Identification & analysis of best practices, tools and entities in the BA Market

8/12/2019 Identification & analysis of best practices, tools and entities in the BA Market

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BEST PRACTICES AND SUCCESSFUL TOOLS FOR THE BA MARKET VERSION: 002

C3: Best practice analysis of sustainable measures and perspectives for theadvancement of the Business Angel Market in the MED

TEMPME SA

Issue date: 30/09/10 MACC-BAM TEMPME S-PU D3.2 best practices and tools 002.doc BEST

PRACTICES AND TOOLS FOR BATEMPME SAV2Page 1 of 71

Measures to Accelerate the Mediterranean

Business Angel Market

IDENTIFICATION & ANALYSIS OF BESTPRACTICES AND SUCCESSFUL TOOLS FOR

THE ADVANCEMENT OF THE BUSINESS ANGELMARKET

Programme co-financed by the European Regional Development Fund


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Document History

Version Main Author Date Description Pages

001 TEMPME SA 23/08/10 Draft to be approved 64

002 TEMPME SA 30/09/10 Final Version 71

Attached Documents

File Name Short Description

MACC-BAM

IDENTIFICATION & ANALYSIS OF BEST PRACTICES AND SUCCESSFUL

TOOLS FOR THE ADVANCEMENT OF THE BUSINESS ANGEL MARKET

Author:

Evangelia StavrinakiFilippos Georgopoulos


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Table of Contents

Table of Contents .......................................................................................................................... 31. Introduction......................................................................................................................... 41.1. Aim of the project........................................................................................................... 41.2. Aim of the study.............................................................................................................. 52. Benchmarking framework................................................................................................. 52.1. Methodology................................................................................................................... 52.2. Limitations of the study................................................................................................. 72.3. Cross-border perspectives........................................................................................... 83. Public Policy and the operating environment................................................................ 83.1. Partners countries overview........................................................................................ 83.2. Problems/barriers of BA activity................................................................................ 133.3. Entrepreneurial culture................................................................................................ 153.4. Taxation......................................................................................................................... 174. Management & Financing of Business Angel Networks............................................ 204.1. Types of BAN................................................................................................................ 214.2. Management of networks........................................................................................... 274.3. Funding of BAN............................................................................................................ 325. Promotion and dissemination of BANs & Partnership................................................ 365.1. Raising Awareness...................................................................................................... 375.2. Training of angels and entrepreneurs....................................................................... 385.3. Investment and Investor Readiness Programs....................................................... 415.4. Matching Angels with Enterprises............................................................................. 436. Financial and non-financial instruments that support BA activity............................. 486.3. Guarantee products for the support of BA activity.................................................. 546.4. Mezzanine financing.................................................................................................... 604. Holding Funds and Other Funds................................................................................... 627. Conclusion and Recommendations.............................................................................. 657.1. Recommendations regarding the pilot project of the MED Business AngelSupport Centers (M.B.A.S.C.)................................................................................................ 657.2. Recommendations regarding Public Policy and Financial Tools for the supportof the BA activity...................................................................................................................... 67REFERENCES......................................................................................................................... 71


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1. Introduction

1.1. Aim of the project

Measures to Accelerate the Mediterranean Business Angel Market (MACC BAM),

is a Project co-financed by the European Commission and by public contributors (such

as local governments) belonging to the MED Programme (Axe 1, Objective 1.2).

The project aims to build and test a coherent framework for planning and implementing joint

sustainable measures in order to accelerate the Business angels Market in the MED space.

The MED cooperation framework is ideal to reinforce the cooperation between interested

partners that form the current consortium and demonstrate proven experience and activities

towards the establishment and reinforcement of Business Angels Networks. This is a

necessity due to the fact that BANs activities are quite fragmented throughout theMediterranean. The general objectives of such an endeavour are to strengthen the

organizations that can support the creation and the valorisation of the Business angels

networks. Furthermore the partners will promote and support measures within a framework of

a Mediterranean Business Angels network among the participating MED countries and

regions, while assessing existing policies in the MED space regarding the support of BANs. To

this end this solidification of interested organizations and the establishment of partnerships

and activities will develop and implement consistent innovation and economic development

policies that will generate synergies at a transnational level. More specifically, MACC BAMproject aims at:

creating permanent MED Business Angel Support Centres (MBASC) and their

Network

training their staff in order to help SMEs to compete in their respective markets

sensitizing BA, SMEs and institutions with this key topic


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promoting collaboration between institutional and interested actors, involving all

the relevant stakeholders

assessing the pilot activities that will be undertaken

preparing a plan for the continuity of the MBASC and their services

proposing policy recommendations to concretely accelerating the BAM in the

MED area.

1.2. Aim of the study

This study aims to set the minimum standards for the sound operation of a Business

Angel Network and to analyse successful tools that advance Business Angel (BA)

activity in Europe.

In addition, the output of the study will constitute a sound basis for the design and

implementation of the projects pilot program, the creation of the MED Business Angel

Support Centres (MBASC).

This research is a critical overview of the effective mechanisms and tools necessary to

accelerate the BA market in the Mediterranean area and more specifically in the 3

Mediterranean countries (France, Italy and Greece) that participate at the project.

2. Benchmarking framework

2.1. Methodology

This study is one of the outcomes of the project MACC-BAM and is based on:

a) data form the completion of a questionnaire by the partners of the project from 4

countries (France, Italy, Greece and the U.K.)

b) the transnational research for diagnosing the current situation of the BA markets

the MED and the E.U. carried out by Exemplas (U.K., partner of the project)


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c) a technical meeting held among the participating partners in January 2010 in the

U.K. in order to discuss findings, best practices and challenges for the Business

Angel market for each country

d) interviews with key organizations/ people in the Business Angel Market and other

organizations that support BA activity

e) interview with Professor Colin Mason of Entrepreneurship in the Hunter Centre for

Entrepreneurship at the University of Strathclyde in Glasgow

f) desk research of existing literature, articles and research regarding the BA

activity, public policy and financial tools for its support

g) data collected by guarantee organisations (through a questionnaire distributed in

co-operation with AECM and relevant desk research) for financial tools (e.g.

guarantees) that support BAs

Tempme SA has been responsible for Component 3.3. of the project whose outcome

is the present study.

