ASPECTOS GENERALES DEL SECTOR EDICIÓN E IMPRESIÓN

43 This section of our report analyses the evaluation questions set out in the terms of reference, and then presents recommendations

7.1 – Introduction

This section of our report analyses the evaluation questions set out in the terms of reference and presents points for further action. The evaluation questions are addressed in the same order as contained in the terms of reference. We have included a brief summary of findings and analysis of the question, where data is available. There is of course additional substantial data within the main body of the report.

7.2 Relevance

Two matters are considered under the topic of relevance: the sources of data and public action. What are the available data sources for the Business Angel market in EU Member States or regions? There is a wide range of available data sources but they are of variable quality. In respect of the visible part of the market, the main data sources include data collected by EBAN from national associations and national BANs and data collected within countries including individual studies referred to in this report. Data on the non visible part of the market is sparse. The GEM reports (referred to again later in this section) provide a basis for estimating the number informal investors, some of whom will be Business Angels. There have also been efforts to estimate the potential number of Angels, based on the number of individuals that meet the wealth criteria that would enable them to act as Business Angels (for example in France by the Conseil d’analyse stratégique). However, the data presents a very partial and fragmented picture.

Underlying the data collected: both actual and imputed, is a layer of complexity that has not been fully addressed, surrounding the definition and typology of Business Angels. It is difficult for the data to distinguish between Business Angels and other informal investors such as friends and family. There are also different motivations for Business Angels There is relatively little information about the potential supply of Business Angels (except in France) and the factors influencing supply.

What is the identified need for public action (e.g. financing gap, market failure) to support Business Angel financing and how have the programmes or policies of EU Member States been designed to meet this need?

It has been well-established in many other studies that there is a funding gap for firms at the seed or early stage. Firms largely rely on informal sources of capital and are too small to attract venture capital or some forms of bank funding. This is particularly the case as in recent years venture capitalists have been increasing their minimum thresholds, while banks have withdrawn even further from seed and start-up funding.

Business Angels can meet funding requirements from as low as several thousand Euros. Where Business Angels act in syndicates, or as co-investors, they can contribute to funding packages of 1-2 million Euros when. So they can play a role in meeting this funding gap.

Data collected by the BANs also suggest that only a very low percentage of projects presented to Bans are eventually backed - maybe even as low as 3-5%, sometimes less. The issue is, how many of the

Conclusions and Recommendations 7

44 rejected projects could have been backed if more Business Angels existed, or were those projects just not of sufficient quality to be backed? Our view is that more projects could find backers if more Business Angels existed. So, to the extent that Business Angels can meet this finance gap there is a rationale to support them, and possibly also to encourage an increase in supply of Business Angels through policy measures if possible to do so.

Given the relatively small size of many deals, the main market failures are search costs and transaction costs which deter investors and those needing investment.

It does appear that the policies used to support Business Angels target these market failures. Tax incentives should increase the profitability of participating in the market from the supply side. Co- investment initiatives lead to shared transaction costs, uncertainties and risks (the public sector assumes part of these). Support for BANs and syndicates can lead to expanding supply and demand to those who have yet entered the market, reduced search and reduced transaction costs. Each of the three main policy approaches has a place, and can play a role, but their effectiveness will depend on how they are implemented – outcomes are not be “automatic”. At present it not possible to say which of the three policy approaches are the most effective either, due to importance of how they are implemented. In some Member States tax measures have been done away with and supplanted by support for co- financing and BANs, in others tax measures are in the process of being implemented. In other parts BANs are being discontinued as they do not bring additionality.

7.3 – Effectiveness

How effective are different data-collection procedures? Do they allow for consolidation of data on cross-regional and cross-country level?

The annual survey of Business Angels by EBAN provides the most consistent source of data on Business Angels in Europe. It is based on common indicators and common definitions that provide a wealth of information on the characteristics of the networks that respond to the survey, and is capable of being analysed across regions and member states.

However, the survey covers only that part of the visible market that chooses to respond to the survey. The survey is sent to national federations and each year there is a different response rate both by country and within countries from different BANs. So the survey results are not wholly consistent from year to year. More importantly, a bottom-up survey of this nature cannot obtain data on the non-visible segment which, our analysis suggests, is many times larger. So the EBAN survey, whilst providing much interesting data, cannot be a comprehensive indicator of the market.

