Trade Watch V9 No1 2015

ACCESS TO FINANCE

Financing from the Angels

It is no surprise that one of the major difficulties that start-up companies have is gaining access to finance. Some of the options available are bank loans, grants, guarantees and investments from venture capitalists or business angels. And quite often, many people are confused about the difference between venture capitalists and business angels. Mr. Nelson Gray, the Project Director for the Caribbean Business Angel Advisory Program, and European BA of the year 2008 has been a business angel for over 21 years and recently met with Caribbean Export. He explained that “venture capitals are institutions that collect other people’s money and invest it for a fee. Angel investors or business angels invest their own money, make their own decisions and ideally invest their time, knowledge and experience mentoring the company in which they have invested”. Typically angel investors invest in companies in the infancy stage and start-ups in the technology industry; however they are not limited to these criteria and often invest in businesses of any size, stage of development or industry that appeals to them. In the United States last year there were 70,000 angel investments into start-up companies compared to 4,000 investments by venture capitalists. This is a clear indication of the level of impact business angels have on companies in the start-up phase. Angel investment is usually exchanged for a stake in the equity of the company, but can also be exchanged for a share of profit, turnover or even as a loan. However, it is important to note that business angels provide more than financial support for an entrepreneur, as they also provide various forms of expertise such as management experience, industry knowledge, or technical skills. Consequently, many entrepreneurs have indicated that the

support received from a business angel was more important than the financial injection into the company, making this combination of financial investment and practical support to be commonly known as “smart money”. In fact, Gray describes taking money from the bank as “dumb money” because “you get the money and nothing else except a set of controls and restrictions. Where as, if you take money from an angel investor you get the introduction to their rolodexes, so you get the introduction to companies that you want to sell your goods to, companies with the best manufacturing partner and experience on how and who to hire. All of this comes “free” and this is how you leverage your business.” Gray sites a study that was conducted in the United Kingdom which suggested that only 4% of start-ups will be suitable for third party investments, the rest are sole trader lifestyle businesses. Angel investors target that 4%. It is predicted that in 10 years’ time that the 4% will account for 50% of the employment created by that set of start-ups. This in itself is the economic driver that supports angel investing. “It is partly a self-fulfilling prophecy that if you take external funding to grow your business you will have higher levels of employment, turnover, exports and profits because you have the money and the expertise of your angel investors.” The relationship between an angel and an entrepreneur can therefore be very close and akin to a true business partner. Consequently if the business fails, the angel investor would have not only lost his money, but more importantly he would have lost the time that he spent with the entrepreneur. Gray states “I want to be valued more than my money and if the entrepreneurs doesn’t value my time and effort … then I should not invest in

Mr. Nelson Gray, the Project Director for the Caribbean Business Angel Advisory Program chats with Mrs. Pamela Coke Hamilton, Executive Director of Caribbean Export

10 Tradewatch • The Official E-Newsletter of the Caribbean Export Development Agency • Vol.9 No. 1 January - March 2015