Business Angel Investing


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An overview of business angel investing and angel investor networks, with a focus on Singapore

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Business Angel Investing

  1. 1. © Wong Poh Kam Trends in Business Angel Investing Prof. Wong Poh Kam Chairman, Business Angel Network Southeast Asia Ltd (BANSEA) & Director, NUS Entrepreneurship Centre
  2. 2. © Wong Poh Kam Brief Outline • Business angel investing as a mode of financing for early-stage, knowledge- based/high-tech start-ups • Profile of angel investing in Singapore • Angel Networks • Business Angel Network Southeast Asia (BANSEA) • Government schemes to promote investment in early-stage start-ups
  3. 3. © Wong Poh Kam Funding of New Businesses • Equity vs. loan financing • Knowledge-based/high tech/creative business: “intangible” assets not acceptable as collaterals by banks • Staging of equity fund raising (seed, first round, second round,…, IPO or other forms of exit) • Sources of Investors (own, family & friends, angel investors, early stage VCs, later stage VCs, corporate investors)
  4. 4. © Wong Poh Kam Financing Mechanisms at different stages of the Start-Up process High Founder, Friends, and Family Business Angels Level of Venture Capitalists Investment Non-financial Risk Corporations Assumed Equity By Investor Markets Commercial Banks Low Seed Start-up Early growth Established Stage of Development of Entrepreneurial Firm Source: Onasbrugge et. al. (2000)
  5. 5. © Wong Poh Kam Professionally Managed VC Funds vs. Informal Investment • Although much attention has been paid to the role of professionally managed VC funds, the potential contribution of the informal investment sector has been under-researched in most countries • Even in the US, where the formal VC industry is the most advanced, angel investors have played an important role in the development of high tech start-ups in the Silicon Valley • Worldwide, it has been estimated by the Global Entrepreneurship Monitor (GEM) Study that informal investing contributed 3 times more than VC investment. • The role of informal investment is more than just money at the critical early stage; it provides the mentoring, coaching to guide the start-up to reach the next stage for funding by the formal VC firms
  6. 6. © Wong Poh Kam Role of Informal Investors in the US & UK • Estimates from the Global Entrepreneurship Monitor (GEM) Study over 2000-2006 suggests that as much as 4- 5% of adult population aged 25-64 in US engaged in some form of informal investing • One estimate indicated that there are about 260,000 active angel investors in the US in 2007 (UNH Centre for Venture Research). • In the UK, estimates of business angels range between 30- 50,000 in the 1990s, investing 3 times more than the amount invested by UK VCs in start-ups (Van Osnabrugge(1998)) • Estimates from GEM2000-2005 Study suggests that 2-3% of adult population aged 25-64 in UK engaged in some form of informal investing
  7. 7. © Wong Poh Kam Informal Investing in Other Countries • According to GEM survey over 2000-2005, most countries have informal investment rate of between 1.5%-5%, with a mean rate of about 3% • In Asia, China had informal investment rate of over 5%, Hong Kong and Taiwan about 3%, and Singapore 1.5-3.5% • Globally, about half of all informal investments are by family members/relatives, while about half are by people unrelated to the family of the entrepreneurs
  8. 8. © Wong Poh Kam Relationship of Investor to Investee, Global Average 2000-05 (GEM Study) % Close family member 43.7 Other relative 8.9 Friend or neighbor 29.2 Work Colleague 8.9 Stranger 9.3
  9. 9. © Wong Poh Kam Rate of Informal Investing in Singapore 2000-06 Year Informal Total Investment Entrepreneurial Rate (% of Activity (TEA) Adult Rate (% of Adult Population) Population) 2000 1.3 4.2 2001 2.0 6.6 2002 3.6 5.9 2003 1.6 5.0 2004 2.7 5.7 2005 3.5 7.2 2006 3.0 4.9 Source: Wong et. al., GEM Singapore Reports, 2000-06
  10. 10. © Wong Poh Kam Relationship of informal investor to investee, Singapore 2000-06 2000-04 % 2005 % 2006% Related (Family Investors) 41.7 35.9 53.0 Close Immediate Family 31.0 22.9 35.3 Other Relative 10.7 13.0 17.7 Non Related (Business Angels) 58.3 64.1 47.0 Work Colleague 5.2 6.1 6.8 Friend/ Neighbour 49.6 52.7 34.6 Stranger/Other 3.6 5.3 5.6 Total 100.0 100.0 100.0 Source: Wong et. al., GEM Singapore Reports 2000-2006
