Strat. Change 18: 249–258 (2009) Published online in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/jsc.852
Strategic Change
Business angels: who they really are Veland Ramadani South East European University in Tetovo, Macedonia 䊉
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Financing is a critical issue for the survival and development of small and medium-sized enterprises. Business angels play a key role in financing these enterprises, especially innovative ones with high growth potential. Business angels fill the gap between founders, family, and friends on one side, and institutional venture capital funds on the other side, as a financing source. Business angels invest a large amount of money in seed, start-up, and early-stage enterprises. Business angels are important for small and medium-sized enterprises because they provide more than money. They are hands-on investors and contribute their skills, expertise, knowledge, and contacts in the businesses they invest in. They are wealthy persons with great business experience, willing to invest and offer their wealth and knowledge to owners and to entrepreneurs to start or develop their businesses. Business angels like to remain anonymous, so many ideas cannot be implemented. To address this issue, many countries establish business angel syndicates and networks to facilitate the process of matching entrepreneurs and business angels. Copyright © 2009 John Wiley & Sons, Ltd.
Profile and attributes of business angels The term ‘business angels’ comes from Broadway. At the end of the 19th century, rich investors began providing funds for directors to finance production of new musicals and plays. Besides financial benefits, their motivations came from their love for the theater and the opportunity to meet and socialize with famous actors, writers, and producers. These investors secured high-risk capital and were motivated by something larger than money. Even today, writers, actors, producers, and musicians often depend on the altruism of others to promote their projects and careers.
* Correspondence to: Veland Ramadani, South East European University in Tetovo, Faculty of Business Administration, 1200 Tetovo, Macedonia. E-mail:
[email protected]
Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change
Business angels became a critical source of financing risky but promising ideas and projects beyond Broadway. Just to illustrate: in 1874, Alexander Graham Bell used funds from business angels to found Bell Telephone; in 1903, five business angels helped Henry Ford, with $40,000; in 1977, a business angel invested $91,000 in Apple Computers; in 1978, a business angel provided initial funding for the Body Shop chain. Companies such as Amazon (see Figure 1), the Mining Company, Go2Net and Firefly owe their survival to business angels, to their funds and their expertise and experience (Van Osnabrugge and Robinson, 2000). In the literature there are several definitions for business angels that do not differ from each other drastically. According to Fiti et al. (2007), business angels are individuals who have available financial means and are ready to invest in entrepreneurship ideas. They
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Source: Munck and Saublens (2006), p. 66.
Figure 1. Chronology of the financing of Amazon.com (1994–1999). Source: Munck and Saublens (2006), p. 66.
Companies such as Amazon, the Mining Company, Go2Net and Firefly owe their survival to business angels, to their funds and their expertise and experience
include retired managers who were awarded large payments or compensation as well as entrepreneurs and managers who became rich from their business. Mason and Harrison (2008) define the business angel as ‘an individual, acting alone or in a formal or informal syndicate, who invests his own money directly in an unquoted business in which there is no family connection and who, after making the investment, takes an active involvement in the business, for Copyright © 2009 John Wiley & Sons, Ltd.
example, as an advisor or member of the board of directors’. Business angels represent private investors who, during their active work, have gained wealth and experience and are ready to invest in new enterprises in order to help young entrepreneurs and profit simultaneously. Business angels have usually had a successful career, but because of age or some other reason they cannot devote themselves to their business anymore. In their thoughts, there is always one motto present: ‘there is still more to be earned’. This attitude can always lead to the possibility of losing a lot of money, but that does not prevent them from accepting the challenge. Characteristics of business angels Although the population of business angels is quite diverse, their profile is not difficult to describe. In almost all research on business Strategic Change DOI: 10.1002/jsc
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angels, the same or similar demographic features emerge: Gender. Studies conducted in various countries confirm that most business angels are male; for example, in the USA, 95% are; in Great Britain, 99%; in Germany, 97%. In Hungary, 100% are male (Kosztopulosz, 2004). This may be because such a small number of women have created successful enterprises, or have held executive positions in large companies. Age. Business angels are generally from 40 to 65 years old. It is assumed that by this age entrepreneurs have gained enough experience and gathered enough money, and all that is left for them is to choose whether to be ‘relieved of their duties’ or to become business angels who are economically active. Hill and Power (2002) have concluded in their research: ‘The average age of the subjects is 49 years. To be specific, 54% were between 46 and 55 years old; 25% were between 36 and 45 years old; 13% were between 56 and 65 years old; 4% were between 66 and 75 years old and 4% were between 25 and 35 years old. None of the subjects claimed that they are older than 75 years old. Education. Business angels are typically people with a university diploma and/or professional qualifications, but angels with masters and doctorates are rare. According to many researches, about 75% of business angels have a university degree and about 20% enrolled in university but never finished their studies.
