Rise of the Online Angel Investor series: #2
The term “entrepreneur” is a funny one. It can be both all-encompassing and very specific. In general use, it usually refers to any individual who has headed a start up business.
However, the definition given by those who have been repeatedly successful in this field often suggests some innate force is responsible.
“someone who sees an opportunity which others do not fully recognise, to meet an unsatisfied demand or to radically improve the performance of an existing business. They have unquenchable self-belief that this opportunity can be made real through hard work, commitment and the adaptability to learn the lessons of the market along the way.”
Good and innovative ideas need funding in order to become “something”; an actual business. Innovative methods, alone, of processing or production won’t get far past the idea stage without finance to cover all of the associated costs of setting up and running a start up business. This is where traditional angels, Venture Capitalists (VCs), and now, through equity crowdfunding platforms, online business angel investors come into play.
This post will look at how start up businesses can affect the UK economy, the potential for long-term results, and the introduction of online angel investors via equity crowdfunding.
All start ups, be they one man band operations, those who employ 2 or 3 people, or businesses with credible high growth potential, play an essential role in job creation and economic growth.
A business with this level of high growth potential, which is owned by an entrepreneur who demonstrates high levels of innovative and disruptive capability, is known as a “gazelle” company.
Gazelle businesses contribute significantly to economic growth and are in fact often the biggest creator of jobs in a country. Businesses with this much high growth potential usually require funding from the Venture Capital (VC) community: angels, VCs, and now the crowd or online business angel investors, rather than simply from their own personal network.
The larger amounts of risk capital that can be invested by the VC sector mean that ambitious entrepreneurs can really drive their businesses forward and quickly take them towards the next stage of growth.
However, recent research suggests that gazelle companies have been struggling to find funding through traditional routes (which was previously mostly VCs).
This could have spelt trouble for the UK economy; if the businesses who have the biggest potential couldn’t get started, how could they have gotten their foot onto the first rung of the growth ladder?
Fortunately, access to finance through alternative routes and the rise of the online business angel thanks to equity crowdfunding has been found. You can read more about the struggles and successes of gazelle companies here.
Can we see the impact of gazelle start ups?
Recent news reports have suggested that the UK economy is growing, in part, due to the success of true entrepreneurs and their start up businesses. However, the majority of those start ups would probably never have gotten that far without the involvement of angel investors or VCs.
Both ambitious entrepreneurs and forward-thinking investors are playing an equal part in kickstarting the growth of the UK economy and the results are just beginning to show. It will take a few more years until we will be able to see the full impact of the success of start up businesses, though.
According to the Office for National Statistics, the UK economy has grown by 1.9% – its fastest rate since 2003. It may be very early days, but according to these figures and a number of recent reports, the country may finally be starting to emerge from the shadow of recession. The message though, is not to get too excited; we’re not out home and dry just yet.
In fact, the Internal Monetary Fund (IMF) have said that the UK economy will be “the fastest growing in the G7 this year” which is interesting because the country is also the global market leader in equity crowdfunding.
Now, this may just be a coincidence but it could also, quite easily, be a direct correlation. If an increased number of start up and early stage businesses are being funded, then although a large number of them will fail, a proportionate number of them will go on to succeed, to grow, and to thrive.
UK economic growth is expected to reach 2.9% in 2014.
Potential for longevity
The Federation of Small Businesses (FSB) say that the small businesses they champion will continue to “help drive total UK growth and recovery”. This is further backed up by the findings that a number of small firms had reported increased revenue. Charles Davis, Head of Macroeconomics, Cebr. went on to say that “there are signs that small businesses are likely to make a significant positive contribution to UK growth”.
Those findings, coupled with the tentative news that the UK is coming out of the recession brings with it a definite increase in confidence amongst small business owners. Research found that “small businesses are raising their aims, with 5.4% aspiring to grow over the coming 12 months”.
In order to do this though, they’re going to need growth capital. Access to traditional sources of finance, such as banks, is still proving quite difficult, meaning that alternative funding has to be found.
For an increasing number of entrepreneurs, this is where equity crowdfunding has come in. The entrepreneurs come to online equity crowdfunding platforms with the idea, the team, the product, but need the money to enable them to reach the next stage and that investment comes from...well, the investors.
Equity crowdfunding and angel investors
The introduction of equity crowdfunding platforms has brought with it a new class of investor: the online business angel. As long as a person can prove that they understand the risk and reward profile associated with equity investing, they are free to invest into any company listed on the platform.
Although online equity crowdfunding is a relatively new introduction to the world of alternative finance, it has already gained tractions. In fact, early research carried out by NESTA found that “business angels have become more significant as a source of early-stage investment since 2000, increasing from 16 per cent of all early-stage deals with private involvement in 2000 to 41 per cent in 2007.” (from Siding With The Angels). Since then, this involvement has grown even more, although exact number are difficult to determine.
However, this new investor class also seems to have been overlooked in some cases. The UK Business Angel Association (UKBAA)’s website states that:
“Angel investing is the most significant source of investment in start up and early stage businesses seeking to grow their business. Whilst the market is relatively difficult to calculate since many Business Angels are investing privately, an estimated £850m is invested by angels annually in the UK.
This is more that 2.5x the amount of Venture Capital invested in early stage small businesses annually. Whilst it is also estimated that there are about 18,000 angel investors around the country, there is a need for more individuals to become Business Angels to provide finance to meet the needs of these growth potential entrepreneurs."
Equity crowdfunding platforms, such as GrowthFunders, mean that there are now hundreds of thousands of self-certified and Financial Conduct Authority (FCA) -accepted online angels investors.
In April 2014, new guidelines were introduced by the FCA in their policy statement. These regulations aim to keep the crowd in crowdfunding by allowing a new group of investors to invest in start up businesses via online equity crowdfunding platforms. Angel investing has always been an important part of the UK’s economic growth, and now online business angels are able to play a significant role in that.
What does this mean for business owners and angels?
Entrepreneurs and business owners can focus on building and growing a solid and viable business, knowing that there are forward-thinking investors who are interested in playing a role in its future success.
The entrepreneur can use the finance they receive in order to progress their business effectively and successfully, whilst also having a positive impact on the UK’s economic growth. Whilst equity crowdfunding is still a relatively new venture, it is quickly gaining traction as a trusted means of raising growth capital, and attracting countless angel investors in the process.