The search is on for Maltese ready to invest in entrepreneurs – but the potential ‘business angels’ are being warned that they must understand what they are letting themselves in for.
Business angels put up money to help companies in the early stages of development – a stage beyond start-ups, when the company is already set up and well on its way to a prototype, with clients lined up.
The investors usually take equity in the company but eventually sell out, hopefully getting a return on their investment. But early stage investment is high risk and you have to go into it with your eyes wide open and a clear strategy, the founder and CEO of the Go Beyond network Brigitte Baumann explained.
She had a number of tips for potential business angels, the first being that they should aim to create a portfolio of different investments, and that because they were such high risk, only around 10 per cent of their wealth should be dedicated to these companies.
Business Angels tend to shun majority shareholding, as they are not after a controlling interest, opting instead for around 20 to 30 per cent of the equity, at least at the beginning. One reason for this is that the intention for most business angels is to exit after a few years and to reinvest in something else – which also explains why technological companies are preferred: they are easier to scale up and sell. Service companies would need 7 to10 years to build up and are not as tempting as an acquisition.
The normal statistics on business angel investing are daunting: in four out of 10 cases, they expect to lose all their money, and in four to break even or make a small return. This means that the remaining two companies have to give a fivefold return for the portfolio to remain static.
“This is why it is so important to choose wisely,” Ms Baumann said.
Being a business angel is a bit like diving. You should not just jump into the water. You should be prepared and always have a dive-buddy that you can rely on
“We meet 100 companies and will only choose five.”
She had three tips for business angels: ask about the other financing; think through to your exit strategy; and do due diligence on Go Beyond.
Ms Baumann had tried to set up the Malta Business Angel Network some years ago and failed but she is now back with Go Beyond, which she set up in 2008. Its back office is in Malta and the team, with Jean Paul “JP” Barthet as operations manager since summer 2013, it is based at Take Off, the incubation centre at the university.
Go Beyond pools investors to get companies the money they need, usually a few million euro – anything beyond that would usually be more suitable for professional investment funds. Anything less, and you are looking at a crowdfunding scenario.
“There is a lot in common with crowdfunding but in our case we know and meet the entrepreneurs and we negotiate deals,” she explained.
Each business angel would ideally build up a number of different investments over two to three years, so they can start with as little as €10,000 to €15,000 a year.
“It is a fallacy that only very wealthy people can become business angels,” she stressed.
“The optimum would be to have around 10 investments in your portfolio. But don’t commit all your spare money to them. Keep around half your money because you may want to invest more in the ones that do well – and you may want to get involved in other investment rounds.”
Ms Baumann is passionate about business angels – check out her TED speaker on the subject in Malta a few years ago – but although the concept is growing fast, there is much more that could be done.
“In 2003, there were maybe 25,000 business angels around the world. Now there are probably closer to 100,000, with €3 billion invested through them. But there should be 5 million. And Malta could have hundreds! There are more than enough people who have enough capital to be able to do this.”
It is not for the faint-hearted. Normally, only 20 per cent of business angels actually make money, although Ms Baumann claims that Go Beyond has a track record of 80 per cent, thanks to the intense networking and mentoring approach.
She has managed to enlist the first few Maltese business angels and received applications from four companies, and has already organised a training workshop which included the screening of the monthly virtual event where the companies make their pitch to the business angels.
Go Beyond makes its money through membership and training. So far it has 200 business angels – a third of whom are women – who are financing around 35 companies to the tune of €8 million. Half the companies are in Switzerland, with a quarter in the EU and the rest spread between the US and Asia.
Apart from the individual angels, it also helps family offices and corporates seeking investment targets.
“Being a business angel is a bit like diving. You should not just jump into the water. You should be prepared and always have a dive-buddy that you can rely on. That is what we offer,” she said.