Time for the angels
For many entrepreneurs and start-ups, the financial struggle is real. The fight to secure sufficient funds to start, grow or maintain a business can be debilitating and can lead people to giving up altogether. It is estimated that 90 per cent of start-ups fail, but at times like this, entrepreneurs will be glad to know, ‘angels’ do exist.
The ‘angel’ investor — too good to be true?
Some may have never heard of an angel investor and others are generally sceptical about all investors, questioning their motives and always thinking: ‘What’s in it for them?’ But one shouldn’t make too hasty a judgement and instead dig deeper — assess the possibilities, benefits and analyse the potential of third party funding.
It helps to first understand the differences between two main categories of investors: angel investors and venture capital firms. Depending on your circumstances, one is likely to be a better fit than the other.
An angel investor is an individual who invests his or her own money in your company. Angel investors are often successful business people who have a high net worth or a high income. To register with the Malaysian Business Angel Network (MBAN), for example, you must have either net personal assets of RM3 million and above or earn a gross total annual income of not less than RM180,000.
A venture capital (VC) firm, on the other hand, is a firm that invests other people’s money.
Rise of the angels
Why would it matter where the money comes from?
Angel investors, being individuals, have limited funds to invest compared to VC firms. Additionally, when it comes to the companies they invest in, angel investors and VCs have different preferences. A key factor is the level of maturity: angel investors prefer early-stage companies seeking seed money, whereas VC firms prefer more mature companies requiring Series A funding or beyond.
Here’s some good news for entrepreneurs looking for their first break —
angel investors get excited about start-ups at the beginning of the journey when they require funds to grow the entrepreneurial seed
and develop their products. VC firms, on the other hand, like to look for cash-flow positive companies with potential for further growth — these companies often already have products in the market.
In the technology industry at least, the early-stage start-ups favoured by angel investors usually require less money compared to the funds needed by the more mature companies favoured by VC firms. This is because tech companies today are more likely to be developing software than manufacturing hardware, so the costs associated with developing the product are likely to be lower than the costs associated with the subsequent task of growing and sustaining the business. Take the example of early 19th century storage methods, shifting from manufacturing bulky hard disk drives to intangible storage like Dropbox. VCs are usually less keen to invest in early-stage tech start-ups that require less resource and involve greater risks. They preferred to follow a stringent and time-consuming due diligence process when making decisions. For that same reason too, VCs usually insisted on board representation.
It was at this point that the business world saw the rise of the angels.
Angel investors are often happy to be hands-off and remain uninvolved in a company’s management.
A VC firm, having invested larger sums of money, might want to have more say in the running of the company and usually requests a seat on the board of directors. This in turn means that VC firms can be involved for longer periods of time, actively investing in a company for years, whereas angel investors typically look for shorter-term involvement.
These distinctions are not set in stone. An angel investor might also get excited about an established company. Similarly, a VC firm might take an interest in a particularly promising start-up even if it is just at the seed stage.
Angels in ASEAN
In the ASEAN region, there appears to be a need for greater awareness of angel investing. At the recent IdeaLab 2016, Nicole Paterno, founder and CEO of Philippines-based 1000 Angels, spoke about her experience: ‘We do a lot of enabling work for would-be angel investors and start-up founders. I think one of the challenges is the lack of education and skills on both ends. On the start-up side, there is a need to revisit basic business principles. On the investor side, it is educating them about the landscape and the tech eco-system in the Philippines.’
Paterno sees a need for education at an even more fundamental level among investors, including ‘introducing them to angel investing as another form of investment and recalibrating their investment expectations.’
1000 Angels is part of the ASEAN Angel Alliance (AAA), a recently-established collaboration of angel investor networks across the ASEAN region. Paterno is optimistic that the newly formed alliance will be a good start towards expanding angel networks and resources within ASEAN. Besides 1000 Angels, other groups participating in AAA include Vietnam’s HATCH! Ventures, Malaysia’s MBAN, the Cambodia Investor’s Corporation, Myanmar’s Yangon Angels, the Bangkok Venture Club, Singapore’s Business Angel Network (BANSEA) and Indonesia’s Angel Investment Network (ANGIN).
ASEAN’s venture capital firms collaborated in a similar fashion recently to form the ASEAN Venture Council.
IdeaLab 2016 was a 2-day boutique start-up conference, held in Kuala Lumpur, focussing on ASEAN start-up cross-border linkages, the Malaysian start-up ecosystem, and MBAN Summit (All About Angels) for investors worldwide.