UK Business Angels Association (ATF 32)

Access to Finance inquiry

UK Business Angels Association is the trade body for angel and early stage investing, supporting over 15,000 investors in the UK. Our membership reflects the diversity of the investment community and includes individual angels, angel networks, syndicates, equity crowdfunding platforms, early stage VC funds, accelerators and incubators and professional intermediaries. UKBAA is pleased to contribute to the BIS Select Committee review into Access to Finance.

The inquiry is timely for our association since we have recently been carrying out a review of the early stage finance ecosystem - and the role of angels within it, looking at how it has changed since the financial crisis, how it is operating at present , what works, where the problems and bottlenecks lie, and how we can improve it.

To achieve this review UKBAA has consulted with many different representatives of our membership including angel investors, Crowdfunders, VCs and Entrepreneurs and organised two round table sessions with key representatives of the market to enable in depth discussions.

Please see below our responses to the BIS Select Committee Enquiry.

How has the landscape for access to finance evolved since the end of the financial crisis?

The Positive Developments:

Changing Profile of Angel Investors:

Britain has become a nation of angels.  Our “Nation of Angels” Research[1] carried out by UKBAA in collaboration with the Centre for Entreprneurs and supported by the Enterprise Research Centre   showed that there are many more investors entering the market place , supported by the EIS and SEIS tax breaks , as well as the advent of online investing and crowdfunding. Our research showed that angel investors are much younger with 43% in our survey being under 50 years of age and with many more successful entrepreneurs reinvesting their success and skills back into the next generation of start-ups.  Also there is an increase in the number of women investors, now 14% of all investors when previously this had been only 5. However there are still not enough women with financial capacity and business skills engaging in this market.  Angels are also not only investing in their own locality, but now report that one in 4 of their deals are outside the region or international.

Angel investing has become more professional, and the growth in the number of angel syndicates is driving this forward

Angels are adopting more sophisticated approaches to investing, acting more like VC funds and conducting greater levels of due diligence. In some cases, angel syndicates now compete directly with VC firms. Angel funding rounds are increasing in size. Angel co-investment funds are adding to firepower and capacity. The Angel Co-Fund has also been a strong catalyser in driving syndication. Currently 83% of angel deals are done by syndicates of angels ( Nation Of Angels January 2015)

The average Angel CoFund deal is £1.4m - an unimaginable round size just ten years ago. Growth companies can look to angels for scale-up finance.

The emergence of crowd equity platforms and the digitalisation of investment have allowed more people to invest - when they want, and the amounts that they want.

By making it easier for people to invest, crowd equity platforms have democratised investment, by enabling many people to invest small amounts in early stage companies. At the same time, significant large investments are also being made on the platforms. More angel investors have been created, including many time-poor professionals in the City and beyond.

Early stage finance is more visible

The investment in marketing by crowdfunding platforms has built up their brands and created a greater awareness of how to access finance. Social media enables greater brand awareness for VC firms, angel syndicates and individual Lead/Serial angels. Angels are no longer secretive. They are making themselves visible and accessible - and in return they are seeing quality deal-flow and attracting co-investors (when previously all angels kept themselves under the radar).

Angel and early-stage investment sources are growing in scale and diversity

New sources of finance, including next generation family offices, are entering the market and wish to invest in early-stage companies. The professionalisation of investors is leading to better returns and outcomes, which in turn acts as a driver to attracting more investment. Changes to pensions both in terms of regulation and participation create a substantial opportunity for more investment within the angel eco-system. Individual people will want or need more diversity and investment opportunities - and that will include angel investing.

What have been the most successful Government policies to assist growing companies access private finance and where is there room for improvement?

The Government has been extremely supportive of schemes to increase the level of investment available to entrepreneurs and to encourage more individuals to invest into small businesses.

EIS/SEIS

The introduction of SEIS and the extension to EIS from 20% to 30% has created a tax environment that has encouraged many more individuals to invest, by mitigating their sense of risk in investing in early stage  businesses. The level of investment using EIS and SEIS is rising and the recent £1.5bn invested through EIS in 2014-15 (HMRC) was the highest level ever recorded.  UKBAA’s recent research carried out by the Enterprise Research Centre in 2014-15 (Nation of Angels January 2015)  has shown that 9 out 10 angels are using EIS and SEIS for  their investments. Whilst angels in our survey reported that they used EIS/SEIS for 80% of all investments made in SMEs.

