HOW BUSINESS ANGELS GET THEIR WINGS
Financial guru Peter Ranscombe meets the business angels investing in Scotland's up-and-coming businesses
One of the strangest parts of writing about finance is getting to grips with all the odd words and phrases. The stock market is littered with ‘bears’, ‘bulls’, and even ‘dead-cat bounces’.
Yet one phrase always conjures up more romantic imagery – ‘business angels’. Are these mythical beasts that descend from the heavens on fluffy white clouds to help companies, strumming tunefully on their harps as they go?
Not quite. But nor are business angels the firebreathing monsters portrayed in the Dragons’ Den television series.
‘At its most basic level, we’re talking about people with some means, who are investing their own money in private businesses,’ explains David Grahame, executive director at LINC Scotland, an umbrella organisation for business angels. ‘The key point is that they’re making their own decisions because they’re interested.’
Rather than buying shares in publicly listed companies that are traded on stock markets, angel investors are taking stakes in unlisted businesses. These companies need cash to help them grow – perhaps to invest in equipment or premises or hiring workers.
Angels want these companies to expand so that their shares become more valuable, and they can then sell them further down the line for more money than they paid, giving them a healthy return on their investment. They’re looking for skilled management teams with intellectual property (IP) – inventions, designs, or other ideas – that can be patented, trademarked, or protected in other ways to give them an edge.
These aren’t the types of companies that can simply walk into a high street bank and take out a loan or overdraft. They tend to be at an earlier stage in their development and tend to be higher risk.
Angel investors usually manage that risk by investing in more than one company; they build a portfolio. For every ten investments they make, they expect only one will deliver the stellar returns that are needed to make up for the other nine failing to deliver on their promise.
‘It’s not enough to just double your money here,’ says David. ‘Business angels need to invest in companies that have the potential to deliver a return that’s five or ten times greater than the amount that was invested.
‘They need to be patient too. This isn’t about a quick return after two years – the average length of investment is often more like nine years.’
Managing investments in ten companies would be too much for most individuals, so investors tend to come together to form business angel syndicates or groups. ‘Generally, this type of investing is better done as a team sport,’ points out David.
Teaming up certainly appears to be popular. LINC Scotland now has 21 member groups, which together represent around 2,000 investors.
Individual angels within a syndicate will usually take the lead with the one or two companies working in their specialist sectors.
“Angel investors are taking stakes in unlisted businesses
They will sit on the board of directors of those companies to share their experience and other advice to the management teams.
In some cases, that advice and mentoring can be equally as important as the cash that’s being invested in the company. Angels are normally well-connected in the wider business community and can make the introductions that are necessary to help entrepreneurs to grow their businesses.
‘While many angel investors will also be philanthropists and will support charities and social enterprises, they’re not investing in companies out of the goodness of their hearts,’ David adds. ‘They’re doing it on a commercial basis.
‘But it’s not just about the money. Most angels will have been successful in their business lives and now want to give something back to the business community.
‘Helping a company to grow can be very satisfying, even if you’re waiting for the returns. It’s what the Americans call “psychic income” – you get the satisfaction before you get the money.’
That desire to give something back to the business community certainly strikes a chord with Paul Atkinson, who has been an angel investor since selling two of his businesses back at the turn of the millennium. ‘Back then, it was still called “investing in other people’s companies” – I don’t remember anyone calling us business angels,’ he remembers.
After investing in a number of companies directly, Atkinson decided to turn investing into his ‘day job’ and in 2008 founded what has become Edinburgh-based PAR Equity, an investment firm that brings together a network of more than 200 angel investors and also runs an enterprise investment scheme (EIS), which allows people to invest in companies through their wealth managers or directly, depending on their level of investment experience.
As chair of PAR’s investor network, Atkinson is also usually the first point of contact for people who want to become angel investors. ‘We’re looking for people with experience of either building their own businesses or investing in unlisted companies, and who understand the risks that come with angel investing,’ he explains.
‘We look for people who have expertise about the areas in which we invest, which include many digital technology companies,’ he adds. ‘Being active investors and supporting the companies is a big part of what we do.’
Since it was founded, PAR Equity has led investments into 62 companies in the north of the UK, with about 70% of those businesses being based in Scotland. In total, it has led investments worth more than £250 million, and has grown its own team from three to 19 people.
There was no let up during lockdown, with 35 deals completed in the last tax year, featuring £17m from Par Equity investors alongside £26m from other investment partners. The switch to remote working during the pandemic has stoked interest in companies offering digital products and services.
Highlights in PAR Equity’s present portfolio include Current Health, which makes devices for monitoring people’s health remotely. Its technology played a role in the Covid-19 vaccine trials.
Another of its healthcare investments, PathXL, was sold to electronics giant Philips in 2016. The company has developed a way to spot tumour cells on tissue samples that have been digitised.
‘That technology has the potential to make a real difference,’ adds Atkinson. ‘We like things that make a difference.’