Financing High-Growth Firms THE ROLE OF ANGEL INVESTORS Contents Financing High-Growth Executive summary Firms Chapter 1. Overview of financing for seed and early-stage companies • Project overview • Background on financing for seed and early-stage companies THE ROLE OF ANGEL INVESTORS Chapter 2. Angel investment: Definitions, data and processes • Definitions of angel investment • Angel investment process • Data on angel financing Chapter 3. Trends and developments in the angel market around the world • Some of the key success factors for angel investing • Challenges for the angel investment market • Recent trends and developments Fin • Evolution by region/country a n c Chapter 4. The role of policy in facilitating angel investment in • Overview of public intervention in seed/early-stage financing g H • Targeted angel financing policies ig • Supply-side measures h - • Demand-side measures G r • Conclusions and further work o w t h F ir m s T H E R O L E O F A N G E L Please cite this publication as: IN V OECD (2011), Financing High-Growth Firms: The Role of Angel Investors, OECD Publishing. E S http://dx.doi.org/10.1787/9789264118782-en T O This work is published on the OECD iLibrary, which gathers all OECD books, periodicals and R S statistical databases. Visit www.oecd-ilibrary.org, and do not hesitate to contact us for more information. ISBN 978-92-64-11877-5 -:HSTCQE=VV]\\Z: 92 2011 15 1 P Financing High-Growth Firms THE ROLE OF ANGEL INVESTORS This work is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Organisation or of the governments of its member countries. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Please cite this publication as: OECD (2011), Financing High-Growth Firms: The Role of Angel Investors, OECD Publishing. http://dx.doi.org/10.1787/9789264118782-en ISBN 978-92-64-11877-5 (print) ISBN 978-92-64-11878-2 (PDF) The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. Photo credits: Cover © Archerix/Shutterstock. Corrigenda to OECD publications may be found on line at: www.oecd.org/publishing/corrigenda. © OECD 2011 You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases and multimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitable acknowledgement of OECD as source and copyright owner is given. All requests for public or commercial use and translation rights should be submitted to [email protected]. Requests for permission to photocopy portions of this material for public or commercial use shall be addressed directly to the Copyright Clearance Center (CCC) at [email protected] or the Centre français d’exploitation du droit de copie (CFC) at [email protected]. – 3 FOREWORD Foreword This report covers seed and early-stage financing for high-growth companies in OECD and non-OECD countries with a primary focus on angel investment. Angel investment is the primary source of outside equity financing and support for start-ups in a number of countries, yet it is frequently overlooked as angel investors are often not visible. Following the recent financial crisis and continued difficult economic environment, angel investors have been playing an important role in filling financing gaps left by banks and venture capital firms. This report provides an in-depth look into angel investment, including definitions, data and processes. It reviews developments around the world and identifies some of the key success factors, challenges and recent trends. It then discusses policy measures for promoting angel investment, with examples from countries which have been active in this area. As part of the background research for this project, over 100 people were interviewed from 32 countries. This volume summarises the work of the High-Growth Financing Project of the OECD Science, Technology and Industry Directorate’s Committee for Industry, Innovation and Entrepreneurship (CIIE). The project was generously supported by the Australian government with input provided by the member countries of the OECD represented in the CIIE. The project has been managed and this report written by Karen Wilson, consultant for the Structural Policy Division of the OECD Directorate for Science, Technology and Industry. FINANCING HIGH-GROWTH FIRMS: THE ROLE OF ANGEL INVESTORS – © OECD 2011 4– ACKNOWLEDGEMENTS Acknowledgements The OECD would like to thank the many people who have contributed to this project. This includes all of the people interviewed and consulted in the process as well as the angel associations and federations around the world who shared information and data: • Australian Association of Angel Investors (AAAI, Australia) • Angel Association of New Zealand (New Zealand) • Angel Capital Association (ACA, United States) • British Business Angels Association (BBAA, United Kingdom) • European Trade Association for Business Angels, Seed Funds and other Early Stage Market Players (EBAN, Europe) • European Private Equity and Venture Capital Association (EVCA, Europe) • LINC Scotland (Scotland) • National Angel Capital Organization (NACO, Canada) • World Business Angel Association (WBAA, International) The complete list of people interviewed can be found in Annex A. The author would like to give special thanks to Richard Snabel, Damien Ellwood, Arthur Lau, Margaret Lee and Veronica Morales from the Department of Innovation, Industry, Science and Research in the Australian government for their support, time and input on the project. The author also wishes to recognise and thank Christian Reimsbach-Kounatze, Information Economist/Policy Analyst in the OECD Directorate for Science, Technology and Industry, for his work on the data section of this publication. FINANCING HIGH-GROWTH FIRMS: THE ROLE OF ANGEL INVESTORS – © OECD 2011 – 5 TABLE OF CONTENTS Table of contents Executive summary ....................................................................................................... 9 Chapter 1. Overview of financing for seed and early-stage companies ................. 15 Project overview ........................................................................................................ 16 Background on financing for seed and early-stage companies ................................. 18 References ................................................................................................................. 25 Chapter 2. Angel investment: Definitions, data and processes ............................... 27 Definitions of angel investment ................................................................................ 28 Angel investment process.......................................................................................... 31 Data on angel financing............................................................................................. 44 Notes .......................................................................................................................... 67 References ................................................................................................................. 68 Chapter 3. Trends and developments in the angel market around the world ....... 71 Some of the key success factors for angel investing ................................................. 72 Challenges for the angel investment market ............................................................. 73 Recent trends and developments ............................................................................... 75 Evolution by region/country...................................................................................... 79 Notes .......................................................................................................................... 93 References ................................................................................................................. 94 Chapter 4. The role of policy in facilitating angel investment ................................ 95 Overview of public intervention in seed/early-stage financing ................................. 