Uncertainty over the future of EIS/SEIS

Angel investment in the UK has been built around the success of EIS and SEIS. Yet recent changes to these schemes, negotiated between the Government and the European Commission and announced in the 2015 Summer Budget could create considesrable market uncertainty an d reduce usage of these schemes by private investors and this would impact heavily on the level of  investment available to  businesses and thus on the whole chain of early-stage and growth finance in the UK. The restrictions of the schemes to companies less than 7 years old and  on EIS investment monies used  to purchase a subsidiary, a trade, intangible assets or goodwill, do not recognise how companies grow and develop. We are working closely with BVCA, EISA and AIC to work with HMT and HMRC to review and achieve adjustments.

We are also concerned that these restrictions imposed by the European Commission reflect a culture that is only focused on supporting start-ups in Europe when there is a clear need to ensure companies can access the finance they need to support growth and scale-up. Without such a focus on scale-up, there is a danger that all of our European “unicorns” and high growth companies will move to the US or other international markets to obtain the level of capital investment and support they need to achieve global success.

The £100m Angel Co-Fund now operated by the British Business Bank has also been a strong catalyst for the encouragement of syndication and the professionalisation of the angel community. Currently 83% of angel deals are done by syndicates of angels ( Nation Of Angels January 2015).  The Angel Cofund is giving greater fire power to syndicates to enable them to build  bigger deals to meet growth needs. The average Angel CoFund deal is £1.4m - an unimaginable round size just ten years ago.

However there are only a limited number of deals done by the Angel CoFund since its processes are often regarded as slow and cumbersome in making decisions and  this  can prevent many syndicates from taking advantage of the Co Fund. This has resulted in a patchy take-up of the Angel Cofund support  across the UK.

A number of LEPs are now looking to develop their own local funds which can be more agile and flexible than the existing AngelCoFund. For example the Mayor of London has supported a new £25m London Co-Investment Fund, drawing on the “Going Places Fund”.This fund has been set up based on the co investment model of the Scottish Investment Bank Angel Co Investment Fund, whereby pre-qualified angel networks and VCs can access a pre allocated pot of co finance funds to co-invest alongside their deals, making the process of decision making on deals much faster and more efficient than the Angel CoFund operated by the BBB.

SITR: We are supportive of the new Social Investment Tax Relief (SITR) which allows investors to receive relief on income tax and capital gains tax for money invested into social enterprises and charities. Such firms are currently eligible for up to £250,000 of tax-advantaged investment over three years.  Our research (Nation of Angels) has shown that 1 in 4 angels are interested in supporting social impact businesses as part of their mixed portfolio and there is clear opportunity to increase the number and level of social investors. . We believe that SITR scheme should be less restricted and offer a larger level of investment per annum to meet the finance needs of these businesses and be more attractive to angel investors and increase the number of investors engaging in this area.

Does the UK have globally competitive markets / suppliers for financing (and debt financing) at 1) seed 2) venture and 3) growth stages? What steps could Government take to strengthen these systems?

We believe that there is an adequate level of capital available to support small businesses at seed and early venture stage, provided that there are no significant changes to the EIS and SEIS scheme.

However, we have identified a number of Challenges:

There is insufficient scale-up finance available

The focus has been solely on startup finance and SEIS/EIS funding. It has become even harder for growth companies to secure growth capital. There have been some issues identified at the interface with Series A in relation to the share structures required by EIS and where preferential shares are structured by the VC/PE, thus affecting the capacity of angel and early stage investors to maintain their position. This can deter investors from pursuing the opportunity to access next level growth capital. The funnel of investment has fewer funds at the higher end with many VC and PE funds having challenges to raise the next Fund as Institutional investors; including Pension Funds have become more risk averse. The results as refreenced above is that the UK’s high growth busiensses are likley to look to the US or other international markets as their location to find the finance and environment they need to support their ongoing growth,

Lack of Liquidity and exits for Angel Investors

A further key challenge for the market is the lack of liquidity and exits for angel and early stage investors to enable them to recycle their finance back into further small businesses. The number of startups has increased and far outstrips the potential for exits. The proportion of startups that will exit is shrinking. The challenge to find a trade sale  has grown with Corporates being unwilling to engage in the earlier cycle of investment and many Corporates remain very risk averse. At the same time many businesses backed by angels still find the  IPO markets a challenge to access , despite the reduction in stamp duty and efforts by AIM and the LSE Group to create a less  demanding pathway. So currently it now takes between eight to 12 years to get a positive exit. There is a clear need to support a better secondary market to improve the whole ecosystem and encourage greater participation of corporates to encourage them to support trade sales.

Investment is patchy across the UK regions

The London-Cambridge-Oxford triangle is indeed a golden one - yet its strengths do not yet benefit the rest of the country. There is negligible co-investment between the north and south. In many regions, angels and early stage VCs are less visible and key players are not well connected. Local entrepreneurs cannot access significant growth capital from outside of their region. While initiatives such as Tech North are attempting to address these issues, much remains to be done.  UKBAA is working with all key players in the regions to stimulate the development of angel investment.

