29/08/2013 - 08:02

Business angels aim to do good, and do well

29/08/2013 - 08:02

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The start-up sector is hot right now, so where are the business angels?

Business angels aim to do good, and do well
CONNECTORS: Ray Hart (left), Greg Riebe, and Jim Tweddle established WA Angel Investors four years ago; the group now has 24 ‘financial’ members. Photo: Attila Csaszar

The start-up sector is hot right now, so where are the business angels?

It's time for local ‘angels’ to look beyond speculative mining stocks and get behind the state’s high-growth tech startup sector, Greg Riebe told a recent meeting of the WA Angel Investors.

While acknowledging some people were already investing in the tech sector on an individual basis, Mr Riebe said others who lacked the experience or expertise in high-tech business often preferred not to take the risk.

This shortfall in funding was currently holding the sector back, he said.

“There are only two venture capital funds of any size in Western Australia and these are both pretty much full up,” Mr Riebe said. “So it’s even more important for angel investors to fill the gap.”

Angel investors are usually high net-worth individuals who like to mentor and invest in early stage businesses. The term ‘angel’ was first used as a term to describe wealthy New Yorkers who backed Broadway shows.

These days, business angels fill the gap between the founders’ own money and the larger sums dished out by venture capitalist funds. As such, angels play a critical role in getting startups commercialised and growing.

“The startup sector is happening in WA,” Mr Riebe told Business News.

“On the other side, however, investors don’t have the experience in this sector yet. Doing it alone is tough – which is where a group like WA Angel Investors comes in.”

There are 15 business angel groups in Australia but only one in WA, which has about 24 financial members. Each quarter, they meet to deliberate over three new possible ventures. Two investments have been made in the last year, and several others are being investigated currently.

These are small steps, however, and there is a clear need for much more angel funding, or opportunities from the startup sector are not going to be developed.

Jordan Green is the founding director of the Australian Association of Angel Investors, the national organisation to which WA Angel Investors belongs.

He said that while angel investment was high risk, it also offered high returns.

“Strategic value is all about the ability of the buyer to exploit the opportunity faster and bigger than the start-up. To maximise the return, angels seek companies that can demonstrate a doubling of their strategic value every six to 12 months,” Mr Green told Business News.

“Angels tend to prefer strategic value exits through trade sale.”

Typically, business angels invest between $25,000 and $75,000 in cash in a deal, but also bring their time and connections. They may have to make follow-on investments if the business needs more assistance later on.

“Angel investors want to ‘do good’ as well as ‘do well’,” Mr Green said.

But there are problems. Not only is the sector in its infancy, the vast majority of investments come to nothing.  

“While every investment you place you fundamentally believe will be ‘the one’, the reality is that less than 10 per cent of angel investments yield a return of five times, and in half the instances you never see your money again,” Mr Green said.

Sydney-based venture capitalist Rick Baker, from Blackbird Ventures, has researched the sector and estimates angel investors are responsible for $500 million in funding across Australia.

“These startups are typically valued around $2 million, depending on whether they have customers and income yet,” Mr Baker said.

“If anyone is interested in becoming an angel investor, then my advice would be say ‘no’ ten times before you make your first investment. It should occupy a minority position in your personal investment portfolio.”

In general, the high-tech high-growth sector is not one in which many WA business angels would have experience.

“Angel investors may not understand this sector as they may have mainly invested in small mining stocks to date,” Mr Riebe said.

“Investing from within a group gives you the confidence and education in what is a speculative venture, so we would welcome new members to our group, as we would welcome hearing from potential high-growth startups that are looking for seed capital.”

The founder of the Spacecubed co-working facility in Perth, Brodie McCulloch, agrees that it’s time for angel investors to get on board with tech startups.

“Now is a great time to start investing in high-growth tech businesses as there is a lot of rigour going into them through programs like Founders Institute, along with instant access to national and international markets due to the nature of their business,” Mr McCulloch said.

“We are starting to see people who have done well or are doing well in their corporate life looking for ways to invest smaller amounts to get an idea to market and prove a concept.”

For more information on angel investing, contact the WA Angel Investors: www.waai.net.au

Charlie Gunningham is an internet entrepreneur and general manager of digital at Business News.

Twitter: @chazgunningham 

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