The current analysis is focused on the special characteristics and structure of

Business Angels Networks in the 3 aforementioned Mediterranean countries and in

the U.K., which is a country with developed BA activity, the public support and the

financial tools that support BA activity attempting to trace best practices.

It should be noted that a draft report was sent to all partners involved for their

comments that have been incorporated in the current text. In addition, the content of

the study was approved, prior to its publication, by the Steering Committee of the MED

Macc-Bam project.


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2.2. Limitations of the study

Data limitations

Primary data collected by the questionnaires provided by the partners is limited

because mainly:

a) in the U.K. the majority answers were oral as they perceived this information as

confidential

b) the total number of completed questionnaires by BANs is small

c) the geographical coverage is limited to the regions participating at the project,

which on the one hand, is positive because of the focus, but on the other hand

the results cannot always be generalised.

In this context, good practices have also been selected by other sources, as

secondary data, as paper, researches and outcomes of national or international

organisations, mainly by EBAN.

Comparison limitations

It is important to pin out that from the methodology followed, attempts to investigate

the advantages and disadvantages of the existing Business Angel Networks, the

public policy and the financial tools, as well as direct comparisons among the

countries cannot be made. The reason is that BAN operate within a different country

and thus the financial environment and the political, economic and geostrategical

circumstances are different. In addition, the social structures and the business

mentality are different for each country. Consequently the analysis attempted does

not intend to rank the BAN but aims to extract good practices for the environment and

the market they operate in, and thus, attempt a comprehension of the reasons that

each system has been developed to its present status, meaning that they are not

ideal schemes for all countries and markets.


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2.3. Cross-border perspectives

For cultural and geographic reasons the majority of business angel deals are still

national, but this is liable to change, as even start-up businesses became more

internationalised. Particularly in the high-tech sector many European enterprises have

presence in the Silicon Valley area, and benefit from the US business angel

investments. Similarly, European business angels invest in enterprises there.

Such powerful clustering effect is less present in Europe, although there is some

evidence on transnational investments in Europe when the fiscal and regulatory

environments have been right.

For individual business angels that have a thorough knowledge of their field and have

the contacts, transnational investing is feasible. To stimulate such transnational

investments, business angels should access the matching and support services also

across borders, although locally oriented business angel networks rarely offer

opportunities outside their area.

3. Public Policy and the operating environment

3.1. Partners countries overview

According to , the European business angel market in 2009 was comprised by

334 networks (approximately 75.000 angels) and it is that 3 to 5 billion EUR were

invested.

According to EBAN Statistics Compendium 2009 business angels are continually

improving even more in a time of financial and economic downturn, and that angel

investors have nowadays ranked as un-discussed players in the financing of high-

growth, innovative start-ups. Data collected in 2009 is consistent with data from 2008

in a number of areas. Some interesting findings include:


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The number of business angel networks in Europe has continued to increase. They

remain largely associative structures and not for profit.

The number of angels recruited last year was superior to the number of angels

leaving the networks. Most countries have experienced a growth in the number of their

members and in the quality - deal flow they have received.

The average size of the deal has gone up slightly in 2008 which could be indicative

of investments made last year in existing portfolio companies or companies that

traditionally should have had access to other sources of capital but had to be followed-

up by angels as a result of lack of market alternative.

The impact of co-investment mechanisms in the UK is measurable, with a quasi

doubling of the amount invested in companies thanks to these schemes (see country

by country information).

The number of investments outside of the networks region/country has decreased

angels focusing on local deal flow, probably as a result of the current challenges and

the importance of nurturing the investee companies.

BANs collaborate significantly with other investors, particularly in early stage venture

capital funds and family offices. This trend is likely to increase in coming years, as the

equity gap continues to widen and investors active in the seed and start-up stages of

companies need to collaborate.

ICT and Software remain the predominant sectors of investment for business angels

Europe wide.

However, business angels continue to invest in a variety of sectors, including in recent

times in health related and environmental companies.

At European level, the main business angel market characteristics could be

summarized in the following points:

Business Angel activity has a versatile level of development (e.g. the UK has the

most mature market in the EU; France, Germany, Sweden, Belgium, Finland,

Netherlands are important markets; Smaller players: e.g. Italy, Spain, Norway; Very

small markets: e.g. Slovenia, Greece, Portugal)

Different types of founders for BA networks


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Business Angels have a varied level of support: EU, national, regional, etc.

National trade associations sometimes represent the market

BA market has shown rapid growth in recent years although lately it has been

influenced by the current financial crisis

Furthermore, the trends of the European Business Angel Market show an increasing size

of deals, but with a decreasing size of investment, meaning more small investments,

syndicates seem to increase as well as networks get more organised by providing

packaged deals and more value added services. Other trends indicated are the following:

Leverage of co-investment funds to close equity gap

Creation of sector specific networks

Increasing interest in cross border activities

Initiatives to help BA and VC collaborate more effectively

Better organisation of the market

Greece

Angel investment in the country is occasional but considerable. There is a strong

need to raise the awareness about the benefits of angel investment and to inform

potential angels and entrepreneurs about the advantages of BANs. Public

administration, local government and academic institutions have a critical role to

play in order to promote informal investing.

Mentoring is a privately held company (SA) offering business development services

to start-up and early stage companies. Mentoring is actively networking with

academic and research institutions, players of the formal venture capital market

(incubators, VCs), Banks etc.


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Source: EBAN

France

The first associative network, named Leonardo, was set up at the beginning of

nineties. The first local network(non-profit) initiative in this field was taken by an

association of young entrepreneurs called Club Essor 92, and by Andre Jaunay in

Hauts de Seine in 1998, under the name Investessor. France Angels, the national

association, was set up in 2001 in order to develop the number of BANs in France.