However we believe there is a role for both the LEPS as well as the private sector to support the growth and development of Angel investing around the development of the new Growth Hubs. This will include provide a focal point for new investors to meet and access quality deal flow,  gain access to capacity building and opportunities to form syndicates, as well as exploiting the potential for  co-investment funds.

Need for better Connectivity across Funding Sources:

Overall UKBAA has identified that there is a need for much greater connectivity across the different finance sources. Whether between angels and VCs, individual investors and syndicates, or syndicates and corporates, there are substantial opportunities for achieving greater collaboration and co-operation among key players in the ecosystem.

There is scope to improve communication between all the different funding sources (eg re their requirements/parameters). Knowledge about deals and information on outcomes can be shared more widely and we need to encourage more opportunities for co-investment.

More investors and entrepreneurs should tell their stories and case studies could be ‘showcased’ online, providing greater understanding and insight for entrepreneurs and investors.

There are clear opportunities to break down internal competitiveness and improve sharing among key players to support both deal flow and deal sharing and improve the potential to build the levels of finance needed. New and dynamic co-investment relationships across regional boundaries are required to ensure entrepreneurs can access the finance they need

To begin to address this, UKBAA has introduced the UKBAA Deal share platform www.ukbaa.org.uk/dealshare that enables angels and VCs to share and build investments in SMEs across all the regions of the UK.

Need for increased Sharing of Data and Market intelligence

A more transparent market will lead to greater capacity and better connectivity. With wider, faster access to more data, more players in the ecosystem can share and communicate their successes and challenge.  Investors and especially crowdfunders need to share intelligence on successes and failures; all players in the ecosystem should have clearer understanding of what works and what doesn’t.

In relation to data sharing, we need to access more robust statistics and data on the market. There should be greater sharing of knowledge on investment activity and also outcomes among all key players. Currently private investors and  groups are reluctant to share data on their investments and this needs to be much more transparent.

Build increased capacity and capability for entrepreneurs and investors

Given the growth in the number of entrepreneurs, it is vital to improve efforts to equip them with the skills, tools and information to help them become investment-ready. The provision of investment readiness offered to small businesses has been very patchy to date with the need to give entrepreneurs much better access to skills and information on both identifying the right finance for their needs and how to successfully position their business to attract investment. With the demise ofo the Growth Accelerator Access to finance porgrammes and devolution to the LEPs and Growth Hubs, it is vital to ensure a quality and consistent approach across these localised  hubs to mentoring and support for investment readiness which builds close connections to the investment community.

The rise of so many novice investors attracted by the SEIS and EIS programmes and by crowdfunding who do not have the skills and experience of angel investing requires the need to build up knowledge and understanding of how to invest effectively, so that they remain committed and engaged to angel investing and can make relevant judgements on both selecting businesses that can benefit from angel investing and support their long term growth. At UKBAA we have developed a programme of education for new investors and we are now developing an accredited  programme of e-learning which will give a new OfQual validated Certificate of Angel Investing followed by a competence test, based on having made a number of investments and use of skills leading to the award of Accredited Angel investor.  We believe that this will create a strong force for quality standards and professionalism in the market and will be specifically addressing investors who  are investing on the crowdfunding platforms to reinforce  their effectiveness in the market (see also comments on Crowdfunding below).

The emergence of angel syndicates and co-investment funds creates an opportunity to build a larger cadre of lead angel investors, in order to further professionalise the marketplace. The role of Lead Angels is vital both in mobilising other angels to syndicate into deals and they play  a key role in providing direct support to the investee entrepreneurs to support onoing growth and access to further funding. Lead Angels are generally experienced angels often wth direct industry experience combined with experience of investing. UKBAA is seeking to develop a national pool of Lead Angels

Are alternative methods of raising finance (such as crowd-funding and peer-to-peer) sufficiently well-regulated and monitored for companies to be confident in utilising them?

We are extremely supportive of the Government’s policy to enable a diverse range of finance to be available for entrepreneurs reflecting the need to have the right finance at the right stage of growth. 

UKBAA has been supportive of the growth of equity crowdfunding, both as an alternative source of finance to angel investing and as a complement.  To reflect this UKBAA has currently 11 equity Crowdfunding platforms as part of its membership and these are seen as providing a vital role in the investment finance supply chain.  Angel investors are both investing in the platforms as investment opportunities and co-investing alongside retail investors on the site. Our Nation of Angel research showed that 45% of the investors surveyed had done deals on crowd funding sites alongside their mainstream investments.