Business angels are typically people with a university diploma and/or professional qualifications, but angels with masters and doctorates are rare Occupation. Business angels come from various professional fields. According to some research (Alterovitz and Zonderman, 2002), Copyright © 2009 John Wiley & Sons, Ltd.
25% have worked in finance as financial directors, accountants, etc.; 20% have worked in the machines and equipment sector; the remaining 55% come from areas such as medicine, production, construction, biotechnology, etc. Business angels also display the following characteristics: Wealth. This is one of the main preconditions of becoming a business angel. Business angels invest an average of £10,000 per deal and generally have a portfolio of two to five investments. In the USA, one in every three angels has a net worth of at least one million dollars whereas in Great Britain 19% of business angels are millionaires (Mason, 2006).
The fact that business angels invest personal assets distinguishes them from institutional investors of high-risk capital Investing personal assets. The fact that business angels invest personal assets distinguishes them from institutional investors of high-risk capital, whose funds come from sources such as pension funds, banks, university endowments, and insurance companies that have legal obligations to exercise caution and invest in less risky ventures. They make risky decisions. Most business angels have extensive and often successful experience in managing companies. They are ready to make different decisions, which often carry a large dose of risk. Even though they were once successful entrepreneurs, or were executives of large companies, business angels do not always possess the required knowledge and skills for successful management of the companies they invest in. They invest locally. Business angels prefer to invest in enterprises near their homes, usually within a 50–100 mile radius or 1–2 hours of driving time. Just to illustrate, in Great Strategic Change DOI: 10.1002/jsc
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Britain, 67% of business angels invest in enterprises that are 100 miles or less from their home or work place. In Norway, it is 48% (Reitan and Sørheim, 2000). Business angels prefer to invest locally so they can visit the firm in which they have invested and see how things are going. Investing in unquoted companies. Business angels invest in companies that are not quoted in the stock market. Because of the high risk, they invest only 5–15% of their assets in such companies. If the investments fail, which they often do, the losses will not affect their lifestyle drastically. Types of business angels The research on business angels indicates that they are quite diverse. For example, Gaston (1989) counts ten types, Benjamin and Margulis (1996) nine types, Mason (2006) three types, and Evanson (1998) five types of business angels. Here we mention the basic types of business angels: • Active angels have experience in investments and continue to search for more investments. • Latent angels are passive investors who have invested in the past, but have not invested in the last three years. • Virgin angels have not made their first investment yet. Sørheim and Landström (2001) identified these types of business angels in their research in Norway, taking as criteria the investment activity and the competencies of the business angels: 1. Lotto angels — Investors with limited managerial and entrepreneurship experience. — Insist on realizing less income and wealth in comparison to other investors. — Invest a small share of their fortune in companies that are not highly ranked in the stock market. Copyright © 2009 John Wiley & Sons, Ltd.
Veland Ramadani
— Media are a significant source of information. Very few use the networks to find information about investment possibilities. — Their involvement in the companies they invest in is very little. — Do not invest in cooperation with another investor, but do so alone. 2. Trader angels — Investors with a high level of investment activity, make an average of four or five investments in a period of three years. — Have limited managerial and entrepreneurship experience. — Insist on realizing high income and wealth. — Invest a significant portion of their fortune in companies that are not highly ranked in the stock market. — Their involvement in the companies they invest in is relatively limited. — The investment period lasts fewer than 3 years. 3. Analyst angels — Possess extensive managerial and entrepreneurship experience, but have a low level of investment activity. — Invest a small portion of their fortune in companies that are not highly ranked in the stock market. — Their friends and colleagues represent a significant source of information. — Realize their investments in cooperation with other investors. — More than two-thirds of these investors invest regionally, in a period of three years. — The investment period lasts fewer than 3 years. 4. (Real) business angels — Investors with a very high level of investment activity, realizing an average of over seven investments in a period of three years. — Extensive managerial and entrepreneurship experience. — Invest in cooperation with other informal investors. — Function as leaders. Strategic Change DOI: 10.1002/jsc
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— Personal and business networks are their primary source of information, and media are rarely used as a source of information. — Investment period lasts longer in comparison with the other three types of investors. — They play an active part in the companies they invest in as members of the board or advisors. Since there are many types of business angels, entrepreneurs, by knowing the features of specific types of business angels, can select a better investor for their enterprises.
