Angel Investment Matching Services: Friend or Foe?
Brian Perry
04-Sep-06
What initially began in the United States as a method of bridging the gap between entrepreneurs seeking investment capital and angel investors looking to invest their money has now become a fairly common service being promoted in the UK and many other countries. Are these services worth the membership fees? Do they increase quality dealflow? Are they regulated at all? Are they a direct funnel to finding “the next big thing”? These are just a few of the questions we will look at in this month’s cover story and if you have not already heard about these services, this feature should answer all the questions you can come up with.
How They Work
An angel and entrepreneur matching service is generally a webbased service being provided by either an angel investment group or an independent company offering the software platform and service as a stand-alone business model. Depending upon which site you decide to use, you will likely be requested to register online prior to being able to receive entrepreneurs investment proposals. Generally, as part of the registration process, you will be required to complete a form, which has the following details: Name
Address
Telephone
Email
Contact preference (email, tel. or post)
How much you are willing to invest
Industries you wish to invest in
Geographic areas you wish to invest in
Previous angel investment experience
Once the administrators of the service receive your information, they will likely contact you to verify the information you provided is correct and you are who you say you are. Depending upon which service you sign up for, you might also be required to pay a registration fee via credit card (which is also an added verification step).
Once you are registered and select your investment criteria, you will begin to receive emails from the site that either provide a link back to your account or specific entrepreneur investment proposals that meet your investment criteria. If these brief summaries strike your interest, you are likely provided with a way to make direct contact with the entrepreneur or receive your expression of interest and contact you. As a rule, most sites that offer these services charge the entrepreneur a fee to register their investment proposals and free for the angel investors (“he who holds the cash, controls the rules”!).
One such matching service charges no upfront fee for the entrepreneur to submit their proposal but once an investor expresses interest, they are prompted to pay a one-time fee of £ 99.
“As an entrepreneur, I recognised a need to create a forum to bring entrepreneurs and angel investors together for the benefit of both parties,” said President of a UK Angel service. “The website is a user-friendly and effective way to either find money for your business or find an investment that suits your needs.”
Regulations
Perhaps this has always been somewhat of a grey area in the minds of entrepreneurs and angel investors. According to the Financial Services Authority (FSA), an entrepreneur or their company is not permitted to “solicit” for investors unless they meet certain criteria and abide by FSA authority. To most new start-ups or early stage companies the requirements of the FSA are simply too stringent. One method to avoid FSA regulations is for entrepreneurs to solicit “sophisticated” angel investors and by virtue of the angel investor attesting to being sophisticated, an entrepreneur is exempt. You will notice that most of these services request that you verify being a ‘Sophisticated Investor’ as part of the registration process hence protecting both the entrepreneur and investor in any business involvement.
People who can receive an investment proposal (authorised persons):
- Exempt persons (where the financial promotion relates to a controlled activity which is a regulated activity for which a person is exempt).
- Governments and local authorities.
- Persons whose ordinary business involves carrying on a controlled activity of the kind to which the financial promotion relates (i.e. private equity and venture capital firms, investment trust companies, large companies which have a corporate treasury function, other persons who carry on activities but are excluded by the Regulated Activities Order).
- Professional firms who are exempt under the Act.
- Individuals in possession of a certificate of high net worth, or who are self-certified sophisticated investors.
Self certification places the responsibility on you as the angel investor and you should only self certify as a sophisticated investor if at least one of the following applies:
- you are a member of a network or syndicate of ‘business angels’ and have been so for at least the last six months before the date you self-certify;
- you have made more than one investment in an unlisted company in the two years before the date you selfcertify;
- you are working, or have worked in the two years before the date you self-certify, in a professional capacity in the private equity sector, or in providing finance for small and medium enterprises;
- you are currently, or have been in the two years before the date you self-certify, a director of a company with an annual turnover of at least £1 million.
Or, as a “high-net worth” individual, one of the following applies:
- you had, during the financial year immediately preceding the date you self-certify, an annual income to the value of £100,000 or more;
- you held, throughout the financial year immediately preceding the date you self-certify, net assets to the value of £250,000 or more (excluding certain types of assets).