Alternative sources of information on the whole of the market can come from mass surveys of investors, or from mass company surveys or data on tax schemes or other support schemes

A mass survey of investors is carried out by the GEM survey. This survey has a number of key advantages. It covers all EU countries and is based on a common approach and definitions. Thus, it can be used in order to get some top-end estimates of the overall Business Angel market, including the non- visible segments. However the GEM survey does not explicitly focus on measuring the Business Angels’ population. As such, it does not always have good data on whether friends and family make investments, and there is also no coverage of the important aspect of the involvement of investors in the management of the firms. As a result, the GEM survey data can be used for making initial top-end

Conclusions and Recommendations 7

45 estimations and identifying trends but in this form cannot provide a complete basis for measuring the Business Angel market.

Similarly, the approach used in France to estimate the potential supply of Business Angels by looking at the number of individuals with sufficient wealth in a sufficiently liquid form to enable them to be Business Angels is promising, but does not appear to have been replicated in other Member States. We did not find any mass surveys of companies across all member states that provided useful data. Those surveys that were available provided some financing data, but there is a limited requirement for SMEs to publish finance data and accordingly this route may not be a helpful one to follow

Finally, the limited experience from data from tax schemes suggests that, in practice, they often attract a broader range of investors than just Business Angels and do not provide a solid basis for measuring the Business Angel market. Given the different characteristics of the schemes across the EU Member States, any comparison and consolidation is problematic.

What are the main characteristics of the Business Angel financing in selected markets?

This report has included data on the characteristics of Business Angel financing and a short summary is presented here. In total, the number of Business Angels in the visible market – namely the members of BANs - in the eight countries examined is likely to be 18,000-19,000. For the total EU27 it is estimated that the total number of Business Angels in networks and syndicates may be between 25,000 and 30,000. However, the EBAN data also suggest that only around 50% are active, namely that they have made at least one investment during the year of the survey.

For the total market – visible and invisible - the total number of Business Angels in the EU27 is estimated between 170,000 and 240,000, using a top down approach.

The data from EBAN suggests that the average size of investments per firm is generally in the range of €100,000-200,000 in most countries. However, the investment per Business Angel tends to vary much more, starting from as low as €18,000 to over €150,000. The median value is around €50,000. Of course, in most cases Business Angels co-invest either with other Business Angels - the most common - but also with early stage funds, institutional investors (including government schemes) and VCs. Data from Germany and Italy indicate a decline in the average size of investment per individual Business Angel and there were indications of similar trends in some other countries.

Firms in the ICT, Biotech and Healthcare sectors attract the most investments from Business Angels and represent more than 50% of the total number of deals in the visible market in most countries. Other sectors include finance and business services, creative industries, environment and clean technologies with varying weight in the different countries.

In terms of the location of the firms, the vast majority of Business Angels invest in firms in the region or the country where they are located. Cross-border investments are uncommon but appear to be attracting more interest, especially for syndicates, as a way of spreading risk. This result is unsurprising given the need to provide management support, while improved technology and transport infrastructures can increase the geographic scope of operations.

As expected, Business Angels focus primarily on the initial stages of the firm’s life cycle - Seed and Early Stage/Start-Up level - typically more than 75% of the total number of investments. In some countries - Germany, Italy, Sweden and the UK - the data indicate a sizeable share of investments at the later expansion stage.

Conclusions and Recommendations 7

46 The data from BANs suggest that female participation represents no more than 10%, and probably more in the region of 3-5% of the total number of Angel investors.

We estimate the visible segment of the Business Angels market in Europe in 2010 to have invested around €660 million. For the total market – both visible and non-visible - the rough estimations possible indicate that total investment in the whole EU27 market in 2010 might be of the order of €4 to €5 billion.

To what extent has the Business Angel market contributed to the SMEs’ access to finance?

Equity finance is used by no more than 6.3% of firms with less than 10 employees. More traditional bank loans remain the key source of finance for SMEs. However, this varies by sectors – mainly technology intensive sectors - where firms most often seek equity finance and Business Angels assume a more important role. Different sectors also have different capital intensities – software tends to need less than medical technology, for example.

If we compare the total of start-up and seed capital investments identified in the EVCA year book, we find total investments of €1.9 billion in 2010. This is more than the visible Business Angel market (€0.66 billion), but less than the total Business Angel market of between €4 to €5 billion. At the start- up and seed stages, Business Angels appear to be the key source of risk capital while venture capital is the major source at later stages.

How effective is Business Angel financing to bridge the equity gap in the seed and start-up phases of the SME development? What, if anything, could be done to render Business Angel financing more effective as a means to achieve these objectives?

