Getting to "yes" in a world of "no"…


Sometimes, the verb ‘is’ surprises you, by introducing a link between two things you didn’t previously know were the same.For example, philosophy students typically get fed Gottlob Frege’s example of Hesperus (“der Abendstern”, the evening star) and Phosphorus (“der Morgenstern”, the morning star): though a shepherd may have noticed both stars, he/she may be surprised to be told that Hesperus is Phosphorus, and in fact both of them are Venus, which always appears relatively close to the Sun in the sky (because its planetary orbit lies within the Earth’s orbit).

Back in the world of startup funding, and I have a different possibly-slightly-surprising is-based link for you.

One paradox that has vexed UK startup market observers over the last few years is the fact that even though there has been a big rise in the number of business angels (for example, the number of people attending angel network meetings), the number of deals being funded appears to have gone down, while also the size of deals has gone up. What’s going on?

One partial explanation is the dramatic increase in the number of what are called latent angels, typically people who attend angel network meetings and would dearly like to invest in startups but don’t… quite… have… the… nerve… just… yet. This might be a labelling issue, in that historically it’s likely a certain number of angels have always resolutely passed on all investment opportunities, but until recently nobody thought to call them “latent angels”. Yet from recent research, the number of latent angels does indeed appear to have shot up of late, both in the US and the UK: so this seems to be a real phenomenon. All the same, pointing out the rise in latent angel numbers doesn’t usefully address the issues of (a) who these latent angels are, (b) why they’re not investing, and (c) what the reason for that bulge in total angel numbers might be.

As far as (c) goes, I have long suspected that the recent growth in UK angel numbers has come about from mainstream stock market investors collectively wondering if the grass groweth greener on the entrepreneurial side of the fence. Certainly, a substantial number of the London-based business angels I’ve met appear to have made (and are still making) their money from some variant of financial services.

And so my is-based surprise for you today shouldn’t be too shocking: that these two groups are largely one and the same thing. That is, a typical latent angel is a typical disenchanted stock market investor, sniffing around for substantially better (and arguably more reliable) returns than the FTSE 100 etc (which, let’s face it, has been going through a pretty troubled time of late).

The key problem for people trying to make this transition is that conventional stock portfolio management techniques (build up a mixed basket of unconnected small investments) don’t satisfactorily fit startup investment practice. Even though the latter has excellent government support (EIS), you end up with illiquid, long-term investments with large up-front investment costs (due diligence, time, effort, etc). It’s a bit like asking roulette players to move over to the poker tables: yes, they’re both broadly similar types of gambling, but it should be pretty obvious that there’s a world of difference between the two. This chasm is the basic reason that those investors often end up as latent angels: they’d love to start playing (startup) poker, but all the books on their bookshelves are on (stock market) roulette. Sure, they go along to angel network meetings and talks to try to educate themselves into the whole angel mindset, but… they’re still roulette players at heart. And so it never really happens for them.

A staggeringly huge amount has been written on investing in the various stock markets, and entire industries – economics, investment banks, pension funds, etc – are built on the back of it all. Yet I think (and please tell me if you think I’m wrong!) there is almost nothing useful written about investing in startups. Worse still, almost all the books I’ve seen are heavily biased towards US angel investment practice (arguably the most realistic is Scott Shane’s (2009) “Fools Gold?”), which is an entirely different kettle of eels to UK / Euro angel investment.

Are there any good books on angel investment you’d recommend? Please leave a comment here, I’d like to be able to recommend some when asked. 🙂

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Comments on: "Hesperus, Phosphorus, and latent angels…" (1)

  1. I think you are right and have identified a greenfield of opportunity

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