Heaven sent
October 21, 2009
Business angels are ordinarily discreet investors who prefer to work behind the scenes. But earlier this month the Business Angels Association in France held a congress in Paris to discuss how the country's investor network can work together more effectively. Panellists faced a rapt audience of around 350 investors, eager to learn how to identify the next Google and bring it to maturity.
"A business angel is somebody who invests in a company typically in the early stage," said Philippe Gluntz, president of the French Business Angels Association. "They not only finance it, but help to develop it. They put in their own money, and bring all their experience free of charge."
Gluntz has been a business angel for seven years. He could be enjoying retirement after a long and successful career in computing, but he prefers to live his passion for developing new companies.
About 40 percent of business angels are retirees like himself, Gluntz says, while another 40 percent are wealthy younger entrepreneurs - people who started very successful companies and sold them off for substantial sums. Left with cash to invest and time on their hands, they use their business acumen and know-how to help other start-ups.
"(The investor) hopes to have a capital gain at the end of six to 10 years, and will also typically be on the board or a member of a strategic committee," he explains.
Risky but lucrative
The reality is that many young businesses fail, in which case, the business angel loses everything he or she invested. But those start-ups that do succeed allow the business angel to double or triple the investment. In a small number of cases - perhaps 20 percent - the business angel can recoup 20 times their initial outlay.
Business angels tend to become involved in companies at a very specific phase of their development.
First, entrepreneurs try to raise what's often referred to as "love money." They convince people close to them to invest funds they'll probably never see again. This generally follows the "3 F rule": friends, family and fools.
Business angels generally come aboard after that initial round of financing, but still long before venture capitalists or banks will even deign to look at these emerging companies.
Anastasia Smidtas' company is just about at the business angel stage. She attended the congress in the hope of finding a business angel and learning more about how they function.
Smidtas started an elder services company with her husband earlier this year. It offers technological help to people who are physically incapacitated, but want to stay in their homes.
Some 200 seniors have already signed up for the service, and she employs 10 people, whom she is able to pay thanks to 500,000 euros (around $750,000) she received in government financial support. But now it's time to raise more funds to develop the company further.
"At this stage, we need 600,000 euros," Smidtas says. "And we are also preparing the next step which will be in 2010, when we'll need between 2 and 5 million."
She says she would also welcome outside advice on how to run her young company.
"It's the first time I've created a company, so the advice would be appreciated," Smidtas says. "Choosing a business angel means choosing a person we'll be working with on a daily basis - it's like getting married!"
Marriage of interests
That's one of the key difficulties in the world of business angels. If entrepreneurs aren't willing to take the angel's advice, it can cause conflicts and possibly bring the company down. It's a problem familiar to David Grahame, head of Linc Scotland, an association of business angels in the United Kingdom.
"One of the worst things one of my managers can say when he comes out of an interview with an entrepreneur is: 'He's not a listener,'" Grahame says. "Entrepreneurs have to be strong willed. But they have to be able to listen, or be what the Americans call 'coachable.' We would rather have good people with an average idea than a really good idea with average people."
Surprisingly, the business angel community has been weathering these difficult economic times remarkably well. They generally invest for the long term, and so are less exposed to temporary dips in economic activity.
The French Business Angels report that their members invested more this year than they did in 2008. They just wish they were more well known, so that young entrepreneurs would know to knock at their door before getting turned down by the banks.
Report: Genevieve Oger, Paris (dc)
Editor: Sam Edmonds