Business angels’ motives for investing Most angels have held leading positions or they have managed their own business. Having led a dynamic life, it may be difficult for them to adapt to a passive retirement. The question ‘what motivates these people to enter business again and invest in new and risky businesses’ is essential, and entrepreneurs must
Most angels have held leading positions or they have managed their own business. Having led a dynamic life, it may be difficult for them to adapt to a passive retirement know the answer. Business angels have varied motives for investing in new, risky ideas and projects; for example, expectations for big profits, sense of social responsibility, helping young entrepreneurs to set up their companies, etc. On the other hand, some business angels invest simply for fun and pleasure. In research carried out by Newcastle Business School, it is concluded that money is not the only motivation for business angels. Stephanie Macht, one of the authors of this research project, says: ‘Although two thirds of business angels said that gaining return on investCopyright © 2009 John Wiley & Sons, Ltd.
ment was important to them, more than half also said that the enjoyment of supporting the entrepreneur through their knowledge, skills and network of contacts was a strong motivation for investment’ (Macht, 2007). France Angels in 2003 showed similar reasons for investing as, for example: the chance to add value (to their wealth and to the company they are investing in), helping entrepreneurs set up their own business, contributing their knowledge and experience to local economic development, the chance for reemployment, etc. (see Figure 2).
Business angels basically invest a small part of their wealth in new enterprises so that in case they lose their money, this would not drastically influence their way of life Business angels basically invest a small part of their wealth in new enterprises so that in case they lose their money, this would not drastically influence their way of life. They feel great pleasure when they see that small enterprises which they invest in are working better, when they see that the entrepreneur accepts their advice, which contributes to good financial results. But business angels are not philanthropists. They are motivated primarily by the chance to increase their wealth, by the chance to profit from their investments (see Table 1). Most of the research confirms that business angels expect a return rate of 20–30% from their investments. Bob Bosman, general partner in Angel Investors LP (www.svangel.com) says: ‘I want to earn more. In the new small enterprises, I see opportunities that provide me with good profit. But also the entrepreneur benefits from this. When starting a business, it is necessary to overcome many difficulties, to negotiate with different people. It may be hard for entrepreneurs. I have already gone through that and I can help with this.’ Strategic Change DOI: 10.1002/jsc
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Many business angels invest for non-financial reasons. Altruism represents the key factor for business angels to invest in new enterprises. They feel an obligation to transfer their knowledge and experience to the new generation of entrepreneurs, so that they, too, succeed and acquire wealth. Berry Moltz, a well-known business angel and co-founder of the organization Prairie Angels (www.prairieangels.org), says: ‘During the past, as an entrepreneur, I have achieved great successes, but I have also had failures during my work. Now I want to transfer my experience to others, to help people not to make the mistakes I have made. Now I want
to be a counselor of young entrepreneurs in order to help them make their dream come true.’ Some business angels invest in order to stimulate and develop entrepreneurship in the region where they live, and through this, they can provide more work opportunities and economic prosperity. One study reported that some business angels are motivated by an event that has happened in their life. A business angel’s wife had died from breast cancer. Her husband teamed up with other business angels to finance research for possible breast cancer cures (Hill and Power, 2002).
Source: France Angels, Business Angels Survey 2003, CDC PM, January 2004, sl.22.
Figure 2. Business angels’ motives for investing. Source: France Angels, Business Angels Survey 2003, CDC PM, January 2004, sl.22. Table 1. Business angels’ motives for investing Motives for investing
Males
Females
Supporting the new generation of entrepreneurs Personal satisfaction from involvement in entrepreneurial businesses Growth potential Helping their friends to set up their businesses Generating revenues — now or in the future Supporting the production of goods and services which are useful for society Fun Positive impression, reputation in the community Other non-financial motives Tax incentives
2.10 1.45 1.50 2.60 1.80 2.20 1.95 2.60 2.70 2.05
2.68 1.47 1.58 2.89 1.95 2.84 2.32 2.89 2.95 2.16
1 = very important, 2 = important, 3 = not important. Source: Harrison and Mason (2005), p. 14.
Copyright © 2009 John Wiley & Sons, Ltd.
