International Trends in “Angel” Investing

So, you’re looking to become an “ANGEL” investor.  Thumbs up!  There are many reasons why you might become and angel investor.  You may be looking for less risk and more opportunities.

Your ability to invest smaller amounts in more companies will allow you to spread your risk and also increase your chances of picking a winner! (maybe even the next facebook)  Oh, did I mention you are guaranteed a great deal flow.

As an angel the more you invest, the more you learn, like most things in life with experience —you get to know what spells SUCCESS companies, in their management team, and in the entrepreneurs, themselves.

You know how to Pick the winner.

It’s wise even to start a small fund where you can bring in other investors and create a partnership venture.

Improving access to money for women led businesses, along with more women angels and more women specific funds are needed in Canada.  The recent report by the Organization for Economic Cooperation and Development (OECD) that looked at new businesses and startups and how they have been raising money (since the crisis) found only 5 % of angel investors in Europe are women and there are only 13 % in the US.   Women investors are really low in numbers in the angel investment community.

There are groups in the US and in Europe that work to engage women in angel investing.  They also suggest if more women are investors, more women in high growth firms would be successful to get angel and/or VC investment.

Recently, Canada’s Venture Capital & Private Equity Association, CVCA, president Gregory Smith, said there is concern about whether enough fund-raising can be dong to support the demand for investments. This situation was illustrated by the fact new commitments to Canadian VCs were flat last year at $1-billion.

“Canada has a historic opportunity to become an innovation leader,” Smith said, adding that “in order to act decisively on this opportunity, we must first overcome challenges to supplying VC funds that, in turn, supply entrepreneurs.”

So what’s the solution?  This challenge has been around for a long time.  Is it going to change?  How can Canada and the US support innovation and start ups?  How can Canada do a better job of supporting startups? Many say there is not an easy solution?  Is there an easy fix from government or from investors?

A report by the Organization for Economic Cooperation and Development (OECD) look at how startups have been raising money since the worldwide credit crisis.  According to the report, banks are reluctant to provide loans to startups and VC firms are investing in the mid – larger stage companies with a particular industry specific.

The Solutions – growing class of experienced entrepreneurs and business people step in to fill this funding gap.   These are the “ANGELS”.  They not only invest but help mentor the startups.  This is a growing trend globally.

Government policies are boosting angel investment, including tax incentives, in the UK and France and co-investment funds in the Netherlands, Scotland and New Zealand. In Canada, there are investment scenarios as well for Angels with major tax incentives.

Usually, policy makers tend to focus on the venture capital market, which is more visible than the angel market.  However, data predicts angel investors will continue to be the CRITICAL SOLUTION in overcoming the financial and growth challenges facing entrepreneurs, in turn, contributing to innovation and job creation, according to the report.

Also, the report noted that more exits and success are needed in past investments.  I say, think long term again.  But again, without money it is hard for startups to grow and become “purchase attractive” (acquisition targets).  It makes sense if we don’t have enough “purchase attractive” businesses there is usually less interest from investors.

The chairman of India Infoline group (IIFL), Nirmal Jain  says the market always runs on anticipation. He says, “Many times people look at liquidity vis-a-vis fundamentals but if liquidity improves fundamentals can improve because most of the companies can raise equity, reduce debt, recast the balance sheet and if the money market condition becomes easier then money can be raised from overseas or money can be raised locally at lower cost and that also improves fundamentals.”

Says Jain, “If you are holding good long-term stock, even if they correct by few percentage points, in a market like this when momentum is behind you, it is better to hold on rather than book profit in a hurry unless you aren’t very sure about the fundamentals of the company and are looking at exit opportunities.”

The signals that Jain is picking up at the IIFL Investor Conference where he is interacting with over 400 global investors and more than 90 companies is that the worst appears to be behind us with investors optimistic about the future.

“We are just not as smart as we think we are,” said Bill James, the statistician and author who inspired Billy Beane of “Moneyball” fame to choose baseball players by new standards.   Sometimes, experts first ignore stocks and business changers.

Reported by the Huffington Post:

“Those paid to secure top talent missed the signs of Lin’s worth for years.  Yet, again if Apple could fire Steve Jobs, then it makes sense that the metrics by which we measure a basketball player could fail as well, experts told The Huffington Post.

“The human tendency is to think in terms of a model,” said Andrew Lo, a professor of finance at the MIT Sloan School of Management. “We have a model for what a basketball player should look like, be like and act like. It’s the same for what a good firm model or stock might look like. Occasionally, our preconceived notions are shattered.”  

Lo said that evaluators in any field develop a diagnostic short-hand to make many decisions quickly, and success that deviates from those standards should force evaluators to adopt a more sophisticated scale.

Lo equated Lin’s ascent to the index fund Vanguard in the 1970s. No one saw it coming. Back then, observers thought picking 500 companies based on market cap was absurd. “It’s become a multi-trillion dollar industry that has provided tremendous value for all investors,” Lo said.

“Sometimes what we think are the best characteristics don’t prove to be,” he said. “In the stock market, most people think about growth, growth, growth, and don’t think about price. They often buy overpriced stocks that don’t do well.”

It’s the unseen that will ultimately determine true value, said Jeff Sica, the president of SICA Wealth Management. A company will often pick a new CEO who was the CEO of another successful company, or a prestigious investment firm will likely pluck its new talent from only the best schools, Sica said. Factors like a candidate’s enterprise or temperament often take a back seat. In Lin’s case, Sica said, “You can’t measure someone’s desire and intensity to succeed. The same holds for business leaders.”

“You’re turning the evaluation product into a computation mode, trying to oversimplify a complicated process,” Sica said.

“Don’t be a bull, or a bear.  Just be right.”


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