and is asymmetric on the island of Ireland. Specifically, the key incentives in scope are the Enterprise Investment Incentive (EII) in the Republic of Ireland, and the Enterprise Investment Scheme/ Seed Enterprise Investment Scheme (EIS/SEIS) in Northern Ireland. The EIS/SEIS incentives, are, in broad terms, seen consistently as the more ‘attractive’ to investors by those in the Business
Angel community on the island.
However, in both jurisdictions, tax incentives are regarded clearly by many Business Angels as a key part of the case for involvement in this form of investing. Almost half of the Business Angels surveyed reported that they would stop making Business Angel investing if all tax incentives were removed, and a third reported that they would scale back their investing.Whilst tax incentives may matter, they are not the ‘be all and end all’ of Business Angel investing. Four points are important here:
- The tax incentives in place on the island appear to impact on the total scale of investment that Business Angels are willing to allocate to investing, but they do not influence generally individual investment decisions, or the sector within which Business Angels invest. This is consistent with evidence from elsewhere on the role of tax incentives in Business Angel investing.
- While effective tax incentives are regarded as important in an absolute sense, other factors are equally important. Most notably, the quality, viability, and commercial potential of the entrepreneur and business idea, were regarded by many of the study’s Business Angels as equally or more important factors in making investments than the potential for mitigating risk or maximising returns through tax incentives.
- While improving tax incentives was regarded as important for Business Angels (particularly in Ireland), improving other elements of the landscape for Business Angel investing factors were also important, including enhancing the quality of start-ups seeking finance, and improved investment readiness for investors.
- There is limited robust evidence on the impact, additionality and Value for Money of tax incentives as a policy instrument for supporting Business Angel investment, including their effect on firm growth or performance. Further, there are risks associated with tax incentives, their perceived benefits include risk mitigation but whether encouraging investment in higher-risk firms is always desirable may be questioned, and the less attractive tax regime in the Republic of Ireland may in fact incentivise Business Angels to make more thorough and commercially-driven investment.
It is also worth noting that the asymmetry between the tax incentives on the island is regarded as a barrier to further cross-border investing, particularly in limiting the extent to which Northern Ireland-based Business Angels consider making investments south of the border. There is also uncertainty on who can avail of tax incentives in a cross-border investment i.e. whether it is possible for cross-border investors from Northern Ireland to avail of the UK’s tax incentives when investing in the Republic of Ireland (and vice versa); greater clarity on this issue is required.
Developing the Market
In concluding, five Strategic Recommendations are made to improve the market for Business Angel investing on the island of Ireland. These are summarised below; specific detail on underpinning actions to progress these recommendations are provided in the Full Report for consideration by partners across the island.
- Strategic Recommendation I. Increase the profile and policy-leverage of Business Angel
investing among key decision makers across the island of Ireland, placing it at the core of
enterprise and economic development thinking.
- Strategic Recommendation II. Enhance the scale and improve the functioning, of the cross-border Business Angel market on the island of Ireland, with a view to raising the number of Business Angels that consider actively investing in the neighbouring jurisdiction.
- Strategic Recommendation III. Broaden and deepen the pool of ‘active’ Business Angels on the island of Ireland, leading to more individuals becoming Business Angels, and a more diverse cohort of Business Angels.
- Strategic Recommendation IV. Enhance the capacity and support to those groups both providing and seeking Business Angel investment, leading to a more mature, sophisticated, and efficient market.
- Strategic Recommendation V. Develop the underpinning infrastructure for Business Angel investing, including the evidence base. Reflecting the importance of tax incentives, particularly in supporting the development of cross-border investing activity, one ‘Policy Recommendation’ is also offered: Policy-makers across the island of Ireland should continue to give serious consideration to the case for harmonising, and enhancing the symmetry of, the tax incentive ‘offer’ for Business Angel investing on the island of Ireland. This should be focused on considering a ‘levelling-up’ of incentives in Ireland to the UK’s EIS/SEIS model.
Delivering against the recommendations (and underpinning Actions) will require robust governance and delivery arrangements, and further work to move them on to a deliverable agenda for progress. Partners to the study are therefore encouraged to consider the most appropriate form of delivery to ensure that actions are delivered in an integrated and consistent way; this should include specific consideration of the roles of InterTradeIreland, HBAN and Halo NI. Further, while delivery against specific actions will be the responsibility of a range of agencies, it is important that relevant Government Departments, both in Ireland (Department for Jobs, Enterprise and Innovation) and Northern Ireland (Department for the Economy), retain an overall strategic role to ensure that progress is made and delivery is realised.
Click here to download the full report: Funding for Growth – The Business Angels Market on the Island of Ireland