Over-the-top valuations and a perceived high risk of failure are the key reasons why angel investors don’t back early-stage companies, according to a new report.
The study also finds that market-related factors, such as unproven demand and an unclear competition landscape, are also reasons why investors hold back from making investments.
According to the report, which interviewed almost 700 European angel investors, so-called impact investments, which cover money put into start-ups with the aim of generating a social or environmental effect as well as a financial gain, are seen as primarily resulting in losses or a low return. This is despite a number of studies that suggest the contrary.
Overall, 82 per cent of respondents said impact investments would likely result in a financial loss.
The report was conducted by the European Business Angels Network (Eban), which represents 146 member organisations in 41 countries, including Ireland.
It found that projects seen to have good traction are risk reducing while investment readiness is the key factor for investors in deciding whether to back a start-up.
"Identifying and addressing the areas of risk that investors pay attention to will surely create more investment in start-ups in the short term, and, very likely, more global success stories in the mid to long term," Eban said.
“There is a strong need to develop tools, based on input provided by investors, that can help start-up entrepreneurs better identify, quantify and mitigate the risks related to their businesses,” it added.
