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On the wings of angels
11:44am Thursday 14th April 2011 in Innovation
Chris Baker, manager of Oxford Early Investments, highlights trends towards syndication and co-investment that could boost access to finance for early stage businesses
The availability of equity finance for early stage businesses remains challenging and the situation in Oxfordshire is no exception.
Notwithstanding current economic circumstances, since the dotcom boom, equity investors and fund managers have moved away from venture capital towards private equity, with larger deals being arranged for more established companies.
But there is clear evidence the supply of venture capital provided by high net worth individuals — business angels — has become increasingly important over the past decade, and I believe we are now witnessing a significant trend towards angel syndication in our county.
Oxford Innovation has been catering for the business angel community and early stage businesses since 1995.
Its three angel investment networks, Oxford Early Investments (OEI), Thames Valley Investment Network (TVIN) and Oxford Investment Opportunity Network (OION), have a track record in matching high growth potential companies with investors.
The investment networks hold 20 meetings each year, giving 100 businesses the opportunity to pitch to the investor members.
Recent deals include £170,000 secured by Tokamak Solutions, a new fusion research company at Culham, and £600,000 raised by Languagelab.com which uses virtual world technology to enhance foreign language tuition.
Investing in early stage businesses is high risk compared with other investment opportunities and, in recognition of this, tax incentives, notably the Enterprise Investment Scheme (EIS), are available to such investors.
In practice, angel investors can mitigate risk by only considering propositions that have the potential to yield very high returns, are in areas where an investor has experience and expertise and by adopting a portfolio approach in the expectation that the failures will be outweighed by the successes.
There are two further ways in which an angel investor can reduce risk: by investing as part of a syndicate and by investing alongside business angel co-investment funds.
Investing as a member of a syndicate provides an opportunity to combine the due diligence contributed by the syndicate membership, access deals requiring more funds than an individual angel can offer and spread investment across a wider portfolio.
Our experience is that there is an increasing appetite among our members to pool risk and resources, and scale up their investments. And as our angel networks have more than 150 active members, including venture capital trusts, funds and corporate venturers as well as business angels, we believe there is now plenty of scope for syndicate building.
We already facilitate syndicates by providing angel members with free access to workshops on topics including corporate governance in angel-backed companies, co-investment and syndication, due diligence, deal structuring, EIS relief, exit strategies, intellectual property, term sheets and valuations.
In future, we plan to take an active lead in the formation and management of syndicates.
Business angel co-investment funds are special funds that follow investment decisions by business angels by providing matched, or partially matched, funding alongside that provided by the angels.
The advantage to the managers of co-investment funds is that they gain entry to an investment category offering potentially very high returns.
Normally, the due diligence costs to provide comfort to a fund manager for small investments in early stage firms cannot be justified and a funding route is closed off.
But business angels can supply that comfort and due diligence — as evidenced by their willingness to back their judgement with their own money.
Oxford Innovation has previously participated in a highly successful co-investment programme with Bank of Scotland Growth Equity that provided a strong incentive to syndicates to close deals and invest greater sums with professional support.
Many business angel networks around the country have been supported by the Regional Development Agencies (RDAs).
With the closure of the RDAs, it is estimated that more than 60 per cent of these angel networks will lose their grant funding, and will no longer be able to operate, or have to scale back their operations, resulting in a reduction in the level of investing in small businesses and reduced opportunity for investors.
The Government has recognised part of the solution to alleviate this reduction in capacity is to expand business angel co-investment funds.
From a policy perspective, providing access to such co-investment funds supports new business creation and early stage business survival and creates jobs.
In a harsh economic environment, the net returns on such support offer the prospect of funds becoming ‘evergreen’ — recycling returns into subsequent business investment opportunities.
We welcome Government support for investment mechanisms that have been proven to work, and we intend to take the lead in supporting our business angel members with syndicate formation, as well as gaining access for them to co-investment funding.
The result will be an increase in equity finance for early stage businesses in Oxfordshire.
n Contact: Oxford Early Investments, 01865 261490. Web: www.oxei.co.uk n This page is co-ordinated by Oxford Innovation: www.oxin.co.uk