As argued above, Business Angels appear to be a major source of risk capital at seed and start-up phases of SME development. Venture capital is the major source at later stages.

Business Angels financing appears to be able to address only partly the equity gap faced by firms in the seed and start-up phases. The information available indicates significant variation in its role and effectiveness among Member States, with the UK market appearing more effective than in other countries.

The high level of demand for Business Angel financing as evidenced by the number of funding requests submitted to various BANs, suggests that there is scope to increase the contribution of funding by Business Angels to seed and start-up projects, assuming they are of sufficient quality. So an increase in the number of Business Angels might help to expand this market.

The question of the effectiveness, of Business Angel funding is complex. In the first place, it requires a better understanding of the degree of effectiveness, and the causes of effectiveness than we have been able to identify from the current literature. Secondly, there is still a learning process going on as the Business Angels that are emerging in the current market are relatively new market players and the institutions surrounding them – in particular the BANs (including their associated lawyers, accountants and consultants) and co-investment funds (including public sector managers), are also learning. The main part of the Business Angel market is informal and it is important that regulation, although well- intended, does not impede this part of the market. Public support programmes, described more fully below, can also help.

At the same time, it should be emphasised that the financial support is only one aspect of the Business Angels added value. Data from Germany, Spain and Sweden suggest that the management support and knowledge that comes with Business Angel investment is often considered even more important.

Conclusions and Recommendations 7

47 7.4 – Efficiency

How can data sources and data-collection methodologies be improved to allow for comparability across regions and countries?

None of the current approaches provides a perfect solution to measuring the Business Angel market. Possibly the most appropriate approach would be a large scale survey of investors with a follow-up focusing on those that fit the definition of Business Angels. However, given the substantial resources required, in the short to medium term the most practical approach would be to develop and enhance the existing solutions shown above while ensuring that common definitions are used to enhance consistency and comparability of results.

In summary, the main data collection methodologies have the following advantages and disadvantages:

• Top down surveys of BANs and potentially of known Business Angels. There is no doubt that this

approach is capable of providing detailed information of the activities of those surveyed, but the approach will always provide a partial picture of the market with no certainty that the results can be extrapolated to the market as a whole;

• Large scale surveys of investors, such as the GEM data analysed in this report. Such large scale

surveys are capable of giving a picture of the whole market, but since BAs are likely to be a small number of the group samples, the approach cannot give a detailed picture of their work. Large sample sizes are needed to have confidence in the results;

• Estimates based on the potential number of individuals with sufficient wealth, educational levels,

experience and willingness to become involved in companies as Business Angels. To calculate/ estimate the wealth of individuals in a given Member State and even for all 27 Member States may be possible, but the assumptions required to filter that group arrived at down to the core group of individuals that could be Business Angels may require some quite brave assumptions, which will influence the robustness of the findings;

• Records of Member States where registration is currently, or will in the future, be required to work

as a Business Angel (or BAN) in order to benefit from tax advantages or other forms of public sector support could be useful, but it is unlikely that all member States will adopt such systems;

• Analysis of universal tax incentives. Whilst this approach is capable of producing useful information

in those countries that have such tax schemes, it may not always be possible to know more than the basic details of the investment which means it may be uncertain if it qualifies as a Business Angel investment.

Some national BAN and BAN members interviewed have expressed a desire to work towards a more widely accepted and comparable approach to measurement of Business Angels in the EU, so there is a willingness to work towards such solutions and an appreciation of the value of having such data. It may be worth suggesting to the industry to develop a solution, maybe based on a conference dealing with the subject.

Which existing EU Member State support programmes or policies to facilitate the access to Business Angel finance for SMEs are the most efficient or inefficient? Are there significant differences between online and physical programmes or those that operate on a cross-border basis as opposed to a Single Member state?

The main public policy tools examined in the evaluation studies identified include:

Conclusions and Recommendations 7

48

• Tax incentives or tax relief schemes; • Co-investment schemes.

Each of the various types of public policy tool has its own advantages and disadvantages and a combination of tools may be needed in many cases.

Support for the creation and operation of BANs and syndicates can take the form of helping improve the investment climate, providing finance to start up networks or syndicates and helping with running costs. Most assessments have been generally supportive of support of BANs in terms of raising awareness and also bringing together investors and linking them with firms. However, some have been discontinued as they did not provide additionality, and in some Member States they are dependent on public support for their continued operations. In addition, support of this nature only reaches the visible market.