Explore the ScaleUp Annual Review 2022

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The Growing Role of Angels in the Scaleup Ecosystem

Over the past decade, the scale of angel finance has grown. The 2022 ScaleUp Index highlights the significant impact of business angels and networks, which accounted for £367.9bn worth of investments made in visible scaleups between 2012 and 2021.  “As VC money has grown, angels have maintained their position,” says Jenny Tooth, Executive Chair of UKBAA, the national trade association for angel and early-stage investment. 

For example, Scottish angel investment deals in 2021 raised £146m – almost double the amount raised in 2020, and 70% higher than the previous record set in 2019.

For many scaleups, angel finance is the vital early stage of equity finance. Cambridge Angels, a group of more than 60 angels who are principally exited entrepreneurs that focuses on deep tech and tech-enabled healthcare, has a current portfolio of 117 companies, 24 of which are in their scaleup stage after receiving early-stage and ongoing funding and support from the group. 

“Angels tend to grow with their companies,” says Cambridge Angels member and previous chair Simon Thorpe, “and that’s why an angel ecosystem is an important part of a local scaleup ecosystem.”

Providers of patient capital

At an early stage, angels can provide patient capital, often backing their investments with multiple early rounds. “Angels are not looking for immediate exits and know it’s a long journey,” says Jenny Tooth.

“We expect to do one, two or three seed rounds,” says Simon Thorpe. In 2021, Cambridge Angels did 48 deals and invested £35m; of those 48 deals, 16 were new deals – so two-thirds were follow-on rounds. (The 2022 ScaleUp Index shows Cambridge Angels to be the leading angel group that has invested in visible scaleups, participating in 44 investments between 2012-2021.)

“The most mature companies in our portfolio will have had five or six rounds of funding, if not even more,” says Niki McKenzie, joint managing director of Archangels, the 30-year-old Scottish angel group. “Currently we have 20 active portfolio companies in which we have invested a total of £65m.”

Source of advice

Alongside finance, many angels bring strong industry, functional and scaleup experience. They often provide strategic board-level advice and support early-stage companies with team building, often helping to recruit and identify key hires. They often help to introduce formal governance structures, as well as introductions to customers and connections into the wider local and national financial ecosystem. 

Around three quarters of Cambridge Angels’ members are exited tech entrepreneurs. In the group, each member makes its own investment decisions. “An important aspect of Cambridge Angels is that it is not a regulated group,” says Thorpe. He says that the group “provides smart capital from entrepreneurs to entrepreneurs. Because we have been entrepreneurs, we are helping future entrepreneurs increase their chances of being successful. Our members have experienced the scaleup journey in their own businesses, as well as through their active investor roles in our portfolio companies. This allows our members to help founders identify and circumvent potential pitfalls through their own experience, as well as providing founders with access to their networks and support systems.

The need to build angel capacity

Current market dynamics are changing, with reduced levels of exit activity and downward pressure on valuations, leading to VCs moving towards later stage opportunities. “Angels will continue to fill more of the pre-Series A space,” says Jenny Tooth. “In today’s environment, early stage scaling companies need to be more developed – and de-risked – to be attractive for Series A investment from VC funds. Series A funding now starts higher up the investment curve. The amount of VC money going into smaller deals has been diminishing for some time and significantly so from 2021.” 

As the journey to VC extends, she says, there is a need to enable more angel groups to have the firepower, capacity and investment strength to take many scaleups through to that point. 

At the same time, the performance of the wider financial markets will impact angels in terms of their own personal wealth and the finance that they then put into angel investing. “In the first year of the pandemic, we lost 47% of angel investing as angels focused on their existing portfolios or did not make new investments,” says Jenny Tooth. “At the moment, we haven’t seen evidence of angels pulling back but there is caution.” 

She says that the focus needs to be on mobilising more co-investment funds, maintaining and enhancing tax incentives, and building support and education systems around angel groups. “We need to bolster our existing angel communities so that they can continue to build and scale the businesses that they’re already backing.”

Boosting co-investment

Co-investment funds are very important in helping to build and leverage angel investment. 

In Cambridge, there is a long track record of angels sharing deals alongside VCs. Cambridge Angels has five corporate members, “so founders can have a seamless experience moving from the earliest stage through to later stage funding. It’s not an exclusive relationship and there is no obligation for our companies to go to those five firms, but it helps to have a warm introduction. We’re very keen to see our companies take VC funding but only where it’s appropriate,” says Simon Thorpe. 

In the last five years, and particularly in the last couple of years, there have been many more co-investors in Scotland, says Niki McKenzie. The number of new investors to Scottish private company deals increased from 33 investors in 2019 to 105 in 2021. Not all of these are angel deals but Archangels has been securing co-investors not just from England but internationally.

The British Business Bank launched its Regional Angels programme in 2020 which in 2021 received £150m of funding over three years. It has an  important role in stimulating more local angel investment. To date, it has committed £115m in ten investments.

The Fund is key to addressing regional disparities,  as Jenny Tooth acknowledges,  however  it also has  scope for improvement in the programme, says Jenny Tooth. “A significant number of new or nascent angel groups can’t benefit from the fund because it requires a very strong track record and fund management capacity.” 