In 2003/2004 and 2006, new legal frameworks were adopted in order to support

entrepreneurship. Part of the legislation concerns the fiscal environment of

investment made by private individuals in start-up enterprises: the tax deduction

system was improved and a new type of investment company with fiscal

advantages was created. In 2007, a new tax deduction has been voted(TEPA Law)

which allows persons who pay the wealth tax to reduce 75% of their contribution by

investing in a PME. The national network has established contacts with the

relevant Ministries in order to discuss BA and BAN status, to improve legislation

and to promote the BA concept. France Angels has also created a special 4 days

training program for people who are interested in setting up BANs or who want to

have a better understand and to work with business angels(1 seminar organized

per year).

Source: EBAN


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Italy

Interest in the BAN concept, first arose in Italy in 1997. It was created from a few

Business Innovation Centres (BIC) in Northern Italy. Several regional BANs were

set up in 1999, as well as IBAN, the national association created to foster the

development of BANs and Clubs in all Italian regions and to federate their

activities. IBAN has established privileged relations with the banking sector and the

venture capital sector.

Source: EBAN

United Kingdom

The first BANs operating in the UK were set up in the early 80s. Today the UK has

23 BANs operating in England & Wales. In addition there is one BAN in Northern

Ireland (Halo) and a number of business Angel Networks/Groups based in

Scotland. British BANs can be commercial, public sector, commercial and working

for the public sector, or not-for profit organizations. In 2005, the British Business

Angels Association (BBAA) was established to be the trade association for theUKs Business Angel Market as well as for the early stage investment market.

Business angels are becoming increasingly publicized as a form of funding for


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small businesses in the UK.

Source: EBAN

3.2. Problems/barriers of BA activity

The main problems confronted by the Business Angels activity have been

concentrated from research of the BBAA (British Business Angels Association), EBAN

and academics specialized in the entrepreneurship field. In more detail:

a) Poor Quality of deal flow

In Colin Mason and R. Harrisons study entitled Barriers to investment in the informal

venture capital sector, 81% of respondents confirm that their ability to invest is limited

by the quality of opportunities they see, listing the deficiencies as business plans with

unrealistic assumptions or not credible information, or a management team that lacks

credibility. It has been suggested that BAs should: i)educate entrepreneurs going into

the process and set expectations, ii) coach entrepreneurs on presenting skills, iii) have


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a greater understanding of memberships investment preferences, iv) work with

promising companies to ensure the business is investor ready, v) validate investment

by having credible core members making initial investment

b) Credibility

Apart from the fact that every BAN should have a strong leadership, it is of the utmost

importance to have investor champions giving the networks some credibility and

defining the culture of the organization.

c) Limited time to Search and Evaluate Investment opportunitiesA solution to this problem would be to join an angel group fund that could provide the

opportunity to invest in a large number of deals that have been validated by very

experienced informal investors. Alternatively, angel groups should use independent

service to conduct areas with due diligence (e.g. lawyers or accountants to do a health

check when necessary). Often this comes at a greater cost to the company, but it can

be offset by government funding.

d) Unorganized means to source deals

According to Wetzel, Mason and Harrison, informal investors have an ad hoc way of

finding new opportunities as opposed to leveraging more formal sources such as

banks, lawyers, accountants and VC funds. BAs should educate perspective

businesses and get industry partners to help source deals.

e) Difficulties in Negotiation and Valuation

A significant barrier of BA activity is the inability to negotiate a deal with the

entrepreneur that is acceptable to both sides (i.e. discrepancies in the price offered or

the amount of equity to be purchased). BAs should educate entrepreneurs of the

expectation of business angels and the importance of clean and simple term sheets.

f) Activity of Membership

Success in any angel group will depend on the commitment of key individuals and

their ability to identify and nurture high potential investment opportunities. Evidently,

the role of BAs must be to cultivate champions from members who recognize there is

money to be made in the private equity arena and require a proportionate amount of

wealth in private equity placement. Members should be offered BA training programs


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(particularly in negotiation and structure of the deal) and be involved in the operation of

the angel group.

g) Funding Angel Networks

Membership dues are an important source of income. In exchange for the membership

dues, members expect value in return, in the form of well-organized meetings, good

deal flow and a satisfying focus on investing. Moreover, the creation of a co-

investment fund or side fund leverages all the due diligence already done for a

potential investment and will make a decision whether to invest or not. Another means

to be more efficient with funding is to reduce operational costs by employing flexible

labor.

3.3. Entrepreneurial culture

Business angels are the essential link for financing companies with strong potential and

usually finance investments from 50k to 500k.

As shown by the graphic underneath, Business Angels usually take part in the cycle after the

"love money" (Friends, Family and Fools), public funds and unsecured loans (allowing

entrepreneurs to find the necessary funds to start their activity) and before capital investment

professionals (venture capital, expansion capital).


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Source: EBAN

Entrepreneurial culture is very important for the penetration of the business angels

market. The entrepreneurs mentality as observed in the Mediterranean countries

participating at the project varies not only among them but also in comparison with

northern countries. Differences are observed in entrepreneurial, cultural and financial

traditions, meaning that entrepreneurs have different attitudes and face different

environments when trying to find financing.

For example, in the UK, entrepreneurs are familiar of business angels as the BA

market is developed and well organised through the networks and syndications. On

the other hand, in Greece where BA activity is scarce, it has been observed that

entrepreneurs do not have the same approach. Indicatively, in a research conducted

by EOMMEX in 2007, 93% of the respondents were not aware of Business Angels.

However, when entrepreneurs were explained about Business Angels, although

approximately 90% were positive to the idea, the majority of them answered that they

Capital Needs

Time

Seed Start-up Early Growth Sustained Growth

HighRisk

LowRisk

Friends,Family &

BusinessAngels

FormalVentureCapital

IPO

0

Angels helpfill theEquity Gap


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needed a business angel as a consultant (e.g. for the development of promotion and

sales) with a contract than a hands-on partner with part of the share capital.