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Some business angels invest in order to stimulate and develop entrepreneurship in the region where they live, and through this, they can provide more work opportunities and economic prosperity
When and where do business angels invest? Small and medium-sized enterprises go through several stages as they grow: 1. Seed stage. The entrepreneur has an idea or concept for potential profitable business which needs to be developed and proven. 2. Start-up stage. The idea has been developed up to the level which allows commercialization preparation. This stage lasts for less than a year. 3. Early stage. Production and distribution of a specific product or service takes place. This stage lasts up to five years, and business can still be unprofitable. 4. Later stage. The enterprise is already mature and profitable, and it continues broadening. With a continuous high growth, it can become a public company in a period from six months up to one year. One of the greatest contributions made by business angels is that they prefer to invest in enterprises at seed stage, start-up stage, or early stage. In the USA, 55–72% of business angels invest in start-ups or early-stage enterprises. The situation is similar in the UK, although in Sweden business angels prefer to invest in later stages of development (for more information, see Freear et al., 1995). Many angels prefer early-stage enterprises because they are the only enterprises where business angels can have an important and Copyright © 2009 John Wiley & Sons, Ltd.
active role before they opt out from the market. Others prefer start-up and early-stage enterprises because they represent a real challenge for them, similar to gambling. Very often, business angels finance newtechnology enterprises but this is a special type of high-risk business. One UK study found, on the question ‘in which sectors would you invest in 2003?’, business angels answered that they would prefer the following sectors: healthcare, biotechnology, software, and electronics. However, business angels emphasize that they can invest in all sectors (Investor Pulse — Business Angel Survey, 2003). Van Osnabrugge and Robinson (2000)
Very often, business angels finance new-technology enterprises but this is a special type of high-risk business
found business angels who invested in factories for yacht construction, construction of a hockey arena for a semiprofessional club, laundry service stores, etc. Business angels, above all, are interested in the potential for growth, and not in the sector in which the enterprise is active. They invest in those fields where they have knowledge and abilities and where they can give a broader contribution for the development of the enterprises.
How enterprises benefit from business angels First, the amount of money invested by business angels is significant. According to Jeffrey Sohl, manager of the Center for Venture Research (see Sohl, 2003), there are 300,000 to 350,000 active business angels in the USA, who invest $30 billion per year in around 50,000 projects. In the UK, there are 20,000– 40,000 business angels who invest £0.5–1 billion per year in 3000–6000 companies. Sohl Strategic Change DOI: 10.1002/jsc
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Source: France Angels, Business Angels Survey 2003, CDC PM, 2004, sl.17.
Figure 3. Amount of invested capital by business angels in France. Source: France Angels, Business Angels Survey 2003, CDC PM, 2004, sl.17. Table 2. The role of business angels in the development of famous companies Company Apple Computer Amazon.com Blue Rhino Lifeminders.com Body Shop Ml Laboratories Matcon
Business angel
Business
Investment
Value at exit
unknown Thomas Alberg Andrew Filipowsky Frans Kok Ian McGlinn Kevin Lich Ivan Semenenko
computer hardware on-line bookshop cylinder for replacement propanium internet e-mail reminder service body care products kidney medical treatments bulk containers
$91,000 $100,000 $500,000 $100,000 £4000 £50,000 £15,000
$154 million $26 million $24 million $3 million £42 million £71 million £2.5 million
Source: Amis Venture in Munck and Saublens (2006), p. 65.
estimated that the ratio between potential and active business angels is 5 : 1. Figure 3 shows the amount of capital invested by business angels in France. Second, many entrepreneurs are interested in the so-called ‘smart money’, which means that they do not invest only money, but expertise and know-how as well, and are thus more and more ‘interesting’ to entrepreneurs than other sources of capital. Third, business angels have a lot of experience in the business. During their work, business angels have earned many friendships and have created networks of contacts that include successful entrepreneurs, bankers, insurance companies, accountants, etc. (see Table 2). They use these contacts in order to help their enterprises achieve positive financial results. The number and power of business angels is not thoroughly understood yet, although it is of special importance for the small and Copyright © 2009 John Wiley & Sons, Ltd.
medium enterprises and entrepreneurship in general. Therefore, business angels have recently started creating groups (syndicates) and networks which represent associations of business angels. They gather their capital, experience, and knowledge in order to share the risk and invest in bigger and better deals. Business angels’ networks represent organizations whose initial aim is to connect owners of small and medium enterprises with business angels.
