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Flightless angels
Australia is lagging behind other countries in nurturing investment in new businesses.
By Craig Roberts
BRW. 9 June 2005

(Scroll down to see references to aussiehome.com - highlighted in red)

Not all new companies are alike. Upstart companies are starkly different from the 110,000 businesses started in Australia every year. Soon after inception, these meteorites shoot across their industries. They raise the performance bar, requiring large companies to change strategy, and they knock out unwary competitors. Some upstarts will be sold, others will falter and a few will fail. But many continue on a fast-growth trajectory to become big brands and businesses within 10 years.


Charlie Gunningham & Nick Streuli
Photo: Erin Jonasson

In the past two years prominent business angel forums and networks, such as those run by the Victorian Employers' Chamber of Commerce and Industry and Australian Business, have either closed or been merged into other businesses. Early-stage angel investment activity in Australia continues to occur, but mainly behind closed doors among private networks of wealthy investors. There is now no prominent business angel matching group that can be easily accessed, which leaves would-be entrepreneurs unsure where to look for start-up funding.

The Federal Government has at least acknowledged there is a problem: the Department of Communications, Information Technology and the Arts has started collecting data on angel investment in IT-related start-ups and looking at international best practices for how to set up and run a business angels programme. There have been calls for new exemptions from capital gains tax for investments in qualified early-stage ventures.

Separately, the Department of Industry, Tourism and Resources is examining the success (or otherwise) of the introduction of Venture Capital Limited Partnerships (VCLP), a tax incentive designed to encourage foreign investors to back Australia's venture-capital market.

Action is needed urgently. The Australian part of the 2004 Global Entrepreneurship Monitor (GEM) survey, run by the Australian Graduate School of Entrepreneurship at Swinburne University of Technology, found that the level of angel investment and informal early-stage venture capital in Australia declined from 1.45% of gross domestic product in 2001 to 0.93% of GDP in 2004. The survey also found that about 42% of start-ups say they need more than $50,000 for early-stage funding, but only about 5% of business angels are willing to invest more than that amount in any one-year period.

The Australian project director of the GEM research and a professor of entrepreneurship at Swinburne, Kevin Hindle, says: "We do not have enough high-quality, high-growth small businesses, but this is evidence that it is not all their own fault. When they want to grow fast they can't get the money they need."

Business angels, usually wealthy private investors, and advisers are calling for more incentives to encourage people to invest in start-up businesses. Other countries, including the United States, Canada, Ireland and Scotland, offer tax concessions or grants that match private investment in start-ups with government funds.

Damian Papps, a director of Strategon Capital, which in 2004 merged with Australian Business Angels, an angel investor network, says: "The [angel finance] market in Australia is still in its relative infancy. There is not a great deal of incentive for people to get involved. Investors are weighing up a high-risk, early-stage investment against the stockmarket, which has been pretty kind to people over the past few years."

The two challenges for entrepreneurs are to tap into the networks of business angels and to present a quality, investment-ready deal. Most experts in the area say Australian entrepreneurs are bad at both. 

The publisher of the Australian Venture Capital Journal, Victor Bivell, says there are at least 24 separate formal business angel networks operating in Australia. Most angel activity occurs in informal networks that are not advertised or easily identifiable. The formal networks attempt to match would-be investors with appropriate early-stage businesses seeking capital, but the sophistication and success of these networks varies. 

Bob Beaumont, an adviser to fast-growth businesses, who was among the pioneers of the angel investment market in Australia more than a decade ago, is critical of such internet-based angel networks, some of which failed after the dot-com collapse. "If people think they will be able to attract investors by something listed on an internet page, they are going to be dealing with a lot of amateurs on both sides," he says. "Most quality angels already have their networks, and they don't find them on the internet." 

Busy matchmaker 

Christine Kaine, who runs an internet-based early-stage finance matchmaking service called Business Angels, says she has between 80 and 100 willing investors registered, most looking to invest up to $100,000 initially. She will not reveal how many deals are done as a result of her services, other than to say the network is very active. 

"I am referring people to each other all day, every day," she says. 

Other wealthy private investors are organising themselves into syndicates rather than listing themselves on internet sites. Bivell says: "The model that is working in the United States, and is starting to take off here, is small localised networks where they are run by the business angels themselves, sourcing their own deal flow." 

Bivell says Australia's angel market is still in better shape than it was when he first started watching the sector more than 10 years ago. Papps says the angel market is not going gangbusters, but he is seeing interest from investors. "Over the past 12 months, we have seen a 10-12% increase in the number of successful deals," he says. 

But he says there are some misconceptions about the availability of angel finance and what it takes to attract an early-stage investor. "There are a lot of [would-be entrepreneurs] who come to the market unprepared and unsophisticated, expecting things to happen because they have heard there is angel money available. I have to disabuse them of the notion that business angels are a fairy godmother, because that is what a lot of them think." Papps says as few as one in 20 start-ups he sees are investment-ready when they go out looking for angel finance. 

When it works, angel investment can help lift start-ups into a bigger league. Charlie Gunningham and Nick Streuli, the co-founders of the Perth company Aussiehome.com, found that the involvement of business angels in their start-up venture was worth far more than just the money they invested. 

Gunningham and Streuli successfully raised about $400,000 from angel investors in 2000 and 2001 and now run a profitable and expanding real estate listings business. It had revenue of $645,000 in 2003-04. 

Gunningham says he was able to tap into Perth's relatively tight-knit private investor market through professors at the University of Western Australia's MBA programme. "It is difficult fronting up to angels, but you have to remember that they are on the look-out for good investment opportunities," he says. In most cases, investor networks are closely connected so they often refer the entrepreneur to other potential investors. 

Angel investors that are now on Aussiehome.com's advisory board include experts in property, management, strategy and capital markets. One investor has had experience taking companies through from start-up to listing on the Nasdaq exchange. "It is not the money, it's the people," Gunningham says. "In fact, money is not that difficult to get, but the people and their skills and connections are what brought us to the next level. They are very good at lifting us from looking at our bootstraps to looking at the horizon." 

OPPORTUNITY LOST 

Why the Australian angel finance market is struggling: 

  • Australia offers no tax breaks or other government incentives to encourage angel investment in early-stage, high-risk ventures. 

  • Professional angel investors network informally and rarely advertise their presence. 

  • Angel investors are a rare breed, with a high propensity for risk. 

  • Only one in 20 would-be entrepreneurs approach the angel finance market properly prepared, according to some market participants. 

  • Far too many business plans are prepared without a full understanding and valuing of the market and the business opportunity. 

Courtesy - BRW


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