The above verifies another difference in entrepreneurial culture observed mainly in the

Mediterranean countries is that entrepreneurs in each country value differently their

personal control over the company versus their growth possibilities that could be

achieved by bringing in outside shareholders.

In addition, entrepreneurs do not only need support for their access to finance, but

also, as stated in the EBAN position paper for the EU 2020 strategy It is important to

note that European SMEs do not only suffer from a lack of access to finance but also

from skills gap in sales and marketing skills which should be addressed with strong

policies. EU research is often rated as world class however our researchers and

entrepreneurs are poor at selling what they have to third parties, whether it be

potential customers or financiers.

3.4. Taxation

The taxation of risk capital and equity investments has a direct effect on their

attractiveness. This is important, both on the demand side (the high growth SMEs

seeking finance) and the supply side (the institutional and individual investors). The

stability and predictability of the overall tax environment is also important. A tax

environment that encourages risky investments can be favoured either with low capital

gains tax for BA investment or by introducing tax breaks for eligible investments that

make BA investments attractive. Capital gains tax (CGT) affects angel investors

through two channels. First, CGT applies to the disposal of assets and hence affects

the rate of return on investments. It influences decisions by individual investors,

financial institutions and venture capitalists to invest in early start-up companies.

Second, CGT can affect the remuneration packages that are in the form of assets,

usually stock options. The ability of start-ups to offer stock options is often needed to


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attract qualified personnel and achieve growth. The most important features of the

capital gains tax regimes are:

Member State Income Tax for

Individuals/Corporate

CGT for

Individuals/Corporate

Italy Up to 43% plus

regional/municipal tax

rates for individuals

Up to 27,5% plus the

regional tax (3,9%) for

corporate

Taxed at individual tax

rate for individuals.

95% for corporate.

United Kingdom Up to 40% for

individuals

Up to 28% for corporate

Up to 18% for

individuals.

Subject to corporate

income tax

France Up to 40% for

individuals

Up to 34,43% for

corporate

Up to 27% for

individuals

Up to 34,43% for

corporate

Greece Up to 40% for

individuals


Up to 10% for

individuals


(SOURCE: EBAN COMPENDIUM 2009)

In general, equitable and readily understandable tax code is a good goal in a

democratic society. As investments in start-up companies are an effective way of

creating wealth, jobs and growth, capital gains should not be punitively taxed, as they

are the reward for investments in risky enterprises. A relatively low level of capital

gains tax (e.g. >20%) would then be the public sectors contribution to leveraging

investment in start-up companies. In addition, the system should not penalize

investments in unlisted equity as opposed to listed stocks. Raising taxes has a

particularly strong effect in reducing the willingness of angels to invest. Acceptable


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levels of taxation are a necessity, though not sufficient, condition for the growth of the

angel investment market. Non-resident individuals are in most cases exempt from

CGT in the country of the investment under double taxation treaties, but they pay the

CGT in their country of residence.

Concluding, tax advantages can be implemented in different ways for the support of

Business Angels:

up front tax deductions,

reduce the CGT rate,

allow the rollover of capital gains, and

the possibility of offset losses against capital gains.

Good practices:

Italy

In July 2008 a law entered into force (D.Lgs n. 112/2008 art. 3; Circolare Agenzie

delle Entrate n.15/E, 10/04/2009, L'esenzione delle plusvalenze da start- up), which

favours tax exemptions for capital gains realised on both qualified and not qualified

participations by private individual investors (i.e Business Angels), not in business

capacity. More precisely the capital gains are tax exempt if:

Participations have been owned at least for three years;

Companies, that participations are referred, have been established no longer

than seven years;

Companies, that participations are referred, have to be realised

industrial/productive investments;

Capital gains must be reinvested into start-up companies within 2 years the

gain accrued.

The disposition is also extended to non-Italian private individuals investing in

Italy with the same characteristics of the resident ones.


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4. Management & Financing of Business Angel Networks

In order to get a better understanding how BANs work and how they are classified the present

chapter has been based mainly on the following criteria:

Criteria to Differentiate Angel Groups

Management Structure Member-Managed vs. Manager

Managed. This term refers to identifying

who within the group is completing the

majority of work to gather deal flow,

perform due diligence, and negotiate the

investment.

Legal Structure Not for Profit vs. Financial Intermediary.

Investment Structure Investment based on Group vs.

Individual due diligence; side funds. The

investment structure is based around

who makes the decision to invest.

Type of Membership Mostly Active vs Mostly Passive. It

describes the level of membership

activity necessary for the angel group tooperate.

Funding Operations Membership dues, % of committed

capital, sponsorships, events and

programs, company fees, side funds. It

refers to the most predominant way in

which the angel group generates funding


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to support its operations.

Source: Best practices in angel groups and angel syndication, S.R. Carriere, NESTA, BBAA,

2006

4.1. Types of BAN

European BAN

EBAN is the unique pan-European representative for the early stage investment

community. It gathers over 100 member organizations and individuals from 28

countries. Its members are: business angel networks, early stage VC funds,

federations of networks, individual angels and associated members. (Source: Publicpolicy support for the informal VC market, Mason 2009)

National Associations / BANs

All BAN National Associations have one common purpose. To highly increase the

number of business angels in order to stimulate entrepreneurship in all sectors of their

national economies. Examples of national associations are the IBAN(IT), France

Angels(FR) and BBAA(UK). During their progress in time, national associations have

established privileged relations with the banking sector and the venture capital sector.

Good practices

France Angelsis the National association of local BANs in France and was created in

April 2001 by people with various backgrounds (regional developers, individual BAs,

coaching of entrepreneurs, etc.). They represent business angels within French and

European institutions, public and private, in order to create favorable conditions for the

development of this activity.


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IBAN is a not-for-profit Association focused on the development and growth of

Business Angels in Italy. Today it groups 130 Associated Members and is the only

formal institution that represents BAs in Italy.