Business angels in Macedonia In the last few years, business angels have started investing in countries in transition. In the case of Macedonia, unfortunately, the concept of business angels is present only in books about entrepreneurship and small business management. Among the reasons for this situation: undeveloped market of capital Strategic Change DOI: 10.1002/jsc
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In the last few years, business angels have started investing in countries in transition. In the case of Macedonia, unfortunately, the concept of business angels is present only in books (stock exchange), small number of domestic and foreign investors, bigger risk for investment, untrained and inexperienced management, corruption, inefficient regulations, unfavorable tax treatment for this kind of investment, bureaucratic/administrative obstacles, etc. (for more information, see EBRD, 2006). In order to promote the role and influence of business angels in Macedonia, the following measures are needed: • Raised awareness of the benefits of venture capital and business angels. Considering that in my country business angels are not really known, we need to hold seminars, workshops, publish scientific and professional papers, where all the advantages and disadvantages of this way of financing are explained. • Development of stock exchange. If the stock exchange is not developed enough, if business angels’ shares are not easily sold so that they profit from their investment, they will not be interested in investing in new businesses. When it comes to the Macedonian Stock Exchange, it has a low turnover and low capitalization as a result of the undeveloped economy, as well as insufficient information available for potential investors. The Macedonian Stock Exchange should collaborate with other regional stock exchanges, and develop an ‘over-the-counter market’ characterized by more liberal conditions for quoting for new SMEs. The Macedonian Stock Exchange should offer a special service to collect the purchasing and Copyright © 2009 John Wiley & Sons, Ltd.
selling prices of shares from different dealers and present them to the potential investors. Later, investors could close their transactions through computers, without being linked to brokers. For example, the NASDAQ, Reuters, Telerate, and Bloomberg work based on these principles. • Encouragement of wealthy people to become business angels. There is a group of wealthy people in Macedonia who should be encouraged to invest a part of their wealth in new small businesses. In almost all countries in which business angels are active, a good way to encourage angel investing is tax incentives or tax cuts in the first years of investing. • Affirmation of business angels from other sources of financing. Commercial banks, formal venture capital firms, and other funds should affirm business angels as a specific and important source of capital, because they offer great help in setting up new enterprises. These enterprises, once they are ‘up’, will require financing from these traditional sources during the later stages of development, providing them with a profit from interests, provisions, etc.
Conclusion Business angels are private investors, who, during their active working lifetime, have gained wealth and experience. They are ready to invest in small and medium enterprises in order to help young entrepreneurs and to make profits for themselves. They are especially important during the seed stage and start-up stage of development. As patient investors, they direct the entrepreneur toward the right path in developing the enterprise while providing venture capital and knowledge for the enterprise. Business angels are playing a more and more important role in financing many new businesses.
Biographical note Veland Ramadani is currently studying for his doctorate at the University SS Cyril and Strategic Change DOI: 10.1002/jsc
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Methodius–Faculty of Economics in Skopje, Macedonia where he received his Masters’ in economics. His research interests include entrepreneurship and small business management. He has published 20 papers in peerreviewed journals.
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Copyright © 2009 John Wiley & Sons, Ltd.
Veland Ramadani Hill BE, Power D. 2002. Attracting Capital from Angels — How Their Money and Their Experience Can Help You Build a Successful Company. John Wiley & Sons: New York, NY. Kosztopulosz A. 2004. Informal Venture Capital in Hungary. Faculty of Economics and Business Administration, University of Szeged, Hungary. Macht S. 2007. Business angels offer more than money. http://www.growingbusiness.co.uk, 27.07.2007. Mason CM. 2006. The Life Cycle of Entrepreneurial Ventures, Vol. 2, Informal Sources of Venture Finance. Kluwer: Dordrecht. Mason CM, Harrison RT. 2008. Developing Time Series Data on the Size and Scope of the UK Business Angel Market. BERR, URN 08/ 1152. Munck C, Saublens C. 2006. Introduction to Business Angels and Business Angel Networks Activities in Europe. European Business Angel Network. Reitan B. and Sørheim R. (2000) The informal venture capital market in Norway — investor characteristics, behaviour and investment preferences. Venture Capital: An International Journal of Entrepreneurial Finance 2: 129– 141. Sohl JE. 2003. The private equity market in the USA: lessons from volatility. Venture Capital: An International Journal of Entrepreneurial Finance 5: 29–46. Sørheim R, Landström H. 2001. Informal investors: a categorisation with policy implications. Entrepreneurship and Regional Development 13: 351–370. Van Osnabrugge M, Robinson RJ. 2000. Angel Investing: Matching start-up funds with startup companies. Jossey Bass: San Francisco.
Strategic Change DOI: 10.1002/jsc
