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06-06-2017 - - 0 comments
Angel to IPO: why angel funding weathers the turmoil

With all that has been going in the world of late, had you slipped away to a desert island for the last 18 months you might be tempted to think that investors would have taken to the hills, pulling up the proverbial drawbridge and choosing the mattress rather than the markets in order to preserve their nest eggs. But that’s certainly not been the case and appetite from investors for higher risk, but high-potential assets, appears to be in resilient if not entirely rude health as we move through Q2 2017.

One of the key indicators of this robustness of sentiment, for us at the Angel CoFund, has been the appetite for investment and exits across the portfolio since 24th June 2016. With two good trade sales and two strong IPOs, its not been a bad few months, and we now have two more companies lining up for a public debut. Although not headline-grabbing, or unicorn-like, they are perhaps a reasonable indicator of the real market. So for those of us that have been around this space for a while, and remember the hubris of 1999, only to watch it evaporate so shortly afterwards, the prospect of IPO as a realistic exit for a European technology business is one we have had to seriously recalibrate. It no longer feels like a naïve hope or blind optimism to seriously consider the public markets as a route to further capital and liquidity for early investors.

So, what is going on? Why has European venture once again been attracting interest from later stage public market investors, particularly at a time when general uncertainty would suggest the reverse would be happening?

Firstly, the risk presented by of some of the big political change, in the US, Europe, and the UK, are perhaps less of a concern for high-growth early stage businesses than they are for larger ones. Although the main markets have hardly taken a hit either. Most of the startups we see have a strong global focus, looking to innovate at a sector level, not just a geographic one, so they are less tied to national economies and driven more by macro trends.

Speaking of macro trends, there are some pretty big ones in play right now, changing the way we perform and think about a wide range of business activity. This second wave of the internet, for one, when finally the ability of the technology to deliver has caught up with imagination of entrepreneurs, is radically changing the way many sectors operate (think Uber, Just Eat or Airbnb). We have all become more connected, more of the time, creating the opportunity to innovate and do lots of things faster and more efficiently.

In health the ageing, but also increasingly broadly prosperous, global population continues to push demand for better medicine, but also cheaper, faster and more accessible treatments. No longer is the viable market for healthcare products focussed simply on the richest 5 or 10% of the population, we can now consider businesses serving billions not millions of people.

In clean and green areas, after many years of public debate and public subsidy, the acceptance of the need for sustainable energy (for a range of environmental reasons) does now seem to have fully taken hold (although perhaps with the odd notable exception). Electric vehicles now look more like the Tesla or BMW i8 than a milk float in the popular imagination, and with prices of batteries falling rapidly, mass market adoption is starting to look realistic.

No analysis of the landscape would be complete without also mentioning the support that Governments – internationally, but to an exceptional extent in the UK – have given to help nurture and support for entrepreneurship and early stage business development, whether with the £1.8bn of EIS receipts, recorded over the last couple of years, the continued availability of R&D tax credits or the ongoing activities the British-Business Bank.

So in a world where interest rates continue to reside at record lows, with little sign of going anywhere soon, investors looking for returns are perhaps inevitably looking to the opportunity of the future once again with a keener eye than the seemingly certain cash flows of the past.

The sceptic might think that all of this talk of change and new opportunity sounds familiar. As Mark Twain quipped, history rarely repeats itself, but if often echoes, and markets have a cyclical tendency to get carried away with a good a thing when they see one.

That may be true, and it would be folly to forget that early stage investing is still a challenging assets class, and that the chances of failure still usually outweigh those of success. But equally we shouldn’t forget that for most businesses, failure comes because they run out of cash before they make it to breakeven, so supply of capital is always a key part of the risk equation.

What does all this mean for angel investors, its all very well talking about macro trends and market cycles? Well probably it means the best thing is to stick to your knitting. Back strong and capable teams with a deep understanding of the markets in which the operate or wish to enter. Ensure the plans are realistic, that they don’t underestimate the abilities of competitors or the reluctance of customers to switch. That core IP is protected or hidden from view and that whatever the company is building, product or service, it has some defensible value that others will appreciate and pay a premium for. 

Ultimately, whilst it is comforting to know that the market remains robust, companies still need smart active investors and strong supportive syndicates of investors to enable them to flourish. Management teams still need mentors and companies to need networks to access customers and make key hires. So the graft of backing businesses doesn’t change, but it is good to know that the long journey from backing a concept through to realising its potential may have become a little easier, and that a public market exit is a good option to find liquidity.

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