These are individuals who provide support for the formal venture capital sector by seeking out new entrepreneurs and nurturing them up to be investment-ready, thereby raising the number of start-ups and increasing the deal flow for venture capital companies.
In this respect, business angels are widely recognized to play a key role in the first round of equity capital of ‘the funding escalator’ prior to entry by venture capital for a small proportion of companies.
Indeed, contrary to popular myths about entrepreneurial finance, the vast majority of successful high growth potential businesses taking equity finance do not receive venture capital funding even in the most developed capital markets such as the USA.
During the last few years, the UK has benefited from a number of policies that have provided incentives to overcome these issues at a national level, principally through the provision of substantial tax incentives through schemes such as the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).
Simply put, the former provides tax relief to business investors of 30 per cent for an investment up to £1 million whilst the latter provides 50 per cent tax relief on investments up to £100,000.
Data on EIS and SEIS have become proxies for business angel activity across the UK. However, given their importance in supporting growing firms, the latest data from HMRC on EIS/SEIS activity makes grim reading for Welsh policymakers.
It shows that over the period 2012-15, there has only been a 9 per cent increase in the amount of EIS funding to businesses in Wales, as compared to a 76 per cent increase across the UK. Scotland - with only 50 per cent more firms than Wales – has attracted 250 per cent more EIS investments over this period.
Whilst Wales does slightly better on SEIS, Wales still only accounts for 1.1 per cent of all UK investments. Indeed, Wales is the second worst performing part of the UK relative to other regions in terms of both EIS and SEIS, just above Yorkshire and Humberside.
So what can be done to improve this situation and to encourage greater private funding into Welsh firms?
One of the key areas examined by a member of the Task and Finish Group for the Development Bank for Wales (DBW) was the stimulation of greater business angel activity.
A report by Nelson Gray - one of the leading thinkers on informal investment and a former European Business Angel of the Year - showed that those regions that have taken additional measures to invest in the development of the ‘supply-side’ of business angel finance are able to achieve far higher levels per head of population than those that do not.
As a result, the DBW Task and Finish Group concluded that there was a need to stimulate both the supply and demand for equity investing into high growth potential businesses within Wales.
As has happened in Scotland, this could be done by providing support to encourage more high net individuals to become angel investors. This would include training, master classes, mentoring and linkages to international best practice to improve the capability of potential Welsh business angels.
The quality of investment ready training to entrepreneurs seeking funding could also be improved so that they gain a better understanding of the needs of investors.
However, the most important development, as has happened in other countries, is the creation of a forum to bring together business angels to work together to improve their skills and to syndicate investment opportunities.
This would differ from the current model adopted by Finance Wales where it actually owns and manages xénos, the Welsh business angel network. Instead, such a forum would focus on “capacity building” by increasing the number and quality of angel investor groups across Wales as opposed to directly facilitating individual investment as is currently done through xénos.
It would also provide education for both investors and companies on angel financing thus improving efficiency and success. This would result in a bigger deal flow by volume and value and supporting more companies for longer.
As was always the case with the recommendations from the DBW Task and Finish Group,
the main principle was to provide sufficient support to allow the private sector to operate efficiently and effectively in an area of recognised market failure.
Given this (and the fact that it has been over 18 months since the DBW Task and Finish group reported), the woeful performance of Wales with regard to business angel investment suggests that if the Welsh Government is serious about supporting high growth firms, then it needs to move urgently to support such a forum.
This approach has been enormously successful in Scotland which continues to considerably outperform Wales in terms of business angel activity into growing businesses. Certainly, the creation of a Welsh Angel Capital Association to act as an umbrella organisation to encourage the development of multiple angel groups and networks is long overdue.