ACTIVE BUSINESS ANGELS IN FINLAND: AN OVERVIEW

Personal characteristics

Finnish business angels broadly conform to the profile identified in studies of business angels in other countries. In terms of their personal characteristics active business angels in Finland are predominantly males (95%) and the majority are aged between 40 and 60 (67%). In this respect Finnish business angels are somewhat older than those identified in the USA and the UK, but similar in age to Swedish business angels (Landström, 1993) which no doubt reflects the higher tax rates in Nordic countries, meaning that it takes longer to achieve a high net worth. Finnish business angels are also well educated: 56% have a Masters degree, which is the basic university degree in Finland, and a further 8% have a Ph.D. Nearly half (48%) have backgrounds in technology and over one-third have backgrounds in commerce (38%).

 

Finnish business angels are extremely entrepreneurial: 95% of active business angels have participated in the founding of at least one company; the median number of companies founded by the sample is five and the median number of years of experience as an entrepreneur is 15. However, half have also held top management positions in large companies (median of 10 years experience). Not surprisingly, the main source of wealth of the sample of active angels is derived from these entrepreneurial efforts. Only 16% of business angels reported that their main source of wealth was inherited.

 

Deal Flow and Investment Activity

The sample of active business angels receive a median of six investment proposals per year, with 80% receiving fewer than 10 proposals. The most frequent source of information on investment opportunities is business contacts and friends. However, venture capital firms, although a source of information for only a minority of business angels, was rated as providing the best quality information. In aggregate in the three years prior to the survey the business angels had received a total of 330 investment opportunities; 3 or 4 out of every 10 were seriously considered from which one investment was made.

 

Investment Characteristics

Business angels in Finland typically make relatively small investments. Three quarters of investments involved amounts of less than FM 800,000 (approx. $175,000) . By comparison, the average venture capital investment in Finland is FM 2m. Nevertheless, larger investments do occur, and 25% of investors had, at some stage, made investments which exceeded FM 3m ($656,000).

 

Investments are concentrated at seed (23%), start-up (29%) and early stage (23%), and more often in manufacturing (65%) than services (35%). About 40% of investments (62% of manufacturing investments) were in high technology sectors. Finnish investors, just like those in the USA and UK, exhibit a marked preference for investing in businesses located close to home: 60% of investments were located within 50 km from their home or office.

 

Just over half of all investments by Finnish business angels are syndicated, normally with other business angels (43%) but occasionally with venture capital funds (9%). Moreover, it is quite common for the business angel or syndicate not to be the only external investor in the business. A further one-quarter of businesses in which the sample of business angels had invested had raised finance independently, either before, after or at the same time, from another business angel or a venture capital fund.

 

In a majority of cases the investor had some kind of formal or informal link or knowledge of the company before making their investment. The most common connection was simply that the investor knew the owner or management team (43%). However, in some cases (8%) the investor had been in some form of business relationship (e.g. supplier, customer) or had been a consultant or mentor (8%). Moreover, in those 40% of cases in which the firm had been unknown to the investor in this study it is possible that a syndicate member had links with the firm.

EXIT ACTIVITY

Aggregate evidence

The sample of business angels had made a total of 49 exits. In those cases for which information on returns was supplied (n=40) one-third provided a significant or modest return to their investor, and 1 in 5 provided significant financial returns (an IRR in excess of 20%), while at the other extreme just over half resulted in a partial (18%) or full (38%) loss. (Table 1). This compares with Finnish venture capital companies which reported 1 in 3 exits in 1993 to have been profitable. Taken at face value this would suggest that business angels have a similar success rate to professional venture capital firms. This is particularly noteworthy when the different stages of investments are considered. Unlike their counterparts in other European countries, Finnish venture capital funds make a high proportion of their investments in businesses at the early stage of development (EVCA, 1995). However, as noted earlier, many of the investments made by business angels are at even earlier stages. Nevertheless, it needs to be emphasised that this is a very inexact comparison because the exits by business angels have been made over a number of years whereas the venture capital exits relate to just one year.

 

TABLE 1

The perfomance of informal investments from which business angels had exited

 

return

% of exitsc

significant returna

20

modest returnb

13

break-even

13

partial loss

16

total loss

38

 

notes

a significant return: IRR > 20%

b modest return: IRR < 20%.

c n=40

 

Confirming the old venture capital adage that "lemons ripen before plums", the average time to exit for successful investments (i.e. any investment from which the return was greater than break-even) was 5.09 years compared 2.82 years for unsuccessful investments (i.e. exits which involved a partial or full loss of the amount invested). Investors exited from those investments on which they broke even in an average of 1.80 years.

 

In those cases in which the shares had some value and could be sold, the most common exit routes by business angels were a sale to other shareholders in the firm and sale to a third party. Only 16% of exits were achieved through trade sales and there were no public listings (Table 2). The most frequent exit routes for successful investments were trade sales and sales to a 3rd party, whereas sale to existing shareholders was the most common exit route for loss-making investments (Table 2) Two points emerge from a comparison with the exit routes of professional venture capital companies in Finland (Table 3): first, the most common exit route of venture capitalists is also sale to other shareholders in the company; and second, a trade sale is a more common exit route for business angels.

 

TABLE 2

Exit routes

 

 

return

total
  signif-
icant return
modest return break-even partial loss total loss no inform- ation  
listing on public market

-

-

-

-

-

 

-

trade sale

4

2

2

-

-

 

8

sale of shares to 3rd party

2

3

-

1

1

3

10

sale of shares to other shareholders

2

-

2

4

1

3

12

shares have no value

-

-

1

2

13

3

19

total

8

5

5

7

15

9

49

TABLE 3

Exit Routes by Finnish Venture Capital Funds

exit route number of exits
  1993 1994
trade sale 3 2
sale to 3rd party 3 1
sale to other shareholders in the company 11

11

pay back of convertible loan 2

13

written-off/ending of operations 7 6
bankruptcy 9 16
total 35 49

 

Current Portfolio - performance and exit expectations

Business angels find it difficult to estimate the performance of their current investments, particularly in comparison with their expectations at the time of investment. Nevertheless, with this caveat in mind, it is clear that investments performing below expectations exceed those performing above expectation by ratio of 1.5:1. While differences in time periods render comparisons problematic, it would nevertheless appear that the portfolios of Finnish business angels contain a slightly higher proportion of investments performing below expectations than those of UK business angels. In turn, UK business angels have a higher proportion of investments performing below expectations than US business angels (Mason and Harrison, 1994; Gaston, 1989).

 

 

A significant proportion of business angels do not have a clear exit strategy (Table 4), suggesting that exit plans are often not made at the time of the investment (cf. Mason and Harrison, 1996). In terms of their exit horizons, 52% of investors anticipated holding their investments for three to five years. However, in 12% of cases the intention is to retain the investment indefinitely. A trade sale is the most common planned exit route (Table 4)

 

 

TABLE 4

Anticipated Exit Routes for Current Portfolio

 

exit route

% of investments

don’t know

33

don’t plan to sell

12

business will fail

4

sale to other shareholders

15

sale to 3rd party

13

trade sale

20

public listing

4

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Last Updated 4/12/97 by Cheryl Ann Lopez & Dennis Valencia

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