Who wants to be an angel?

At first glance, the question may appear as rhetoric, but the angel being referred to is not a being with a halo and wings. Instead, these angels are high net worth entrepreneurs who usually seek to invest their own funds in private companies, typically at the seed or early stages. . They want to be involved with start-ups without the sleepless nights of start-ups. Many serve as active advisors or mentors for entrepreneurs and provide additional relationships to aid the business’ growth. Angel investors typically look for companies with strong growth potential, solid management teams and sufficient information about related markets so their value can be reasonably assessed. Angel investing helps fuel the economy and creates new jobs. In the US and other developed markets, it is the largest source of capital for early stage entrepreneurs, and it is the most likely source of seed and early stage capital. Google, Amazon, Apple and Starbucks are some of the most well-known companies to start with angel investment funding.

Global Trends in Angel Investing

Recent research done in the US and Europe point to the following trends in angel investing:

  • Angels are investing in diverse industries, mainly high tech.
  • Angels are getting a chance to invest in deals that used to go to venture capitalists.
  • Syndication among angel groups is increasing as a strategy to spread financial risk.

In the post financial crisis world, the opportunities for angel investing is far diminished from what obtained say five years ago. In a recent study by the Center for Venture Research at the University of New Hampshire, it was found that the average deal size shrunk by 31% during the first half of 2009, while the total funds invested fell by 27% during the same period as compared to same period for 2008.

Business angels have historically played in instrumental role in fostering the development of small innovative firms, particularly in the ICT sector. The economics of high technology firms are more difficult to evaluate than the fundamentals of ‘brick and mortar’ businesses. Indeed, not only are innovation-related assets difficult to value in monetary terms, but they also have little salvage value in the event of commercial failure. Therefore, innovation activities have limited collateral value in obtaining a loan. It is for this reason that business angels become best positioned to bridge the financing gap by providing the access to equity financing that supports the company’s early growth while providing entrepreneurs with invaluable guidance in navigating the business arena through the angels’ own expertise and network base.

Angel Investors in T&T

Angel investing in Trinidad and Tobago is already occurring within informal networks of wealthy, investor-savvy businessmen and women as well as primarily to people known to the investor “friends and family”. However, as T&T’s economy is now transforming its economic base into one that is diverse and knowledge-based, more new emerging technology businesses will need equity capital to reach their potential, particularly in the early stage of the business cycle.

T&T has realized the clear growth potential globally for new businesses that are knowledge-driven and innovative and so a compelling business case can be presented for establishing a formal angel investing network locally. The competitiveness of firms and nations in the foreseeable future will depend on the ability of people to leverage their creative and innovative ideas to develop and deliver solutions through products and services.

However, past studies on the feasibility of formally establishing a locally based angel network have identified a number of constraints that are on both the supply and demand side.

Among the supply constraints factors are the lack of a formal public policy that favours business angel activity and the general reluctance of prospective angels to be identified given personal security issues. On the demand side, the deal flow for new technology companies with high growth potential is less than desirable. An angel investor would prefer to be exposed to a broad pool of investment opportunities from which to choose. Also, entrepreneurs tend not to pay due attention to what investors will need in order to evaluate and commit to investing. Again, the problem of delivering key information in a timely manner creates more difficulties for both the investor and the entrepreneur.

At this point it should be stated that if forming angel networks was easy, everyone would be doing it. Nevertheless, it is widely recognized that endless opportunities abound for both angels and entrepreneurs in new wealth creation and increasing employment and economic diversification — a win-win situation for all.

While the Government is an important driver in establishing a local angel network, by no means should it be their sole responsibility. The recommended state strategy should include the introduction of public policies that would encourage angel investing. Investor readiness and education is also a crucial element, particularly in the area of business plan preparation and mentor programs for new entrepreneurs. Finally, the facilitation of formal training opportunities for prospective angels, such as the Power of Angel Investing seminar would bolster the third pillar in the foundation to launch an angel investing group locally.

As this article has shown, there are pros and cons to angel investing; yet despite these differences, the advantages seem to considerably outweight the disadvantages. With the world emerging from the recent economic crisis – which has undoubtedly led to a more cautious approach to traditional business financing – it is now the perfect time to capitalize on new, viable opportunities for angel investors that may not be readily embraced by venture capital firms. Angel investing may now get the chance to take on a new role and become the “new deal” in start-up financing in T&T.

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