BUSINESS:An angel is someone who has been sufficiently insightful to have made some money through their understanding of an industry
MOST OF us categorise angels as messengers, spiritual intermediaries between man and God, showing mere mortals the way to salvation. For entrepreneurs, angels are a somewhat different species: business intermediaries between man and mammon. To us, an angel is someone who has been sufficiently insightful and committed to have made some money, through their understanding of a particular industry; and is keen to invest in, coach and mentor others.
Silicon Valley has had a long tradition of business angels. The original momentum may well have been a consequence of the "traitorous eight" who left Shockley Semiconductor Labs in 1957 to form Fairchild, and subsequently a family of semiconductor companies (including Intel and AMD) inter-related by startup finance among mutual acquaintances. Last February, Business Weekmagazine ran an article observing that 40 one-time Google employees have, since 2005, nurtured over 200 fledgling companies between them, including Twitter, Foursquare and Facebook. Last month, SiliconValley.com published an analysis of what it called the "Paypal Mafia" whose nurtured startups include YouTube, LinkedIn and Yelp.
The angel community here in Ireland is still at an early stage. A number of entrepreneurs have made minor fortunes from technology startups, and a small number of others have made themselves wealthy through participation in some of the multinationals established here. Some go on to reinvest their wealth by completely committing themselves to new startups as serial entrepreneurs. Others stand back from a full-time executive commitment, and are content to invest both their money and their experience in a portfolio of startups, usually also with board participation. Those who have “seen the movie” have much to offer less experienced entrepreneurs, through their personal war stories, experiences of international competition and personal networks.
Seed-stage finance and business angels are the critical foundations to nurture a dynamic pool of high-potential young companies. I suspect many believe, on the contrary, that venture capital is the critical catalyst of an innovation economy. Venture capital is a factor – but venture capitalists tend to be risk averse compared to seed stage and angel investors; venture capitalists tend to invest only once a company has built its product or offering, gained an initial set of customers and needs further investment to capture its global market opportunity. In contrast, seed stage backers frequently invest when the company has just been formed, its product or offering is still a nice PowerPoint presentation, and there is no customer to yet give feedback and reassurance on the quality of the company.
Venture capitalists typically invest well over €1 million on a single transaction. Angels typically invest €100,000 or more in each transaction, sometimes as a syndicate. Angel investing is high risk, but risk is mitigated. Investment can be spread over a portfolio of companies, and the deep experience and personal network of the angel(s) involved can be tapped to nurture young companies and their executive teams.
The Innovation Taskforce (of which I was a member) devoted considerable time to the challenge of fostering a national angel culture for seed-stage investment in young Irish-based companies. One of the key recommendations is to re-focus Enterprise Ireland and to prioritise its efforts on start-up and early stage activities. In contrast, export-focused enterprises with high growth potential can tap risk growth capital including venture capital and private equity, both domestic and especially international. Enterprise Ireland should not be a substitute source of risk growth capital, and companies good enough to compete globally should be able to tap global risk capital. Enterprise Ireland should reserve its limited investment capacity for seed stage funding.
The Taskforce recommended a five-year, State-supported seed stage capital scheme, which will fill the current national gap in private seed stage capital. Normally, Enterprise Ireland invests alongside other investors; the Taskforce recommended, for this new scheme, that co-investment not be a requirement. The scheme will be measured by its economic impact, rather than by fiscal returns, and will be reviewed after five years with a view to withdrawing the intervention.
Concurrently with this five-year scheme, business angel funds will be specifically nurtured from private investors, including formal approval by the State (probably via Enterprise Ireland) and administrative support. One of the roles these business angel funds can play is in helping encourage overseas entrepreneurs to relocate to Ireland to form their ventures, thus augmenting the pool of indigenous entrepreneurs while positioning Ireland as one of the best places in Europe to form high growth export-focused start-ups.
The Innovation Taskforce delivered a powerful message to the Taoiseach and his Government, and indeed to the community at large. Seed stage financing and personal business mentors likewise bring messages to young entrepreneurs: here is what you need to do; here is who you need to contact and work with; here is some money to get you going. Showing young entrepreneurs the way to success, being the catalyst between young entrepreneurs and wealth creation, and reassuring them that it can be done, are ways in which mere business mortals can really become angels.
