Angel Investing: A Growing Phenomenon Around the World

By guest author Karen E. Wilson

A new book from the Organisation for Economic Co-operation and Development (OECD) looks at seed and early stage financing for start-up companies and notes the impact of the recent economic crisis. With banks reluctant to provide loans to startups and venture capital firms preferring to invest in later stage companies, a growing class of experienced entrepreneurs and business people are stepping in to fill this funding gap. These “angel investors” not only provide funding but also leverage their expertise to provide mentoring to the entrepreneurial teams in which they invest, according to a new OECD report.

The book, Financing High-Growth Firms: The Role of Angel Investors, looks at angel investment around the world and includes more than 100 interviews with entrepreneurs, policymakers, and academics from 32 countries. The findings show that angel investments are increasing around the world, and while precise data is hard to collect, the report points out that estimates of the total angel investment market in a number of countries are greater than traditional venture capital investment, particularly for seed and early stage financing.

Angel investors support a much wider range of innovation than VC firms as they traditionally invest locally and in a wider range of sectors than venture capitalists. This means there is broader investment coverage both in terms of industry sectors and geography (angels live everywhere, not only in areas where VCs have offices, which tend to be concentrated in a few technology or science hubs). However, it also means that angel investors can be involved in companies that are not necessarily technology intensive or high growth as well as companies in later stages of development. Like VCs, angel investors tend to invest in a portfolio of companies.

The report notes that women are greatly underrepresented in the angel investment community. Only 5% of angel investors in Europe are women and only 13% in the U.S. While groups like Golden Seeds in the U.S. and GoBeyond in Europe are working to engage more women in angel investing, more efforts are needed. The book suggests that if a greater number of women were investors, more women in high-growth firms would be successful in accessing angel and venture capital funding.

Start-ups from universities are often touted as an important source of deal flow for angel and venture capital investors; however, these firms tend to be more research rather than commercially focused and therefore do not often succeed in securing equity financing. This highlights the broader issue of a potential disconnect between innovation and entrepreneurship policies. Innovation policies tend to focus on R&D rather than the broader definition of innovation, which was noted in the recent OECD Innovation Strategy, while entrepreneurship policies focus on the teams, culture, and ecosystem but not always on the translation of innovative research into firms.

Government policies to boost angel investment are becoming increasingly popular, including tax incentive schemes, such as the ones in the U.K. and France, and co-investment funds like those in the Netherlands, Scotland, and New Zealand. The book discusses these and other policies in further detail, highlighting some of the pros and cons of these approaches while emphasizing that any government intervention must be geared toward providing incentives for greater private sector involvement.

While policymakers and others tend to focus on the venture capital market, which is more visible than the angel market, data indicates that angel investors will continue to be critical to overcoming the financial and growth challenges facing entrepreneurs. This, in turn, will contribute to job creation and economic growth – greatly needed today in Europe and other regions around the world.

This segment is a part in the series : Angel Investing