Could angels be answer to Welsh firms’ prayers?
Investment in Welsh businesses by angel investors is growing, but it is still an underutilised funding route. Is this because Wales doesn’t believe in angels? Mark Sterritt, from the British Business Bank, examines the issue
ACCESS to finance for businesses across the UK is inconsistent, with uneven national, regional and local distribution.
For seemingly near-identical businesses, where they are based can have a significant impact on the type of finance and the finance providers they have access to.
Business angels are an important source of equity investment in startup and early-stage businesses seeking to grow, providing “smart capital”. Alongside equity finance, angel investors also bring business experience, strategic advice and networking opportunities.
With this in mind, we know that angels are vital for Welsh national, regional and local financial ecosystems to flourish.
We also know that developing angel finance clusters and networks outside of London and the SouthEast – regions well stocked with angel-investors – is not easy and requires consistent work.
This is something that, for example, the Development Bank of Wales’ Angels Invest Programme, the biggest angel network in Wales, helps to address by connecting experienced investors with Welsh businesses seeking private investment.
Government funds typically make important contributions to local equity markets.
For example, the British Business Bank’s recent Small Business Equity Tracker states that 58% of all announced equity deals in Wales in 2020 involved a government fund.
The British Business Bank has its own £100m Regional Angels Programme, which is delivered through its commercial subsidiary, British Business Investments. The programme was established to help reduce regional imbalances in access to early-stage equity finance for smaller businesses across the UK.
Since launching in October 2018, the Regional Angels Programme has made eight portfolio investments, totalling £100m of commitments.
It has deployed over £25m into more than 250 businesses, including £1.4m through 12 deals across Wales, from Newport to Anglesey.
Underlying investments include Hengoed-based Transcend Packaging, which manufactures sustainable food and beverage packaging aimed at reducing use of single-use plastic. British Business Investments’ delivery partner SFC Capital participated in a £7.5m fundraise originally planned prior to Covid-19 and Transcend Packaging planned to use this funding to acquire new state-of-theart equipment to support its growth.
Beyond our own Regional Angels Programme, it has been encouraging to see some high-profile deals in priority sectors like green energy, including the investment in Swansea-based Marine Power Systems led by a syndicate of Welsh angels, with match funding from the Development Bank of Wales.
Further contributions from private investors brought the total of their latest equity fundraise to £1.7m.
However, despite plenty of positive examples, we can’t pretend that the last year has been normal.
There were significant disturbances to the financial landscape, and the angel investment community was not immune to this.
However, the picture is not a wholly negative one, as the Bank’s most recent Business Angels Market report revealed that despite almost half of angels reporting that Covid19 has had a negative impact on their investment activity, overall, the business angel population remains supportive of UK businesses and is continuing to invest.
Somewhat unsurprisingly, the report did reveal angels were investing lower amounts and were generally more cautious last year.
So what’s the situation on the ground when it comes to angel finance in Wales?
Apart from some significant and hugely positive deals, there is still a way to go for Wales, with the proportion of deals of the overall equity market in 2020 representing only 4%.
This does match our neighbours in the South-West of England, but is behind many other regions and nations, most notably Scotland at 12%.
But why? According to the Bank’s recent survey of financial intermediaries conducted by Ipsos MORI, only 20% of respondents in Wales said smaller businesses were wellinformed about early-stage equity (business angels) as a finance option.
If you contrast that with debt finance, 80% of respondents in Wales thought that smaller businesses were well-informed about it as an option.
When asked about the local finance ecosystem for supporting smaller businesses, only 36% of respondents in Wales said it was adequate for smaller businesses starting up. Most respondents (78%) felt the ecosystem was adequate for smaller businesses consolidating success.
So, low awareness of the option of angel investment, combined with potentially a lack of scale and strength in the local ecosystem appear to be two key issues to address.
However, I firmly believe that the angel finance ecosystem in Wales is evolving into something that the region should feel very positive about.
There are many exciting angel syndicates and investors doing excellent work in the marketplace. When combined with the backing of the Wales Angel Co-Investment Fund and our own Regional Angels Programme, this provides fertile ground to enable the angel finance environment to flourish.
Looking ahead, anticipated angel investment trends are likely to be based on consistent sectoral preferences demonstrated by angels in recent years and these are unlikely to fall out of favour any time soon. Sectors including healthcare, digital health, medtech, biotech, life sciences, pharmaceuticals and fintech were all doing well pre-pandemic and fared notably well throughout. Wales is well-populated with smaller businesses operating in these sectors and so should be a hugely appealing prospect for greater angel investment as we move forward in the economic recovery.