She points to the Scottish co-investment model as “perhaps the best model of using a co-investment fund to build capacity.” Archangels is a prime example of a group that has been able to benefit from the presence of the Scottish Co-investment Fund (SCF) to increase its firepower and extend its reach and range of investments. The SCF has increasingly participated in Archangels’ deals with a relatively steady proportion of total investment at around 25-30%. “They are our number one co-investment partner,” says Niki McKenzie, “and it works very well for us. We can secure up to £1.5m from the fund on a matched basis. We are very well aligned and we use this stable relation to increase leverage, particularly in later rounds.”

The importance of tax incentives

The EIS and SEIS schemes have had a powerful positive impact on the volume of angel finance. The Chancellor’s medium-term fiscal plan – to be announced in November 2022 – will increase the limits of the SEIS. This is “a very good and serious message to the investment community,” says Jenny Tooth. 

Mobilising and educating more angels across the country

According to Jenny Tooth, Executive Chair of UKBAA, there are 86 angel groups across the country. 

There remains a concentration of angel groups in the London-Oxford-Cambridge Golden Triangle so the focus for mobilisation is in those regions where currently there are not enough angels present.

Many angels remain economically focused on their own cities or regions. They want to support entrepreneurs in their own economy. 

And, notes Niki McKenzie, this is a high risk asset class and will only ever be appropriate for a small number of people. “In our syndicate most people’s portfolios represent £250,000 to £500,000 and there’s a finite number of people who can afford to put that money at risk. Only about 18,000 people in Scotland pay the top rate of tax.”

One rich source for building angel investment groups are universities, says Jenny Tooth. While some angel networks have emerged from business schools such Henley Business Angels and London Business School, there is considerable potential for developing many more groups. 

In Manchester, investment bank GP Bullhound and commercial property firm Bruntwood have launched Manchester Angels, a technology and life sciences-focused angel investment network. Aiming to have an initial founding group of 30 Greater Manchester based technology private investors, it also has Investor Partners including Praetura Ventures, Northern Gritstone and Octopus Ventures, Silicon Valley Bank and The University of Manchester Innovation Factory.

Creating more lead angels

“The importance of the lead angel can’t be underestimated,” says Jenny Tooth. “They may not necessarily be the largest investor in a company but they will be one with the most appropriate experience in that particular market. They are the ones who have a vital role, not just in leading the investment but in helping to build and grow the investee businesses.”

To build up the pipeline of lead angels, education is vital. “Local ecosystems need to create a supportive environment for angel investors who are experienced entrepreneurs, but not necessarily experienced angel investors, is pretty critical,” says Emmi Nicholl, managing director of Cambridge Angels.

To encourage more strong lead angels with deep sector experience requires other parts of the local ecosystem – universities, business agencies, exited entrepreneurs – to collaborate and build around their regional strengths, says Jenny Tooth.

Archangels provides a good example. “We took a decision early on to share learning with other angels and angel groups where appropriate in order to help grow the business angel market in Scotland,” says Niki McKenzie. “Our position as a visible, committed investor that is collegiate in sharing its knowledge into the angel process continues to be an important component in encouraging angel investment, entrepreneurial behaviour and significant levels of financial capital to support high-growth potential Scottish firms. We have pushed our learnings into the wider angel community and beyond into the policy domain in order to facilitate improved performance and impacts economically. The open innovation approach has helped facilitate the wider growth of angel investing in Scotland and helped supply capital in an area of the market which is difficult for policymakers to engage in due to high risk of failure and the need to protect public monies.”

Adding more value

Simon Thorpe says that Cambridge Angels are looking at how they can add more value to their portfolio companies. “We have run portfolio education and connecting events for a number of years, and we also do ‘office hours’ sessions for our portfolio but also for founders who need a ‘surgery’ type of experience to answer a specific question. We are opening up access to our broader angel network so that portfolio companies can interact with the broader skills base and expertise of the whole group.”

New sectors and greater diversity

Many angel groups tend to have a focus on technology and healthcare, to varying degrees of specificity.  “Our primary focus is on IP-rich technology and life-sciences companies but we have invested in sectors ranging from software development and alternative energy to biopharmaceuticals and bionics,” says Niki McKenzie.

Jenny Tooth says that she would like to see angel groups in more vertical sectors but this process will take time. Sector specific syndicates are emerging such as Green Angel Syndicate (which is also supported by the Regional Angels Programme) with a focus on climate change. There are impact investor groups, science and deep-tech groups, and new groups in the creative sector focusing on games and independent music.

“The other big area where there is a need for specialism and a focused approach is around diversity and gender,” says Jenny Tooth. Currently women account for 14% of angel investors and only 11% of the investment community come from black and ethnic minorities. In both cases, the majority of them are concentrated in London and the Southeast.

But progress is being made. The black-led angel group Cornerstone Partners has launched a £20m fund supported by BGF to invest in entrepreneurs from diverse backgrounds. Fund Her North, a regional collective of VCs and angels designed to support female founders, has formed Women Angels of the North under its umbrella. Angels Invest Wales (part of the Development Bank of Wales) has held its first female angel investor event. In addition, 30 UKBAA members have signed up to the Investing in Women Code.

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