The existence of a national association for the support of the BANs operation offers in practice

the following benefits for the BANs, as it has been concluded from the questionnaires

completed by them:

Lobbying with the government Standard rules and procedures for the creation and operation of a BAN

Common code of conduct that clarifies rights and obligations of BANs and BAs

Operational studies and researches concerning angel investment market

Development of relationships within national and European networks

Participation of speakers and testimonials in local events

Transfer of know-how that reduces the management gap in financing start-ups

Legal advice

Organisation of trainings and workshops as well as important communication events

(e.g. Business Angels week by France Angels in France)

Source for contacts for new memberships and deals

Professionalism in business angels actions by facilitating the exchange of best

practices between BANs and external partners (e.g. seed funding and venture capital

organizations), at a regional, national and international level

However, in few cases, participating BANs indicated that the national association is only a

label, pointing out the need that the national association should play an active role for the

support of its members.

Regional / local BANs

Late studies have indicated that most BANs operate on a local or regional scale

showing a clear preference of the majority of investors to invest locally. However, there

are cases and examples of cross-border BANs and new schemes (funded by the EU)

which are seeking to promote cross-border investing by angels.


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Advantages/Limitations of BANs

Advantages Limitations

Provide easier access to potential

investors than an individual search

Maybe too localized

Provide a pool of experience which

benefits less-experienced investors and

entrepreneurs(some provide training)

May lower their acceptance thresholds

for venture proposals to attract enough

investors which lack skills to access

start-up capital

Stimulate demand for private equity

finance, by promotional actions

May need to improve quality of screening

of proposals

Preserve privacy of investors, protecting

them from unsolicited demands

Angel network officials not able to offer

advice or recommendations due to legal

liability

Improve the quality and reliability of

information moving between investor and

entrepreneur

Many angels are very independent and

reluctant to join a formal network

Provide a forum for discussion Financing a network may need public

support as unlikely to cover cost from

fees

Add to interact with business incubators

and with technology commercialization

officers of universities

Dependent on the quality of the manager

Opportunities for training, syndication

and co-investment

Source: EBAN Toolkit 2009, pg. 70


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Each national association has created different categories for the regional/local BANs.

Categorization is based different criteria, such as the way of investing (e.g. association or

investment) or sector oriented, as shown in the following examples of France, Italy and the

UK.

In addition, the respondent of the questionnaires of the current project have been classified in

the defined categories.

FRANCE

The France Angels Association federates different types of BANs:i) Associative networks: structures devoted to putting into contract entrepreneurs/investors.

Generally, the structure organizes regular meetings to present selected projects (3 or 4) to a

group of potential investors. It costs little for both entrepreneurs to access this device: there is

no deduction on the capital raised. These devices are mainly meant for projects requiring low

sums of money (usually less than 200.000). It usually includes local devices (in a department

or region) which are open and visible and these networks do not expect to benefit from the

relationship. The Business Angel of such a network can freely choose to invest or not in the

presented projects.ii) Investment Society Networks:

Two kinds of goals: a) Some Business Angels (especially in limited numbers, between 10 and

20) wish to stay among them and are not looking for a high regional visibility. Thus, they

accept to put their money in a common pool. b) Some networks wish to acquire, in addition to

the associative structure, a common pool allowing them to complete investments made by

individual BA. In order to create an Investment society, it is necessary to implement strict rules

of functioning (Board of Directors, Chairman, etc) and of investment decisions (investment

committee). Its members must be very disciplined but it is highly efficient as it leads to quickdecisions and quality allows investors to multiply their investments and diversify the amounts

invested.

iii) Mixed organization: Association + Investment Society.

More and more networks which have experienced separately both the associative structure

and the Investment Society structure come to the conclusion that a two-fold structure(BA being

members or not of both structures) holds many advantages. The associative structure allows

an easier cultural integration for the new Business Angels with less experience, provides

diversified communication actions in order to recruit new members and to systematically put


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them into contact with entrepreneurs looking for funding. In an Investment Society structure

the decision-making process is organized and decisions are taken collectively and with rigor. It

also brings together more Business Angels, both active and passive.

iv) Clubs.

They are generally not organized, difficult to identify and brings together potential investors

who are friends or have the same professional expertise. They do not intend to be visible, are

usually more exclusive and it is not easy for new members and entrepreneurs to join them.

Clubs potential level of investment fluctuates greatly according to their members goals but can

be important if the club is made up of wealthy Business Angels.

UK

Accor

dingly

in theUK

mainl

y

exist

2

types

of

organ

izatio

ns a) Introductory Agencies - angels groups (resembling Angels Association and/or clubs) and

b) Angel Funds - angel syndications (resembling investment society networks).

Greece

The early stage funding market in Greece is underdeveloped. Only during the last years has

the Government launched some initiatives to support the creation and development of SMEs.

Type Country Example

Associative

Networks

France Sophia Business Angels (FR), Provence Business

Angels (FR)

Investment

Society

Networks

France Alumni Entreprendre (FR), VAR Business Angels

(FR), SUD Angels (FR)

Mixed

organisation:

Association

and

Investment

Society

France Grand Delta Angels (FR), Savoie Angels (FR)

Clubs France Lyon Angels


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Programs like Support and Creation of innovative SMEs for the exploitation of RTD results

and funds like the Fund for High Technology Business Ventures and the Guarantee fund

facility scheme for SMEs aimed at leveraging the entrepreneurship in Greece. Currently,

angel investment in the country is occasional and although there are no favorable policies for

angel investment in Greece, business angels are investing in traditional sectors (tourism &

retail). Although there are no favorable policies for angel investment in Greece, there are a

number of corporate entities (i.e. Zenos S.A.) that act as business angels and invest in new

and existing business activities. Furthermore, in the last few years some business angels have

invested in a number of incubators established in Greece. There is a strong need to raise the

awareness about the benefits of business angels and to inform potential BAs and

entrepreneurs about the advantages of BANs.