  11. 11. © Wong Poh Kam What does an experienced angel investor look for? • At least 10x expected return for very early stage deal • Quality of business plan (the 3 Cs) • Commitment & passion of entrepreneur • Quality & Experience of management team • Valuation • Likelihood of follow-on investments
  12. 12. © Wong Poh Kam Exit Mechanisms for Investors • IPO (typically after a lock up period) – Organic growth – Roll-up • Mergers & Acquisition by a Corporate Group – For Cash – Share Swap • Trades Sales • Hold for Dividend Yield …try to avoid • Living Dead
  13. 13. © Wong Poh Kam Importance of Business Angel Networks • Many Angel Investors Participate in Formal or Informal Networks – Information exchange/knowledge & practice sharing – Exchange of deal flows – Joint Investment/Pooling of risks – Forum for networking & professional development
  14. 14. © Wong Poh Kam Examples from North America & Europe • Informal Business Angel Network, e.g. – Silicon Valley Band of Angels, California – Angel Forum-Vancouver, Canada – Tech Coast Angels • Investment Clubs, e.g. – The Angels’ Forum (TAF), Silicon Valley – CommonAngels, Boston • Formal Private Equity Fund • Investment Advisory Services/brokerage & Incubation Services • Online Investor-Entrepreneur Matching & Networking Services (e.g., • Association of angel networks (e.g. Angel Capital Association (US), European Business Angel Network (EBAN), Australian Association of Angel Investors (AAAI))
  15. 15. © Wong Poh Kam Business Angel Network (Southeast Asia) (BANSEA) • Established in 2001 in Singapore as a Public Company limited by guarantee by a group of Singapore-based angel investors, with network connections to investor groups in Thailand, Malaysia, Vietnam and Indonesia • Membership is open to bona-fide angel investors, recommendation by an existing member
  16. 16. © Wong Poh Kam Business Angel Network (Southeast Asia) (BANSEA) • Website • Receive and circulate business proposals to members; A sub-committee vets submitted plans for presentation at networking lunch • Regular networking lunch, usually with a guest speaker and invitation of 3 start-ups to make business plan pitches & network; Members can invite 1-2 guests to attend • Mentoring service • Participate in various activities (e.g. serving as judges in business plan competition, providing inputs to government policy making etc) • Angel investment forums and workshops
  17. 17. © Wong Poh Kam Singapore Government Schemes to Promote Angel Investing: SEEDS • Lack of early stage risk financing is main bottleneck to development of high-tech/knowledge-based/creative start-ups • Government co-investment to leverage private sector investors who are taking the risk themselves • The SEEDS Program was introduced in 2000 by EDB, now administered by SPRING – 1:1 Co-investment between S$75K to S$300K with third party investors who are not related to the early stage start-ups; increased to 1.5:1 and S$750K (cumulative) in 2009 – If there is a profitable Exit within 5 years, the Scheme will first recover its investment cost + accrued interests, and give one-third of any remaining surplus gains with the third party investors – If no profitable exit after 5 years, SEEDS will seek to dispose of its investment by selling back to entrepreneurs or other investors • Over 150 start-ups have been funded under SEEDS by end ‘08
  18. 18. © Wong Poh Kam Government Schemes to promote Angel investing: The case of Singapore • The BAS Program (administered by SPRING) was introduced in 2005 – Co-investment of S$10 million with 3 or more experienced angel investors who collectively commit to invest at least S$10 million over 5 years – 1:1 Co-investment of S$1 million per deal – In 2009, co-investment terms improved to 1.5: 1, up to S$1.5 million per deal • Three active BAS Funds have been co-funded so far – Sirius Capital – BAF Spectrum – Accel-X
  19. 19. © Wong Poh Kam Early-Stage Venture Capital in Singapore • Although Singapore has attracted a decent amount of Venture Capital funds to base their operations in Singapore, these funds are predominantly later- stages funds, and are investing mostly outside Singapore – A large proportion of the US$1 billion TIF fund-of- fund established in 1999 has gone to US-based VC funds, with extremely limited investment activities in Singapore – Most members of SVCA do not invest in early stage • In Q4 2008, the NRF announced a new early-stage VC fund co-investment scheme, providing 1:1 matching fund of up to S$10 million to each of 6 selected new VC funds