22 May 2012

Venture capital

May 2012 23

L ike their ethereal name-sakes, angel investors can appear when all other hope is lost. While they have saved numer-ous start-ups in devel-

oped economies, China has been off their regular migratory paths – until relatively recently.

A lack of access to regular capital, bur-densome regulations and a shortage of funds for research and development can stifle innovation, but such an environment can sometimes create the right conditions to summon angel investment.

The proportion of angel investors – who tend to invest smaller sums and use their own money – is unknown, and international benchmarks such as the Pricewaterhouse-Coopers’ annual MoneyTree report, which measures cash-for-equity investments by venture capitalists, exclude angel funders. In comparison, private equity deals were valued at US$217.6 billion globally in 2011, a 7 percent decline over the previous year.

In China, private equity deals totalled US$20 billion in 2011, a 48 percent increase

over the previous year. Again, how much of this sum is angel investment is not easy to measure. Mainland angel investors are usu-ally secretive.

Eva Ip, a managing director at Ernst & Young in Hong Kong who tracks Chinese venture capital and private equity trends, says there’s little hard data about angel in-vestment in the mainland or Hong Kong, but adds that anecdotal evidence suggest it is growing fast. (The other Big Four firms wouldn’t venture any comment.)

Technology entrepreneurs say it is the be-ginning of an angel investor boom in China. “This population is just getting started,” Cyr-il Ebersweiler, a French venture capitalist based in Shenzhen, says of Chinese angels, who are slowly organizing themselves to in-vest more efficiently.

There are possibly millions of people on the mainland who have extra money to invest and who are looking for the next big thing, say experts. “This entrepreneurial spirit is the key to the future of investment in China,” says Ip, who is a member of the Hong Kong Institute of CPAs.

Formal networks are emerging, such as

the Angelvest group in Shanghai, while ac-counting firms have also joined the band-wagon with initiatives such as the Baker Tilly Hong Kong Business Angel Programme.

“While small- and medium-sized enter-prises receive little support from the gov-ernment, there are still some avenues that start-up companies can turn to in the pri-vate sector,” says Beatrice Fan, a corporate affairs officer at Baker Tilly.

Furthermore, Chinese angels are invest-ing beyond the mainland. Eugene Zhang, cofounder of TEEC Angel Fund, a China-focused investor group in California, has launched a new incubator called Innospring to help Silicon Valley entrepreneurs tap into funds from mainland China. “Innospring’s focus is on encouraging American and Chi-nese start-ups to expand beyond their home countries,” says Zhang.

Others are investing in start-ups from Korea to Ireland, while New Zealand’s first angel fund set up by mainland investors kicked off last month. Chinese angels are also using their business and personal net-works to connect start-ups with global fi-nancial institutions such as Citibank.

WHERE ANGELS TREAD

Angel investors are emerging from China to invest domestically and internationally.

George W. Russell reports on how accounting firms help connect investors with companies

looking for seed money Illustrations by ER Grafix

24 May 2012

Venture capital

Technology focusTechnology-related start-ups attract the bulk of angel funding. “Most of the enter-prises we invest in are related to technol-ogy, media or telecommunications, and the majority of those are Internet or mobile-related,” says David Chen, a cofounder of Angelvest. “But there are other exciting sec-tors,” he adds.

Biotechnology is also emerging as a core interest area for Chinese angels. That could be a boon for biomedical companies in the United States, which have long depended on angel investment – investment that dried up after 2008.

“Biomedical companies have long relied on government grants and venture capital to finance innovation, but funding sources are shifting and companies will need to adapt to a new reality,” says Tracy Lefter-off, U.S. life sciences partner at Pricewa-terhouseCoopers in San Francisco. “Angel investors will continue to be an important source of funding.”

Consumer retail and education start-ups can also attract interest, says Chen, formerly a managing director of the Hina Group, a mainland investment banking and private equity company. “We recently invested in a bilingual kindergarten in Shanghai,” he says.

The main hindrance for Chinese angels is official interference. Xu Xiaonian, a pro-

fessor of economics and finance at the Chi-na-Europe International Business School in Shanghai, told a March business forum in Guangzhou that government agencies are vying for regulatory power over private eq-uity, including angel funds, which until now has gone without oversight.

Xu lamented that if officials were suc-cessful, only angel investors with govern-ment connections would be approved to disburse funds, thus throttling innovation. “What the government can do is to meddle less,” Xu told the forum.

