At the recent launch of two new reports on start-up venture funding, I was struck with the thought that rewards will come to those who have faith to try.  And, there are notable differences with how successful countries have been in encouraging innovation.  The research was sponsored by NESTA, the UK’s national endowment to science, technology and the arts.  The reports highlighted the role that early stage funding, either from angel investors or micro funds, can have in driving innovation and creating a vibrant economy. 

Angel investors are individuals contributing their own funds, expertise, and enjoying very attractive returns.  Here in the UK, the report identified that the internal rate of return (IRR) of angel funded investments is 22% which is superior to most others.  However, when you see that fully 56% of angel funded investments do not return their original investment value and only 9% of the investments returned 80% of the positive cash flows, you see this is a risky business.  Five out of ten of the investments are a failure.  Four provide a good return.  One is a big hit.  On top of that, the UK government rewards those who take risks by providing a further tax credit, called the Enterprise Investment Scheme, that amounts to a tax credit in the year invested equal to 20% of the value.  So, for those who have faith in entrepreneurship and take the risk, the rewards are there.

How does UK angel funding compare to other markets around the world?  As an American expat living and working in Britain, I see the big differences with the attitude towards risk between the two countries.  The USA is more boom and bust, while the UK is more cautiously optimistic.  The report supports this view identifying that there are 4,000 to 6,000 business angels investing £1 billion in the UK each year.  Compare this to 250,000 angel investors in the USA investing $26 million (£16.4 billion) annually.  The amount invested in USA is nearly 20 times that of UK, yet the population is only 5 times larger. 

Having witnessed the transformation of Silicon Valley in California during the early years of my career, I see the significant role that angel investing and risk taking can have in stimulating extraordinary economic growth.  By lowering the barriers between business, investors, and the academic community, an environment can be created that encourages the incubation of ideas in the academic setting then spinning these out easily into commercial enterprises.  While programmes to encourage university spin outs are here in the UK as in the USA, they are not nearly as prolific or successful as models like  California’s Silicon Valley, Boston’s I-128 corridor, or North Carolina’s Research Triangle Park, among other areas. 

I believe that angel investing is very promising and can have a significant role in growing the UK economy through innovation.  The UK government can take a proactive role by enhancing current programmes like the Enterprise Investment Scheme, stimulating more activity in university research and spin outs, and encouraging investors who seek to commercialise new ventures to locate here.  The benefits can be extraordinary, but it does take a leap of faith to send in the angels.