ITALY

In Italy, Angel Investing activity is structured in:

i) Local Generalistic BANs managed by Public Institutions or Private Investors

ii) National Generalistic Angel Investment Clubsiii) National Thematic BANs

iv) Independent-Autonomous BANs

Concluding, regardless of the form of BANs in all countries, their success lies in common

factors such as: achieving financial sustainability, attracting new sponsors, recruiting new

business angels, qualifying the deal flow, matching investors and entrepreneurs, and training

BAN Managers in an efficient way.An example where the above mentioned criteria where met successfully, is the case of BAN

Bologna. BAN Bologna is a Regional Network(Emilia Romagna) established in 2001 and it is

a public/private initiative promoted by Bologna Province and in collaboration with other local

institutions. The main successful factors of this BAN have resulted in:

Good quality of partner organization that groups the most important players operating in

SME support

Strong relationship with universities and incubators

Recruiting BA amongst regional industrial and financial network


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Knowledge and implementation of European project in collaboration with Emilia-

Romagna Region

Relationship business plan competition

Organizing investment forum between investors and Entrepreneurs

Flexible operational structure and public/private workflow organization

On the other hand, there are cases where BANs failed. Such is the case of BAN Sardegna.

BAN Sardegna was established in 2001 on behalf of BIC Sardegna and co-funded by

Sardegna Region.

The main reasons why BAN Sardegna failed are:

A low entrepreneurial experience of BAN Managers

A low regional industrial performance

No investment forum promotion and any training events for investment readiness, both

for BAs and Entrepreneurs

Few activities made but without an organic working plan

Regional economic support died out after a few years

4.2. Management of networks

Codes of conduct

Business angel networks are services based on trust. The business angels trust that

the networks have a selection of good projects available for them, and that the

networks do not waste their time on low-quality projects. The entrepreneurs trust that

the angel network provides them a good opportunity to present their project to serious,

interested investors. The entrepreneurs need to be assured that the confidentiality of

their information is preserved, as the networks are not subject to legislation on banking

secrecy. Thus the strength of their brand is the key asset in business angel network

operations. For this reason it is

not surprising that codes of conduct have become common among business angel

networks. Such codes provide one tool to uphold the standards of the network brand

through clarifying the principles of behavior of all stakeholders, enhancing


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transparency and increasing trust. Codes of conduct have been introduced for both the

angel networks and for the business angels themselves. The European Business

Angel Network (EBAN) has introduced a model code of conduct for angel networks,

which covers the following areas:

Need for openness in their relations with entrepreneurs, business angels and other networks

Maintaining the good standing and reputation of the network

Avoiding funds with suspicious provenance

Need for contractual relationship between angels and entrepreneurs Limiting the spread of company information to inside the network

Forbidding networks to invest significantly in the investee companies

The networks should preserve their impartiality even if they have introduced a success fee

The networks do everything to protect the confidentiality of information

It is clear that codes of conduct are only guidelines, pointers towards issues that need

to be taken into account when matching investors and entrepreneurs. Codes as such

cannot guarantee behavior, it is the real integrity of the angels, entrepreneurs and

networks that determines whether the market operates according to the principles

listed.

Setting up and operating angel networks

Setting up a business angel network often requires cooperation with banks, regional

development agencies, professional service providers, and naturally business angels

and potential investee firms. In many cases existing angel networks provide logistical

support and expertise for new networks, as do national business development

agencies. Since its inception EBAN has provided a forum for exchanging information,

for person-to-person networking, and for establishing best practices among network

operators. Identifying actual and potential business angels to form a network can be

difficult. The usual method is that of person-to-person networking, working from one

angel to another. Finding potential investee companies can be easier, as these can be

located through many of the stakeholder organizations, including development

agencies, incubators and banks. The majority of business angels networks operating

in the European Union are legally set up as not-for-profit organizations, private entities,


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or possibly foundations. They can be founded also by regional development agencies,

Universities or incubators. The graph below illustrates the legal status of the networks

based on 138 answers, including aggregate data provided by France Angels. 6

networks have a double structure.

The graph below illustrates the type of networks based on 109 network answers,

including data provided by federations of networks in Europe.

Source: EBAN toolkit(page 27)

Some well-known regional institutions can be invited to collaborate with the BAN:

Banks, financial intermediaries, venture capital and seed funds, incubators, science

parks, chambers of commerce, regional development agencies, business support

providers, etc. These institutions can provide the business angel network not only with

deal flow or exit opportunities but can also infrastructure, collaboration on the

organization of events, dissemination of information about the activities of the network.

This collaboration can be reciprocal, for instance:

For the bank: securing new clients and/or co-investment funding

For the incubator: a new client

For the region: a renewal of the entrepreneurial base


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For the financial organizations: potential clients

For seed and venture capital funds: co-investing

There are a number of reasons why a Chamber of Commerce would want to create a

BAN:

help small and medium-size enterprises (SMEs), so they can meet the

requirements of the modern competitive environment

create a legislative and administrative environment that will guarantee

effectiveness, transparency and healthy competition with equal terms and

conditions for all

encourage and help individual enterprising initiative

eliminate every kind of disincentives which prevent developmental initiatives

create the appropriate conditions to attract and promote new investments

organize educational programs and seminars that promote human resources

skills of its member companies

systematically informs its members about developments in critical financial and

business issues

provide free information and consulting services to its member companies

organize events, meetings and conferences for the analysis of financial and

individual sector-based issues

organize and participates in trade missions to and from foreign countries aiming

to expand international economic relations

conduct research surveys in order to support productive classes in the best

possible way and inform its member companies


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There are a number of reasons why a university would want to create a BAN:

They are an important part of an entrepreneurial program

Technology transfer and research opportunities for the faculty

Opens channels for students learning and start-up funds

Active involvement of alumni

Engagement with local communities

Generates wealth in the hands of entrepreneurs engaged in building

businesses and jobs

Investor wealth brings benefits to the university

Models ethical investing standards for students

Examples of recently founded business angels network in Europe:

Grenoble Angels(FR)

The idea of creating a business angel network in the Grenoble region first came from

the Chamber of Commerce of Grenoble, to leverage the existing potential for

promising start ups businesses in the region. Grenoble Angels was created and

developed under the Chamber supervision by placing in charge a well-known

charismatic leader and by gathering the first group of business angels. To facilitate

integration of new members in the group a welcoming kit is introduced and distributed

amongst them regarding the activities of the network. Moreover, several meetings and

training courses(eg school of business angels) take place throughout the year in order

to speed-up the sharing of knowledge between members.