Not all involvement by Chinese officials is negative, however. Shanghai Munici-pality has had an active angel investment programme for several years. Last month, Shenzhen’s municipal government said it would encourage angel funds as part of an overall financial innovation package.

How they workAngel investors – Angelvest, for example – aim to provide early-stage capital to companies with significant operations. Members generally make individual investments from US$10,000 to US$50,000 per deal, and US$100,000 to US$500,000 as a group. Angelvest members also typically seek a board seat on the companies they’ve invested in.

Zhang says Innospring boasts its own in-house accountants and bookkeepers to

help incubating companies, but accounting firms have sponsored angel investment pro-grammes in a number of countries.

Grant Thornton, for example, has helped angel investors in Canada for the past few years. “Our corporate sponsorship of angel investor exposes us to the up-and-coming business visionaries that will lead Canada’s economic future,” says a spokeswoman for the firm in Toronto. “This exposure is great for our business.”

In Hong Kong, the Baker Tilly programme is a not-for-profit initiative that connects aspiring entrepreneurs with experienced business people. “So far, the programme has helped numerous new and existing SMEs secure angel funding up to US$2 million, while offering investors attractive invest-ment returns,” says Fan.

The Baker Tilly programme works in cooperation with the British Chamber of Commerce. “Hong Kong has a strong entre-preneurial culture but, surprisingly, there are few organizations supporting the fundrais-ing requirements of early stage companies,” says Neil Orvay, chief executive officer of Asia Spa and Wellness and chairman of the chamber’s business angel committee.

Baker Tilly helps vet candidates and gives accounting and professional help. “We nor-mally receive between 25 and 30 applica-tions for each event of which only four make

May 2012 25

it to the final breakfast presentation in front of the investors, so it is very helpful having Baker Tilly’s input in the selection process,” Orvay says.

Like Angelvest’s programme, Baker Tilly offers small sums to start-ups. Most applicants to the Baker Tilly Hong Kong Business Angel Programme are seeking US$500,000 to US$1 million. “This amount is insignificant for many venture capitalists and private equity investors, where interest starts at US$10 mil-lion to US$20 million,” says Orvay.

“We have a very strict vetting process,” says Chen at Angelvest. Submissions are emailed or lodged via Angelvest’s website and re-viewed by a panel. Angelvest members select eight favourite submissions each month. The top eight are invited to present a 10 minute pitch to Angelvest and submit to a further 10 minutes of questioning. Angelvest members form a due diligence team for each submission and successful pitches receive funding within seven weeks of their presentation.

The Baker Tilly Hong Kong Business Angel Programme runs a similar online process on

its website. Every few months, the investment committee prepares a shortlist and these com-panies present their business plans.

Angels among mortalsIndividual angels are usually more risk seeking than private equity groups and expect higher rewards, but not all angels keep their wings.

“Given the early stage of businesses seek-ing angel funding there is much higher risk and the return is often binary – the investor either makes a huge return or loses everything,” Or-vay adds. “Most angel investors are looking for at least 10 times their investment, while ven-ture capitalists and private equity investors tar-get returns that might range from three times to six times their investment, depending on the maturity of the business.”

Xu Xiaoping of Zhenfund, one of the best-known angel investors in China, has moved into mainstream private equity. He teamed up in December 2011 with private equity group Sequoia Capital China to set up a US$30 million fund. They plan to invest in about 100 companies within two years, with

each investment ranging from US$100,000 to US$300,000. About US$3 million of the new fund has already been invested, Xu told China Daily.

Meanwhile, Lee Kai-fu, chairman and chief executive officer of Innovation Works, last year launched a €22.5 million joint ven-ture seed fund with Sequoia. Lee has said he believes there are huge opportunities for an-gel investment in China, given the low start-up costs. An angel investor in the mainland can buy a 20 percent stake in an early-stage company for about €225,000, whereas a simi-lar stake in the United States would cost six times as much.

In China, the angel investor network re-mains handicapped by its highly fragmented nature, a recent Ernst & Young report noted. However, once Chinese angels become orga-nized and focused, the investment climate in the mainland could change dramatically.

Chinese entrepreneurs, and investors, are very much aware that at least two of the world’s most admired companies – Apple and Google – were first borne on the wings of angels.