Angel investment is still working its way into the Australian mainstream, with many business people outside the world of tech start-ups unsure of who and what angel investors really are.
Lacking the sophistication of US and UK markets, where tax incentives are offered to reduce capital gains tax for angel investors, it has taken longer for this form of capital to find its feet in Australia.
One report, the Study of the Business Angel Market in Australia, commissioned by the Department of Industry, Trade and Resources, couldn’t even determine how many angel investors exist here.
“It’s hard to know if the number of angels are growing because to do so, you would need to sample the whole population,” according to Professor Mike Vitale, one of the report’s authors. “Not everyone wants to admit they are an angel investor, or sometimes even realises they are one.”
Other problems with the angel market in Australia are a perceived conservatism, a tendency to look to short-term outcomes and a more timid approach than British and American counterparts when it comes to risk analysis.
But the domestic market is changing, albeit slowly, with increasing numbers of angel investors willing to stump up cash for innovative and risky start-up ventures.
How does angel investing work?
An angel investor is an affluent individual who provides investment for a business start-up, often one with significant risk involved which has been turned down by more traditional financiers.
A small but increasing number of angel investors are organising themselves into angel groups, networks or agencies, in order to share research, pool resources and spread the risk.
The study reported that:
- Angels tend to invest amounts less than $500,000, typically make two new investments a year, and prefer to invest less than 10% of their available capital.
- Only a third of Australian angel investors are members of a business angel network.
- Most angel investing pays off, with “most angels reporting a remarkably high positive return from their exited investment.”
- Australian angels invest a minimum of $54,000, with an equity stake in the company ranging from 9% to 34%, and agreements taking the form of ordinary share structure.
- Angel investment typically happens only after a company has been up and running for at least one to two years.
Who is your typical angel?
According to the study, there are three main types of angel investor, each with their own trademark background and personality.
Early winners. Younger and pacier, these 35 to 45-year-old angels have often made quick money through tech investment or inheritance and they’re eager to fund technology ventures. Excitement and challenge really fuel them.
Professionals. Older and arguably wiser, these angels have been around the block in the traditional fields of banking, finance and law. With a multitude of skills at their disposal, they fund start-ups in a broad range of industries.
Experienced entrepreneurs. Hot off the mark when it comes to business instinct and honing in on a great idea, these guys spread their entrepreneurial spirit across multiple industries.
The pros and cons of angel investing
- The potential returns are high, but so is the pressure. Angel investors aim high. They routinely expect a rate of return up to ten times their initial investment within five to seven years . . . high stakes!
- You don’t have to pay the money back, but you give away a business stake. There’s no loan to repay, whatever your business fortunes. But the angel investor now has an ownership stake in your business, so there are strings attached.
- You stand a better chance of success, but you’re not in total control. Harvard Business School researchers have found that ventures funded by angel investors are likely to stay in business longer, experience significant growth and see a higher rate of return. But you’ll be sharing it all with your investor, who now owns part of your potential business empire.
Before you even consider a pitch to angel investors, work on presenting a watertight business proposal with sound market and customer research. Also investigate setting up an 1800 number to allow customers to reach you toll-free.