Angels for Growth(IT)

Angels for Growth have demonstrated an ability to rapidly build a new Angels Network

in a difficult market like Italy being able to integrate and balance different features:


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Build up a cohesive group able and willing to share and operate with an

outstanding commitment

Operations over a broad territory: ability to attract members and deals from

North to central Italy

Maintenance of strong international links, both at the European level and

international level

4.3. Funding of BAN

The majority of BANs (64%) are usually not-for-profit entities, supported by

organizations with a remit for economic development (e.g. local authorities,

government agencies, universities, science parks, business incubators). They operate

in an environment under certain codes of conduct and typically rely on a range of

income sources, notably fees from investors and entrepreneurs, sponsorship and

success fees from investment which occur (EBAN, 2008). However, this is generally

insufficient to cover their operating costs, thus most are not financially self-supporting

and depend on the public sector for their ongoing existence. There has been an

increase in for-profit networks in recent years partly as BANs have lost their public

funding and partly on account of the emergence of commercially-oriented BANs

operating with different business models.

Most of the networks have a fee system. The system is either a mix of registration fee

and success fee or a registration fee. According to the EBAN collection of data in

2008, 64% of the networks charges fees to investors (from 100 to 1.500) and 30 %

to entrepreneurs (from 25 to 750). Moreover, 30% charge success fees to

entrepreneurs (from 1.5% to 8% of the investment made), and 16% charge success

fees to investors (from 2% to 20% of the investment made). Other funding sources of

the networks are:

Sponsorship(covering from 2% to 100% of the networks budget)


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European funds(covering from 2% to 100% of the networks budget)

National funds (covering from 12% to 100% of the networks budget)

Regional funds(covering from 20% to 100% of the networks budget)

Funding from parent organization(covering from 10% to 100% of the networks

budget)

Other funds (private funding by the partners or owners, municipal funds, private

company funds, subsidies, event, trainings and visits).

According to the BBAA, a lot of groups, even some of the prominent ones, require

government assistance in order to keep operations ongoing. Having struggled but

succeeded in establishing financial self-sustainability, one manager of an angel group

estimates that it typically needs both public and private sector support for 3-5 years

before a group is fully self-sustainable. Thus funding is required to provide

compensation for management and administration and other general operating

expenses such as meetings, mailings, technology, legal tax and accounting in addition

to deal-specific expenses such as due diligence and professional services. Some

angel groups get funding for both operating and deal-specific expenses, while other

groups merely gather funding to cover operating expenses, but will require additional

funds from members on a deal by deal basis which could be either a fixed amount per

deal or proportional to the capital raised. There are several ways in which angel

groups can be funded.Membership dues

Its probably the most popular method of BAN funding. But whether to charge

members a fee, and if so how much of a fee to belong to the group is an often debated

matter as some groups choose not to charge their members any annual fees at all,

while others charge up to 1000 per annum

Percentage of Committed Capital or Pooled Funds


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This occurs in angel funds where members are required to commit capital up front and

have a percentage of their committed capital allocated to cover operational costs.

Occasionally, management will also be rewarded with a carry of the returns once they

surpass a certain threshold.

Sponsorships

While sponsors can be an effective and significant source of funding, the angel group

must ensure that member meetings maintain their focus on core member needs.

Usually funds gathered from sponsorships in the UK do not represent a large

proportion of contribution to the operating budget and are used to off set expenses,

such as providing appropriate facilities for an angel meeting.

Events and Programs

Investment and educational forums can be used as a source of angel group funding

while providing means to help prepare promising new companies

Company Fees

Some organizations charge companies for the right to participate at a member

meeting. If an angel group is considering charging a fee to a company before a

business angel has invested, the amount should not be too large as to drive good

companies away or raise possible issues of broker-dealer status for the angel group.

As mentioned before, angel groups will usually charge the company a success fee

after the investment is made, thereby, not penalizing the prospective companys

already delicate cash flow. Moreover, the angel group may charge the company a

monitoring fee to offset the expenses of tracking the investment

Side Funds

Another means to generate funding for angel groups are side funds or co-investment

funds. A side fund leverages all the due diligence already done for a potential

investment and will make a decision whether to invest or not.

Examples of funding sources:

France Angels Funding

The main funding sources of the networks are:


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- Fees from business angels (100% of the budget for 16 networks), representing on

average 51% of the budget for 36 networks;

- State subsidies: for 6 networks this resource represents more than 60% of the

budget. On average, for 16 networks this resource represents 32.6% of the budget.

Maximum: 80% of the budget.

- Local subsidies: for 14 networks, this resource represents, on average, 21% of the

budget.

Maximum: 60%

- Fees from entrepreneurs: for 6 networks they represent, on average, 2% of the

budget.

Maximum: 20%

- Success fees: only 1 network for which they represent 100% of the budget.

Other funding sources are: events/ recognition and valuation of unpaid work / in-kind

support: secondments, lending of rooms, etc.

IBAN Funding(IT)

BBAA Funding(UK)


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5. Promotion and dissemination of BANs & Partnership

Most angels share a desire for anonymity, and are unwilling to share information about

their investment activities. There are very wealthy investors that invest up to 500.000


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1.000.000, and there are angel syndicates that invest up to 4 - 5 million. The

challenge is to get potential angels that are interested, but have not yet made

investments, and inactive angels, who might already have some experience in

investing, to start investing actively.

5.1. Raising Awareness

Business angel networks need the support of policy makers to attract more investors

to the market. Raising awareness about the benefits and services of the business

angels and angel networks is the first step in developing the business angel market.

Both potential angels and entrepreneurs need to be aware of the advantages of

business angel networks. Public-private partnerships need sustained efforts to show

their importance in many countries. In general, such awareness raising would also

need to include discussion on the administrative, legal and fiscal environment in which

business angels and business angel networks work.

