Europe Needs A Financial Ecosystem for Business Angels

Europe is facing a conundrum when it comes to innovation. Despite high levels of investment in research and many market-leading global companies being based on the continent, most disruptive and radical innovations are coming from other parts of the world. One reason for this is the shortage in funding available to European companies – a shortage that is currently being filled by what are known as “business angels”, that is, private investors who support young companies and start-ups with both their capital and expertise. How can Europe benefit from business angel investment more than it does already? This was the central question posed at the ZEW Lunch Debate entitled “On Angel’s Wings: Can Business Angels Stimulate European Innovation?” which took place on 22 November 2017 at the Representation of the State of Baden-Württemberg to the European Union in Brussels.

“Innovative start-up companies need more capital,” said Dr. Maikel Pellens, senior researcher in the ZEW Research Department “Economics of Innovation and Industrial Dynamics”, in his opening presentation. “One in five companies in the EU-16 is reporting insufficient financial resources as a significant barrier to innovation.” Pellens also pointed out that traditional investors such as banks and venture capitalists are often too risk-averse, too inflexible and too busy with other clients and investments to invest profitably in innovative start-up companies, and, if they do, only invest at a later stage. According to Pellens, as business angels do not face these kind of constraints, they can make riskier investments in start-ups in their early stages and then patiently wait for their investments to bear fruit.

“The growth potential of business angel investment is on the increase”

Pellens demonstrated the significance of business angel investment using recent ZEW research findings. “High-tech companies are more than twice as likely to be funded by business angels than by venture capitalists.” Business angels also proved to be even more active in other sectors of the economy; for every investment in a high-tech company, eight companies in non-high tech sectors also received investments from business angels. “The growth potential of this type of investment is on the increase, with 60 per cent of European business angels expecting their investments to increase by at least five per cent in the future,” Pellens continued. This new financing structure has also clearly been growing in significance for some time, with the transaction volume of investments involving business angels having nearly doubled since 2007. Business angels are therefore a significant, necessary and fairly common source of funding for innovative start-ups. This is reason enough for governments to encourage such investment.

The opening presentation was followed by a lively panel discussion on the actions that EU policy-makers should take to create a more friendly environment for business angel investors. The head of the ZEW Research Department “Economics of Innovation and Industrial Dynamics”, Dr. Georg Licht was joined on the panel by Philippe Gluntz, president of “Business Angels Europe”, Helen Köpman, deputy head of the “Start-ups & Innovation” unit at the Directorate General for Communications Networks, Content and Technology (DG Connect) at the European Commission as well as Chiara Frencia, who heads the Brussels office of Inova+, a consulting company specialised in technology and innovation management. The panel discussion was moderated by Dr. Ute Günther, a member of the executive board of “Business Angels Netzwerk Deutschland e.V.” (BAND) and vice president of BAE.

“We need to harmonise EU countries’ differing approaches to angel investment”

“Appropriate funding opportunities for start-ups are fairly limited – business angels are making this process much smoother through the number and size of their investments,” Gluntz replied when asked about the role of business angel investment in start-ups. Helen Köpman then pointed out on a related note, that the development of a start-up and innovation processes are complicated. “We need to bring the needs of both investors and innovators down to one common denominator,” said Köpman. Meanwhile, Georg Licht suggested that we should not just be looking at the financial support provided by business angels. “Start-ups benefit from the business experience of business angels. These investors are an important source of informal advice and have vast networks of contacts that start-ups can take advantage of. In the long term, this will have a positive impact on economic growth and ultimately on innovation in the companies involved.” “This mentoring cannot remain at a local level, as it has up until now, but must be more actively promoted across Europe,” added Frencia.

All the debate participants agreed that, while there are many constraints on angel investment across Europe, there is also potential for governments to take action. “Currently, the European landscape is highly fragmented in terms of the political measures that have given rise to various European business angel markets. Developing an international strategy for supporting business angel investment is difficult. Ideally, we should be trying to harmonise these measures and adapt successful programmes for EU-wide use,” said Licht. One basic requirement for this, according to Licht, is a strong financial ecosystem. Gluntz added that venture capital investment in European financial ecosystems is far less developed than in the US. Due to a lack of incentives on a European-wide level, many research-intensive start-ups have relocated to more welcoming business locations. “We need to create a trusted environment for business angels in Europe with new investment models, training opportunities and means to monitor the market,” concluded Frencia. 

What might an EU-wide business angels market look like?

Many of the 50 guests at the Lunch Debate, including representatives from both the European Commission and the European Parliament and from the worlds of industry and banking, engaged actively in the discussion, expanding the debate through their insightful questions and comments. These included ways to make more capital available for young companies in the current European financial system, how the EU might go about removing some of the tax-related barriers to business angel investment and what the next step might be towards a harmonised European business angel market. These audience questions clearly underline the need for economists and politicians to tackle the issue of encouraging business angel investment in greater depth.