Angel investors pursue the ‘smarter’ money

14 Jan 20143 Shares

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Michael Culligan, national director of the the Halo Business Angel Network (HBAN)

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Attracted by the rude health of the tech economy, wealth that has remained in Ireland following the property bust is homing in on the start-up scene. That focus is fostering a buzzing angel-investor community, aided and abetted by strong seed-funding activity.

The time is ripe to be a tech start-up in Ireland. There are now funding options that didn’t exist a decade ago, when friends, family and founder rounds would help get a start-up off the ground.
While the latter route still holds true, what has really changed is the availability of seed and angel funding, as well as State support available to founders.

Although the angel and seed-funding environment for investment has never been stronger, there are concerns: as tech firms grow, there is insufficient follow-on funding available for A and B rounds.

This is not only an Irish problem; it’s true for any tech start-up, be it in Silicon Valley, New York, London or Berlin.

Business-angel investment has become a critical source of funding. In the last five years, Irish start-ups raised €55m in investment from angel investors, according to the Halo Business Angel Partnership (HBAP).

In 2012, €90m of angel funds were available for investment, via the formal business angel networks throughout Ireland, according to the Halo Business Angel Network (HBAN).

Seed funds in Ireland

Separate to the angel networks, seed funding is also in ready supply for firms, with four key seed funds (AIB Seed Capital Fund, AIB Start-up Accelerator Fund, Bank of Ireland Equity Fund and Bank of Ireland Emerging Sectors Equity Fund) having up to €130m to invest between them.

On the seed-funding front recently, companies like Galway software firm Converser has raised €1.2m, Cork firm Metabolic Diagnostic has raised €750,000, and in what is understood to be the largest seed-funding round in Europe so far, Cork e-commerce security start-up Trustev has raised €3m in seed investment from international investors.

Between them, some 189 Irish technology companies raised €269m from investors in 2012. While the amount raised is 2pc lower than the previous year, the number is up 18pc from 159 companies in 2011, according to the Irish Venture Capital Association. First-round funding represented 20pc of the funds raised, with the 80pc balance consisting of follow-on funding.

In addition to support from angel, seed and venture capital, Enterprise Ireland has created the Competitive Start Fund to help tech firms pique the interest of investors.

Not only that, individuals who have been unemployed for at least 15 months and who start their own unincorporated business are to receive a two-year exemption from income tax under a new Start Your Own Business scheme revealed in the recent budget.

HBAN and HBAP

In Ireland, there are two distinct angel investment communities being forged with the support of Enterprise Ireland and Intertrade Ireland. These include HBAN, which co-ordinates the community of investor syndicates that are springing up, and HBAP, which is a federation of individual, seasoned angel investors who like to invest on their own terms rather than being part of a syndicate.

With the rise in interest in supporting start-ups that could turn out to be the next big thing, Michael Culligan, national director of HBAN, said the key task is managing investor and start-up expectations around the reality of what investments are about.

“The angels need to understand the risks and their responsibilities if follow-on investment is required. The founders need to realise it isn’t just about the money but also the expertise and contacts that can be provided by the right angel investor."

At a European level, the amount of angel and seed capital available to tech start-ups is above average, Culligan said.

“Another factor in our favour is that in certain sectors, like software and medical devices, there are a lot of seasoned entrepreneurs who, like their counterparts on the west coast of the US, are instinctively attracted to being involved in a rising company for the second or third time."

Many of the syndicates popping up, Culligan added, tend to be either regionally based or focused around specific areas where the co-investors (now high net worth individuals) have cut their teeth, such as food, retail, telecoms, and pharmaceuticals.

“Some of these syndicates are prepared to do six investments over a couple of years as a group," Culligan said.

From his perspective, angel investors who invest as a group have a better chance of succeeding and 10pc of angel investors can enjoy a return of 10 times their original investment.

Before individuals can join the syndicates, they are screened, Culligan said. Their motives and hearts have to be in the right place.

“Business is all about people, it becomes even more challenging when you bring money into the equation. It’s important for the start-ups that investors will go the distance, the real test of that is when the bad times come," said Culligan.

“Ultimately, the syndicates are looking for people they can invest in who are strong enough to be leaders, but at the same time are open to taking their advice."

Angel investors have changed

From the individual angel-investor perspective is John Phelan, who manages HBAP.

Phelan said the calibre of angel investors in Ireland has changed, morphing in several years from speculator to calculating and shrewd investors.

“It’s become a more mature asset class. People are beginning to use it not as speculatively as they would 10 or 12 years ago to drive returns."

He said the key here is "smart money", where experienced investors will pursue markets they understand, "get" the technology, and feel a bond with the founders of the company they are investing in.

Phelan cited smart-energy company Endeco, which raised €1.6m in funding from sources including business angel investors, AIB Seed Capital Fund, AIB Start-up Accelerator Fund, and Enterprise Ireland.

“Endeco originally sought €750,000 for its second round but the investors who had significant European retail experience brought this up to €1.2m and helped them to get into a large channel for sales."

Yet investors are cautious about areas they struggle to understand, such as social media, and want to see evidence of a potential return on investment, said Phelan.

“What a lot of angels want to see is some sales traction or validation that there is a demand for the product."

Angel investors can bring more than funding

On the seed-funding front, Éanna Dáibhis, partner with the AIB Seed Capital Fund, said the involvement of angels in funding start-ups is critical, not only from the obvious financial perspective, but the knowledge they bring and the profile they add to the company.

“They are people who have invested before or, as is very often the case, they were themselves entrepreneurs," he said. "The fact they’ve succeeded in their respective industry is of incalculable advantage and critical to bringing a company to the next level."

The AIB Seed Capital Fund made 32 investments totalling €5.2m during 2013, including 12 new start-up and early stage companies.

Dáibhis said the tension felt in the industry in terms of follow-on funding for A and B rounds is very real, yet eyes are on the €175m venture-capital fund the Irish Government is establishing through Enterprise Ireland. This could have a value of €1bn as venture-capital firms could leverage the funding by a factor of eight to 10 times.

Dáibhis said the AIB Seed Capital Fund plans to make 10 new investments during 2014, though the main effort will be on supporting firms it has invested in to reach size and scale to attract follow-on investment.

Challenge for start-ups in 2014

Eamonn May, manager in charge of Growth Capital at Enterprise Ireland, said the key challenge start-ups in the tech space will face in 2014 will be demonstrating they can grow revenues.

“The seed and angel activity we saw in 2013 augur well for the year ahead. The real trick has been aligning the right investors with the right companies," he said.

Enterprise Ireland’s Competitive Start Fund has been fully active in 2013 and will continue to be very active this year, he added.

The follow-on funding aspect for firms looking to grow after attracting seed funding will be tough, May said. The process will be hard on investors, as well, who need returns and have high expectations of management teams.

May said the tension around follow-on funding will ease as the €175m Government investment in venture funding is leveraged by international venture capitalists. There is also the Innovation Fund for Ireland, a joint commitment by Enterprise Ireland and the National Pensions Reserve to invest €125m in building investment funds, and this has been instrumental in attracting international funds from DFJ Esprit, Highland Capital, Polaris and Sofinnova Ventures.

“Getting the follow-on funding is an international challenge, not just an Irish one, but the right steps are being taken to address the problem," said May.

A version of this article appeared in The Sunday Times on 12 January

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Editor John Kennedy is an award-winning technology journalist.

editorial@siliconrepublic.com