It's time to send in the business angels
8 March 2012
Last week I attended the National Angel Investors conference in Melbourne. The conference was attended by all the key players in the startup eco system; angel investor groups in Australia, international angels, entrepreneurs, accelerators and incubators, advisors and government officials. For me the key takeaways from the conference were:
- Angel investors, or business angels, have a real desire to make a contribution. Not only do they bring cash to their contribution to start ups, but also strategic and operational expertise developed over years in business, as former entrepreneurs themselves. Those years in business also mean a wealth of contacts and networks that provide non-financial benefits to start ups as well. It's well documented in the OECD publication Financing High-Growth Firms: The Role of Angel Investors that the reason why many business angels become involved in investing, is because they have achieved success in their own entrepreneurial endeavors. They want to give something back and gain some return on their investment in the process. However, given many businesses fail, their return comes with a high level of risk.
- Business angels are a catalyst for growth and success. Without a vibrant angel investor market, the next generation of businesses needed to create wealth and jobs will struggle to start and survive. Data collected shows that only a small percentage of start-ups get funded. Part of this is due to the quality of the deals, but it is mainly due to there not being enough angel investors. When you factor in all the time and effort business angels spend identifying and evaluating business investment opportunities, performing due diligence, negotiating investment terms and legal agreements and then coaching and supporting their investments, there are only so many investments they can make and manage. Which leads me to my next point...
- Is the Government doing enough to support early stage high risk investment in this country? When you consider the benefits angel investors bring to the table, we have to ask ourselves whether we are supporting this valuable resource sufficiently. While we have generous incentive and grant programs for small business, there is a need to encourage those with money, to invest some of it in smaller high risk ventures. A forum on SMEs issues conducted by CPA Australia, uncovered several interesting findings during their post GFC consultation with their members, business leaders and government. These findings included:
- Entrepreneurs need a greater level of support,
- There is scope to assist SMEs with managing their business and encouraging the develop of management capability would be beneficial to them,
- Tighter lending and investment conditions will prevail post GFC,
- There's a need for policy and tax incentives directed towards providing support to start-up businesses with good growth prospects, and
- Government should put more effort into increasing awareness of finance options for SMEs and how to access finance.
Business angels provide the funds and support entrepreneurs need, however they carry a high degree of risk in doing so. To address this imbalance, some countries have implemented policies and incentives to support and develop the growth of angel investors. One such country is the United Kingdom.
The UK Enterprise Investment Scheme (EIS) is designed to help smaller higher-risk trading companies raise finance by offering a range of tax relief to investors who purchase new shares in those companies. Many of these policies and incentives are ones that could be easily adopted in Australia, such as:
- Income tax relief for investors. In the UK investors in a qualifying company who hold their shares for a minimum period, are eligible for tax relief of between 20-30%. This can be offset against their personal tax liability, in the year their investment was made, with a maximum deduction of up to £100,000.
This sort of relief is in stark contrast to the changes introduced to Australian laws affecting Employee Share Schemes not so long ago. These changes removed some of the tax benefits available to start-ups, to attract the management talent they needed, but often couldn't afford to pay for in traditional salary and wages agreements.
- A capital gains tax exemption for investors that receive the income tax relief, but dispose of their shares before the minimum holding period is reached.
- Loss relief that provides the ability for a loss on the disposal of shares minus any income tax relief, to be applied against income in the year the shares were disposed or the prior year, instead of being offset against capital gains.
- Capital gains tax deferral relief, which allows payment of tax on a capital gain to be deferred when the gain is invested in shares of an EIS qualifying company. The gain can come from the disposal of any type of asset, but the investment must be made within the year before or three years after the gain arose.
The EIS also supports investment through EIS Funds, which coordinates investment in a number of companies on business angels' behalf. This saves investors the time spent on the investment process and administration if they were to invest on their own as an individual. In Australia, the formation of angel groups is a self-organised means of achieving the same level of coordination and provides mutual support for new angels learning about the investment process, opportunities and pitfalls. Formal recognition, funding and Government support for these groups, as well as peak bodies, to further develop and grow the business angel community is required.
If we are genuinely concerned about a two speed economy, then shouldn't we assist this important segment of our business community? One way the Government can achieve this is through directing some of the funds generated from the resources and mining taxes towards the support and growth of a vibrant angel investment community. This level of funding and support is needed, if we are to promote and send our start-ups out there to compete on a global field and expect the resulting innovation, employment and financial benefits to flow back to our economy.