Combined with the opportunity offered by SEIS and EIS schemes, we have witnessed the significant impact on the volume of private investors engaged in investing in small businesses through the crowdfunding platforms. They have broadened the base of the pyramid by enabling many people to invest small amounts in early stage companies. However, given the  very significant number of new investors that are investing on these platforms, this has resulted in a large wave of inexperienced and uninformed individuals taking decisions on which propositions to support , without an understanding of the market whilst many of the entrepreneurs raising on these sites may not be investment ready. This has resulted in very high valuations and price paid for the investment, whilst not necessarily appreciating the investment potential and having unrealistic expectations of outcomes. At the same time, investment sizes are growing with signficant sums over £2-3m being raised on the platform.

Nevertheless, unlike angel investing, there is very little available ongoing support being offered by the investors to support the growth of the company once the investment has gone in and thus there is. no direct means to ensure an effective outcome for the entrepreneur or return on investment.

We have as a trade body supported the regulatory framework that was introduced for equity crowdfunding by the FCA and felt that its light touch approach was relevant to both encourage the development of this area of finance, whilst offering a certain level of protection for the investors, drawing on the FSMA criteria for HNW or sophisticated, as well as the 10% cap for retail investors. However in view of the issues outlined above, UKBAA recognizes that there are challenges to the market.

We especially see the importance of addressing the skills and knowledge gap among crowd fund investors through enabling access to a programmer of quality online learning and accreditation process, as we have described above, in the which will be accessible for investors on crowdfunding platforms to give them better skills and knowledge of the process and role of angel investing.

There is also a need to bring more transparency to the crowdfunding market with clear and regular statistics on the performance of the investment portfolio, levels of failure and poor growth. It is a known fact  that over 50% of all deals among  angel and early stage investors will fail and not return the stake money.  Whilst it can be regarded as early days to identify outcomes in the investment cycle, it will be important for the platforms to provide access to this data to counteract unrealistic expectations of growth and successful outcomes. We believe that this transparent approach, combined with  offering better access to skills and knowledge would be an important means to counteract the need to place tighter regulatory measures on equity crowdfunding.

There are now some new more sophisticated models of crowdfunding platforms emerging in the second wave, attracting some very experienced professonals from the  investment  market  bringing new more  investor-led approaches  to both selection, due diligence and deal structuring.   

It is also felt that there will be some correction and consolidation of the market in due course with some of the weaker platforms  going out as we develop further transparency on the success rate of platforms and enabling more successful models become more integrated into the rest of the finance value chain.

What are the main improvements or interventions, in terms of finance, that the Government should make to achieve the objective of increasing the number of successful and high-growth businesses in the private sector?

As we have made clear throughout this submission, increasing the number of successful high-growth businesses in the UK is entirely dependent on a strong financial ecosystem operating within a stable political and economic environment.  We therefore reiterate our earlier stated concerns that the Government should retain certainty and consistency in relation to the EIS and SEIS tax relief systems to ensure that the existing pool of vital private investment into high growth businesses is not reduced or deterred by the introduction of new limiting criteria required by State Aid rules.

There are currently a number of situations where this ecosystem is fragmented, and government could have a role to play in improving connectivity. Some of these opportunities are system-based, such as the development of deal-sharing platforms and secondary markets

There is a role for Government to support access to clearer information and signposting to finance for entrepreneurs, in order to enable them to identify the right source of investment to meet their growth needs. This includes the support of an  online platform to enable all of the finance sources to effectively share information and advice on how to effectively identify and access the right source of finance to meet their needs.

There is a further role for Government to improve transparency and support the access to relevant market data. One key area is to gain the commitment of HMRC to open up the data on the EIS and SEIS schemes so that much more information can be obtained on both the investors themselves and much more detail on the profile of their investments and their successes and failures.

There are also opportunities to improve the connection between the different areas of Government and public policy that affect both the support of entrepreneurial growth and the functioning of the finance ecosystem. These policy areas include: start-up and general business support, financing of innovation (BIS and the LEPs); tax benefits (HMT/HMRC); financial regulation (FCA); regional devolution (Cabinet Office/DCLG).

There is an opportunity for a cross departmental approach to the funding of entrepreneurial growth  supported by regular dialogue and sharing between key departmental representatives and with the key trade bodies to ensure a joined up approach to access to finance .

We remain at the disposal of the BIS Select Committee to provide further clarification on any of the issues identified above.  Please note we have also contributed to a further joint submission in conjunction with BVCA, EISA and AIC.

Jenny Tooth OBE

Chief Executive

10 February 2016

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