96 Targeted angel financing policies............................................................................ 100 Supply-side measures .............................................................................................. 101 Demand-side measures ............................................................................................ 123 Conclusions and further work ................................................................................. 129 Notes ........................................................................................................................ 130 References ............................................................................................................... 131 Annex A. List of interviewees .................................................................................... 135 Annex B. List of national angel associations/federations of networks ....................... 143 FINANCING HIGH-GROWTH FIRMS: THE ROLE OF ANGEL INVESTORS – © OECD 2011 6– TABLE OF CONTENTS Boxes Box 1.1. Findings from the Pilot OECD Scoreboard on SME and Entrepreneurship Financing Data and Policies ...................................................................................... 20 Box 2.1. Tech Coast Angels ......................................................................................... 35 Box 2.2. Common Angels ............................................................................................. 36 Box 2.3. Examples of the different organisational forms of business angel networks (BANs) in France ...................................................................................................... 37 Box 2.4. METUTECH, Turkey ..................................................................................... 42 Box 2.5. Technological Incubators Programme, Israel ................................................. 42 Box 2.6. Commercialisation Australia .......................................................................... 43 Box 2.7. Measuring business angels: Moving forward ................................................. 47 Box 2.8. Golden Seeds .................................................................................................. 65 Box 2.9. Astia ............................................................................................................... 66 Box 3.1. Accelerators versus incubators ....................................................................... 76 Box 3.2. Seraphim Fund ............................................................................................... 78 Box 3.3. Austria Wirtschaftsservice .............................................................................. 82 Box 3.4. High-Tech Gründerfonds (High-Tech Seed Fund), Germany ........................ 85 Box 3.5. CTI Invest ....................................................................................................... 87 Box 4.1. Corporate Law Economic Reform Program (CLERP) ................................... 97 Box 4.2. Yozma Fund, Israel ........................................................................................ 99 Box 4.3. Enterprise Investment Scheme (EIS), United Kingdom ............................... 103 Box 4.4. Angel Tax System in Japan .......................................................................... 105 Box 4.5. Scottish Co-Investment Fund (SCF) ............................................................ 109 Box 4.6. The New Zealand Seed Co-Investment Fund (SCIF) ................................... 111 Box 4.7. Netherlands TechnoPartner Seed Facility .................................................... 113 Box 4.8. Vækstfonden (The Danish Investment Fund) ............................................... 115 Box 4.9. Typical role of a national association or federation of networks .................. 117 Box 4.10. Power of Angel Investing (PAI) Training Programme .............................. 121 Box 4.11. Vigo business accelerator programme, Finland ......................................... 125 Box 4.12. Social capital .............................................................................................. 126 Figures Figure 1.1. Private equity and venture capital financing cycle ..................................... 24 Figure 1.2. European venture capital exits in 2010 ....................................................... 24 Figure 2.1. Typical angel investment process ............................................................... 34 Figure 2.2. Types of organisations in the entrepreneurial ecosystem ........................... 41 Figure 2.3. Challenges in measuring the angel market ................................................. 45 Figure 2.4. Total number of angel groups/networks in operation in the United States and Europe, 1999-2009 ......................................................................................... 48 Figure 2.5. Total number of groups/networks in operation in selected countries, 2008-09 ................................................................................................................. 49 FINANCING HIGH-GROWTH FIRMS: THE ROLE OF ANGEL INVESTORS – © OECD 2011 – 7 TABLE OF CONTENTS Figure 2.6. Total number of groups/networks in operation in selected countries, 2010 ...................................................................................................................... 50 Figure 2.7. Investments by business angel groups in the United States, 2006-09 ........ 51 Figure 2.8. Investments by business angel networks in Europe, 2006-09 .................... 51 Figure 2.9. Investments by business angel groups in New Zealand, 2006-09 .............. 52 Figure 2.10. “Visible” investments by business angel networks/groups in selected countries, 2009 ..................................................................................................... 53 Figure 2.11. Average number of deals per network/group in selected countries, 2009 ...................................................................................................................... 54 Figure 2.12. Business angel network investments by sector in selected countries ....... 54 Figure 2.13. Venture capital investments in selected countries, 2008-09 ..................... 56 Figure 2.14. Venture capital investments in selected countries, 2009 .......................... 57 Figure 2.15. Venture capital investments in the United States, 1995-2010 .................. 58 Figure 2.16. Venture capital investments in Europe, 2005-09 ...................................... 59 Figure 2.17. Business angel network and venture capital seed investments in Europe, 2005-09 ................................................................................................................. 60 Figure 2.18. Venture capital investment, 2009 ............................................................. 61 Figure 2.19. Venture capital investments by sector in Europe and the United States, 2009 ...................................................................................................................... 62 Figure 2.20. Share of female angel investors in selected countries, 2009 .................... 64 Figure 4.1. New Zealand SCIF Logic Model .............................................................. 112 Tables Table 1.1. Equity investors at the seed, early and later stage of firm growth ............... 21 Table 2.1. Differentiating the key characteristics of angel and venture capital investors ................................................................................................................... 39 Table 2.2. Estimates of the angel market and comparisons with venture capital .......... 45 Table 4.1. Summary of national angel tax incentives in selected countries ................ 102 Table 4.2. Countries with co-investment funds targeting angel investors .................. 108 Table 4.3. Initiation years of angel associations or federations around the world ...... 118 FINANCING HIGH-GROWTH FIRMS: THE ROLE OF ANGEL INVESTORS – © OECD 2011