Private investors who supported Bell Telephone and Ford Motor in the late 19th and early 20th centuries did not know that they would be called business angels afterwards — this term appeared only in 1978. But seed funding for giants such as Intel, Dell, Microsoft, Apple, and Amazon was clearly called angelic.
Business angels work at the riskiest, lower step of the venture financing ladder — the seed stage, at which the idea of a new business, not yet finalized and not structured, can remain in the “death valley” (this happens with 80% of projects). In the classic investment cycle, the entrepreneur first uses money that he/she managed to attract from FFF (“friends, family, fools”). Then comes the “angelic” period of financing, which helps the project to get to the point at which venture funds begin to show interest in the business. Business angels are the foundation without which there would be no modern model of venture financing. A feature that distinguishes business angels from later-stage venture investors is the personal nature of their investments. They invest their own money, and therefore have a higher degree of freedom and subjectivity, are not bound by any mandates and formal strategies, unlike professional investment players.
Business angels usually become people who already have personal experience of successful entrepreneurship or top managers of corporations, attracted by the high profitability of venture investments. They invest relatively little money, but at the same time, are involved in the project to help with their knowledge, experience, and connections. Business angels can invest in completely different lines of business, often not related to their core business. Someone is guided by the principle of Warren Buffett — to invest in companies whose goods or services they would use themselves, someone, on the contrary, runs the risk of investing in projects that have no analogues in the market, and which lie in the areas that are far beyond the understanding of the investor. About half of the Russian business angels, according to the surveys of recent years, are ready to invest in high-tech start-ups in the field of biomedicine, production technologies, energy and new materials. The IT sector also remains popular with investors. In it, the most considerable interest for business angels is represented by projects related to data storage and processing (49%), fintech (44%), and education (38%).
Russian top and middle managers are increasingly investing earned money in technology start-ups, of which 16% are business angels. Their total number is estimated at 10 thousand; most of them are top managers and owners of their own business. The average angel investment check is $20–300 thousand. All these data are evaluative in nature since a distinctive feature of most Russian business angels is non-publicity. Most of them do not advertise their investments, discuss their activities in a narrow circle, create closed syndicates for joint investments. This is primarily due to the low chances of success and intolerance of the Russian business culture to possible failures inherent in the very nature of venture financing.
Business angels usually leave the company, selling their stake to either a venture capital fund or a strategic buyer. As a rule, they are in the project from a year to two; the average yield occurs with a multiplier of 3–5. There are super successful projects, from which the output receives invested funds multiplied by 20–30 times, but there are only a few such cases every year. According to RVC, in 2018, there were 34 deals involving business angels, with a total value of 1.9 billion roubles. However, far from all deals often fall into the field of view of researchers — according to the market participants, there maybe two to three times more of them.
The Institute of Business Angels in Russia is actively developing, and there is every reason to believe that shortly this segment of venture investments will grow, also thanks to the state. Initiatives that are designed to stimulate the flow of private investors into high-tech industries are currently being discussed in a number of development departments and institutes. Among them, there is the provision of tax benefits. The draft law “Protection and Promotion of Investments and Development of Investment Activities in the Russian Federation” proposes to reimburse PIT for business angels from successful start-ups in order to compensate them for losses from investments in failed projects. It is assumed that this measure will reduce the risks of business angels so that they can invest more actively in the riskiest, but also the most innovative enterprises.
However, business angels are accustomed themselves to taking risks; this is one of the conditions of their business. One of the main trends of recent years is a gradual change of generations and an increase in the number of private venture investors. Many of the founders of the business angel movement, who have long been on the venture capital market, have organized their funds, and new players are taking their place. This is an essential indicator of the ongoing development of the venture capital market and the innovation ecosystem.
By: Alexey Basov, Deputy General Director — Investment Director, RVC.
In the picture: Alexey Basov.