Improving Access to Angel Finance
The single biggest challenge for entrepreneurs, particularly at seed stage, is finding capital. Over the last 4 years, there has been a range of policies implemented as a result of the National Innovation and Science Agenda (NISA). These have certainly helped fill parts of the ‘finance gap’, but they don’t deal with the access problem.
The ability to access external finance at an early stage largely relies on the personal networks.
Steve Jobs was referred to Mike Markkula when he was looking for funding for the Apple II
It is well established that the angel finance market suffers from inefficiency when it comes to access. What’s interesting about this is that the problem hasn’t really changed. It was identified in very early research (late 1970s and early 1980s) and is still a problem today.
Early stage finance is crucial to the success of a new venture, and angel financiers play an important role. Not just because they bring the three types of capital, but because they also have a leveraging effect for other sources of finance.
The package of policies in NISA is a reasonable start to addressing the finance gap – it does provide some tax incentives for angel investors and provides eligible business (particularly those in the STEM areas) with grants and subsidies. Unfortunately, what the policies don’t do is help entrepreneurs find angel investors.
Policy platforms that address the invisible (and fragmented) nature of the angel market will increase access to funding, but also increase deal flow, increase the supply of angel funds, improve investor experience and knowledge, and reduce costs associated with accessing the market.
Australia has several formal angel networks, but accessing them is harder than I should be, as I wrote in an article for Smart Company. For the time being, the best way to improve the odds of accessing angel finance is to expand personal networks.
Business angels often look for ventures that match their own experiences. They want to find the ‘right’ entrepreneur as well. For their part, entrepreneurs need to look, not just for relevant experience of an angel financiers, but also entrepreneurial and investment experience. The best way of doing this is to develop personal networks in and around your industry.
Entrepreneurs often asked me how they can do this. Well, one of the best ways is to join an accelerator program (NOT an incubator, these are a little different). Accelerators give entrepreneurs a range of skills – which is obviously important. BUT, a lot of entrepreneurs think they already have the skills.
They might (though they could probably improve), but, that doesn’t mean an accelerator isn’t valuable. Often accelerators will force entrepreneurs to prove their fundamental ideas (using feasibility studies).
This will put them in contact with a huge range of people, all of whom have relevant knowledge and experience, and some of whom will also have capital.
So don’t be afraid to try out an accelerator – the worst case is that you will improve your personal networks. This will have a knock on effect and your chances of finding angel finance will also improve.
From a policy perspective, however, government wanting to make angel finance more accessible must also provide opportunities to match entrepreneurs and investors. This match-making function, in whatever form it takes, will greatly improve the flow of capital from investors to entrepreneurs.