A copy of the self-certification certificate can be found online at, http://www.fsa.gov.uk/consumer/advertising/self_certifying/self_ high_other.pdf
Another common exemption that takes place is for an angel investment group that provides a value-added matching service to register their organisation as a non-profit. As with the sophisticated investor, non-profits are also exempt in providing such a service and solicitation of investment proposals.
As you can see, these regulations are primarily put in place to control the entrepreneurs and their search for other people’s money.
Fees
As stated earlier, costs to receive dealflow for accredited or sophisticated investors are generally nil. Depending upon the level of service and type of company or group providing the matching service, some charge more than others. Although this in one sense should not concern any angel investor, some thought must be given to these services and fees being provided. For example, Envestors LLP based in London, state they charge entrepreneurs the following fees:
“After receiving your business plan through the website, we review the fundamentals to see if it stands a reasonable chance of raising finance. If suitable, we will invite you to one of our Investment Clinics which are held every two weeks with no charge or obligation from either side.”
Corporate finance fees -
The fees to help entrepreneurs become fully ‘investment ready’ depend upon the amount of work required to produce the investment pack and prepare thoroughly for due diligence. Charges tend to be between £1,000 and £10,000, dependant upon the amount of work that needs to be done. (Please note on occasions, a subsidy can be acquired to help pay for some of the fees.)
Success fees -
We charge a percentage of the amount we manage to raise for your business, usually in the region of 5% of the funds raised.
There are all sorts of sites and groups charging various fees depending upon the service being provided. Our only comment with regards to fees is the question must be asked; “do I eventually want to end up paying a little extra for a company that has had a reality check from a professional advisor or would I like to go straight for the high volume dealflow and decide for myself who is ready, if they have something of interest and is there an advantage to get involved before any other investor does?”
Quality Of Dealflow
Again, every site and service offers a something different in terms of what they provide to the entrepreneur but in terms of what an angel investor is receiving, they all provide dealflow of investment proposals from entrepreneurs looking for start-up or early stage financing.
Any angel investor who is actively looking for proposals and can anonymously review investment proposals is not likely to have much of an issue with registering on a free website that sends very brief emails of these proposals. Any astute investor should be able to make initial judgements as to whether something fits their initial criteria and passes the first “you got my interest test”. If the website offers a service as simple as clicking a button to send a note or expression of interest to an entrepreneur, great and not a lot of effort.
Obviously the quality of these investment proposals is of concern and if every email or proposal sent is of poor quality, the perception of the service and angel’s interest will diminish. With that said, I am a member of several online matching services and regularly receive investment proposals. Just because I receive the most outlandish ideas doesn’t necessarily diminish my perception of the service. I understand there are all sorts of entrepreneurs out there with everything from the next high-tech software to someone wanting to invent something that makes absolutely no sense at all.
Just like entrepreneurs, angel investors however come in all types and sizes as well. Being an advocate of dealflow is recognizing this. For every person with an idea, there is an angel investor out there that likely knows something about that market. This isn’t enough to make any start-up a success but a key part of the puzzle.
How Many Are Out There
According to the a 2005 report compiled by the British Business Angels Association (www.bbaa.org.uk), a total of 725 business angels were recruited to the 17 Business Angel Networks surveyed bringing the total number of business angels within these networks to 3885.
However, according to a report completed by the National Business Angels Association (now the British Business Angels Association – BBAA) in 2004 titled Business Angel Finance, there were 107 angel investment groups in the UK. At the time of writing this article, there is estimated to be approximately 130 angel investment groups in the UK.
In addition to the above organised angel groups, there are an ever increasing number of online web based angel investment matching services. As these are not part of any regulatory or membership organisation, it is hard to say just how many there are. Our estimate would be approximately 10 – 20 in the UK and many more dozen in the United States.
Starting Your Own Angel Investment Group
Another option angel investors have is to create their own investment group. Obviously the effort put into such an endeavour should be geared towards a long-term plan and growing a solid membership base but for those up to the challenge, it is a great way to increase dealflow and work much closer with start-up and early stage companies.
