The mysterious business angel

Ignacio de la Vega. Director Entrepreneurship Area. Instituto de Empresa

21 September 2004

The business angel is a vital figure on our economic scene, and an active member of the business community.

“Business angel” is an interesting Anglo-Saxon term for the more traditional Spanish expression, “informal investor.” Angels are typically ex-entrepreneurs, company managers or freelance professionals with financial resources or funds which they invest “as a venture” in outside entrepreneurial initiatives. Investment is usually made during the initial stages and provides not only finance, but support for management processes or contact networks.

The business angel is as old as the hills. Spain’s Catholic Monarchs could be called angels when they fronted funds for Christopher Columbus's first expeditions in exchange for a percentage of the profits. Their investment was a venture, and one which paid off handsomely, as history has shown. Angels were also successful investors who financed Broadway theatrical productions in exchange for a share of the take in the early 20th century.

These two examples illustrate the mechanism of informal investment. This is investment in shares of a company that is being created, or in one that already exists, in the hope that its future will provide an exit for the capital within a reasonable period of time, and multiply the amount invested (depending on the risk factor, and, of course, management performance and luck).

Informal investors or business angels have become more prominent in the last two decades, with explosion of the risk-capital phenomenon and effervescence in the technological sectors. However, unlike risk capital, a form of investment that focuses on more advanced stages in a firm’s lifetime - expansion, stock market floatation, mergers and acquisitions - angels are usually anonymous. There are no formal requirements for development of their activity, unlike those fixed by authorities that regulate risk-capital investment.

That lack of transparency contrasts with the importance of the figure in the business creation world. According to a report by the Global Entrepreneurship Monitor (GEM) - drawn from 40 countries and led in Spain by Instituto de Empresa - informal investment, as developed by angels, was 10 times greater than investment made by risk-capital companies and funds worldwide in 2002. This figure, which stands at $360,000 million, illustrates the weight of the phenomenon.

Role of the entrepreneur

To better understand the size of this phenomenon and the consequence of informal investment, we can say in all confidence that if investments made by risk capital in our environment were to disappear, the impact on total figures for the creation of companies would be minimal. However, if in a country like Spain - far removed from the leading markets in angel investment - this mysterious, anonymous figure were to disappear, the entrepreneur would also die; such is the size and significance of the work done by informal investors.

Without them, development of business projects in traditional sectors would be difficult. The risk/return ratio in these fields makes it hard to find investments from risk-capital organizations, which are more inclined to venture in potentially high-profit sectors, such as technology or biotech.

It is important to consider the roles entrepreneurs play in any economic system. They are the raison d'être of informal investment. Few doubts exist about this fact; the entrepreneur is a clearly differentiating element between the more buoyant economies and those bringing up the rear. In recent years, rigorous research, such as the GEM’s, has established the relationship between creation of companies and growth of GDP, and increase in employment and innovation in any society. Almost all direct and indirect jobs created in modern economies are produced by new firms and small- and medium-sized enterprises, which also benefit from informal investment in their development projects.

In view of this, it is no surprise that public and private organizations are beginning to grant business angels the merit they deserve, by making their activity publicly known, diversifying traditional formulas of investment implemented by savers, and seeking new ways to popularize this activity. Examples of this include the so-called schools of business angels, which aim to identify new investors, offer them management training so they can better detect opportunities, and provide more support in the strategic development of new companies.

These attempts should bear fruit. On the other hand, the authorities have yet to address an ideal aspect for increasing informal investment: the treatment given to gains obtained (where applicable) by investments made by business angels.

If you have management experience, can provide a network of contacts, possess an investment capacity of over €30,000 and don't mind taking on board a few risks, this could be a way to diversify your investments, further an entrepreneur’s dream, create employment and collective wealth, and promote innovation. There are a number of entrepreneurs waiting for you out there. Good luck, and good returns!


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