Awareness raising has many aspects. In general, awareness raising is a slow

process, and specific intensive awareness raising actions can be needed for 3-5 years

before results can be seen.

Experience shows that effective techniques for Raising Awareness are the following:

Achieving media coverage

Organisation of seminars to inform potential business angels and

entrepreneurs about the advantages of the business angel market.

These seminars have served both training and awareness raising purposes.

They typically bring together experienced angels and both successful and

potential entrepreneurs to share information about the marketplace.

Development of internet sites

Good practices:

Network i2 (Austria)


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The angel network i2 has developed an extensive internet site and it uses local

partners in all of provinces to promote the idea of informal investment and has

tried to locate archangels to support the recruitment of new angels.

5.2. Training of angels and entrepreneurs

Many networks arrange training programs and seminars for both sides to clarify the

expectations concerning power sharing, investment protection, exit, and other relevant

issues.

Proposed tools to be developed in order to facilitate the implementation of training

courses are the following:

1. Training curriculum for angels and entrepreneurs

2. Guidelines for the implementation of training courses

3. Pedagogic guidelines,

4. Recommendations, and check list for implementing a program

5. Mapping Exercise: Analysis of the supply and demand for informal venture capital.

Business angel academies

The objective of business angel academies is to train the participants and create

platforms allowing the exchange of experiences and giving participants the necessary

skills to manage the investment procedure. They also provide coaching angels to

assess a proposal, help them grasp the extent of their role for the business, the risks

involved and the opportunities learn about exit routes and success stories. The

programs are useful for both active and passive investors, experienced investors and

virgin angels.

The topics to be discussed often include: the informal equity market; how to identify

the investments chances; enterprises validation and investment analysis; procedure

structure and negotiation; due diligence procedure and others.


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12. Legal and responsibility issues of the BAN itself

13. The concept of BAN: theoretical and practical aspects

14. Evaluation of the BANs and relations with local partners

Solvay Business School (Belgium):

The Solvay Business School in Belgium also organizes sporadically business angel

academies with the following program:

The role of the business angel: generic approach and risk identification, role of the BA

in the entrepreneurship process, personal evolution from being an entrepreneur to a

business angel, and dos and donts.

The investment cycle: general introduction, practical case followed by a debate,

exchange of experience between the participants.

Selection and analysis of the opportunities: criteria to assess a project, typology of

innovation and sources of added value, discussion forum followed by a debriefing to

establish a list of set criteria to evaluate a proposal.

Best practices in high tech entrepreneurship: evolution of financing needs according

to the stage of development of the company, business planning, marketing high tech,

intellectual property rights, building a management team and selecting external

contractors.

Financing high tech and optimizing the leverage effect of the BA: financial planning in

a changing environment, overview of available financing sources (equity, debt and

public sector support).

Due diligence reducing the risk: evaluating the management team, evaluation of

technologies, evaluation of the market, and legal accounting administrative

aspects.

Valorisation of the investment: valorisation techniques, term sheets, and shareholders

conventions.

Coaching the investment: active or passive coaching and its limits, dos and donts of

coaching entrepreneurs, organization of a professional general assembly.


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Exit routes: preparing the exit route as soon as possible, selling the shares, IPO.

Exchange of experience and conclusions.

5.3. Investment and Investor Readiness Programs

It is widely accepted that there exists an information asymmetry between

entrepreneurs and investors. Investors claim that there is enough money on the

market for good projects, which however are scarce. On the other hand, entrepreneurs

argue they cannot find investors for their projects. For this reason, an emphasis should

be placed on capacity building of the entrepreneurs and investors through investment

and investor readiness programmes.

In more detail, Investments Readiness Programmes prepare entrepreneurs for

investment whereas Investor Readiness Programmes educate investors in the basics

of Angel investment

This increases the quality of the deal flow for investors while bringing more educated

investors to the market and BANs may increase the supply and demand for angel

investments.

To achieve this, it is important to reinforce the structures that make the link between

entrepreneurs and investors, i.e. business angel networks and early stage venture

funds that operate at local, regional, national or cross border level.

Another feature of the whole venture capital market, including the business angel part,

is its competiveness. Only the best projects get financing from angels and only a few

financed projects grow rapidly. There is no way to know beforehand which enterprises

will be successful and usually a large number of investee companies will fail or will not

grow.

The prospects of success in this competitive process can be improved through

increasing the investment readiness of entrepreneurs. The entrepreneurs need to

understand the differences between sources of finance and the specific concerns of

the business angel. Investment readiness can be defined as the entrepreneurs


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understanding of and responding to the investors concerns when presenting the

project.

Investment readiness programs are designed:

To reduce the number of projects refused funding as a consequence of the lack of

quality of the business plan or the presentational skills of the entrepreneur;

To make the entrepreneur understand that not all types of finance are appropriate for

his/her business and that they also vary according to the stage of development of the

business.

Good practices:

Ready for Equity! (Training for Angels and Entrepreneurs) 2 years EU funded

Project,

EBAN has published a Mapping Exercise: Analysis of the supply and demand for

informal venture capital was published in 2007 and updated in 2008 and a Resource

Pack has been produced.

Exemplas (U.K.)

Exemplas runs an investment readiness program that is organized around 3 stages:

awareness seminars, working up the proposition and advisory panels.

The awareness seminar aims at making the entrepreneur understand that not

all sources of finance are appropriate through presentations made by bankers, venture

capitalists, private equity investors and asset financiers. The aim is that each delegate

will leave the seminar having a clear understanding of the sources of funding

available, which type of funding is appropriate for him/her and how to present that

proposition in an attractive way. Keep in mind that banks look for track record safety

and security, while investors are very much looking to the future, risks and high

growth. Seminars are held in conference centres in hotels and similar venues.

Companies that wish to make a presentation to a panel have to ensure that

propositions and plans put forward appear viable and credible. Plans that are not well

prepared are discussed with the companies and valuable help and advice is given. For


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C3: Best practice analysis of sustainable measures and perspectives for