Aside from the obvious company structure, website and operating name, you will require a software platform that will allow entrepreneurs to register, upload their proposals, pay a fee online and then various tools for the angels to review, assess and circulate the proposals. Once such software on the market is Angelsoft.
Angelsoft has built the first group management and deal collaboration platform designed specifically for the angel community. From customized group web sites with integrated deal submission, through secure virtual deal rooms to inter-group syndication, Angelsoft automates and simplifies the business of angel investing.
Once you have the company and online presence in place you will then be ready to find ways to grow your membership. Obviously the key to any angel group is having accredited or sophisticated high-net-worth investors who are looking to invest in high-risk types of investment proposals. As you know, there are many people out there like yourself and just a matter of getting the word out and taking the time to attract their interest.
Susan L. Preston, in association with the US based Kaufmann Foundation, produced perhaps the best resource guide available for anyone wishing to start their own angel investment group; http:// www.kauffman.org/pdf/angel_guidebook.pdf. This guide is 157 pages of everything you will need to know including:
- Community Assessment
- Selecting a Structure
- Decision Steps
- Member-Managed versus Manager-Managed
- Legal Structure
- Investment Structure
- Determination of Membership
- Financial Resources: Funding Your Angel Organisation
- Membership
- Meeting Structure
- Group Budget
- Sponsorships
- Investment Evaluation and Process
Some Other Concerns
Any respectable and diligent entrepreneur will request you to sign a non-disclosure agreement. Some of these can be rather onerous to say the least and you sometimes wonder why someone spends so much time on this when they really need to spend time thinking about how to get their business launched and the capital to do this. With that said, this is a natural step and something expected to show a. you are serious enough about taking their time as well and b. you recognise the proprietary value they have invested. This doesn’t mean you sign anything that comes your way and always thoroughly review any NDA and make sure they are not trying to impose certain unreasonable restrictions on you.
Another concern that sometimes comes up because of the very nature of online or group based entrepreneur and angel investment matching services is the potential of a scam of some sort. Yes, this generally falls on the side of the supposed “angel investor” who has jumped through all the hoops of the service provider’s business and is trying to convince entrepreneurs to pay for upfront fees or to get their bank account details for some sort of fraudulent activity. Obviously the very purpose of the FSA is to protect investors from untrustworthy “entrepreneurs” trying to obtain money through fraudulent activities. This all goes by the wayside once you self certify yourself as a sophisticated or high-net-worth investor. Fortunately, any investor generally has the common sense to perform thorough due diligence when reviewing deals. Treat any type of investment you find through any source the same. Whether it is endorsed by another angel, investment group or online service, never take the chance of investing without conducting proper due diligence.
If you do ask for any sort of upfront fee to review an entrepreneur’s proposal or completely unwilling to sign a reasonable NDA, you will likely be viewed as not serious or someone they do not wish to do business with. Don’t start off on the wrong foot!
Conclusion
If you are an angel investor, you are most likely also an entrepreneur. Entrepreneurs love looking at new business ideas and as long as they can be presented in a short summary and not a 100 page business plan, I personally welcome as many deals as possible. Of the online matching services I am presently aware of, some are excellent and have a fairly extensive list of diverse business proposals. Some are absolutely awful and I struggle to understand how any entrepreneur would take the time to register and pay a fee to use their service. Then again, they know more than anyone how difficult it is to find start-up capital and exploring every option is likely a very smart move.
As with the type of dealflow available by becoming involved in a more formalised angel investment group, the chances are you won’t see nearly as many deals but the quality will likely be a little higher calibre. Investing as a syndicate also provides a much higher level of comfort and allows you to share time and resources amongst other angels.
Angel investment matching services are just like us; some great at what they do and some not so great. Do your own research, search the web, ask associates and look into your local or regional angel investment groups. The more places you look, the more opportunities you will find. The tools available to make opportunities present themselves to you are better and faster than ever. Angel investment matching services are here to stay and will only increase in numbers as entrepreneurs continue to look for capital and angels continue to invest in their businesses. Find one or as many as you can handle and good luck in your search for that Google type return, surely there has to be another one just waiting for a little cash to get started!
