Industry: Keeping angel investors relevant

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on January 15, 2018 - January 21, 2018.

There are too many initiatives filling the gap that angels used to fill. So, the role of angel investing needs to be thought through much more carefully. > Lomnitz

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In the past, it was common for early-stage businesses to look for seed investments from angel investors in exchange for equity. However, in recent years, the need for angel investments has gradually declined due to the emergence of other early-stage financing alternatives such as accelerators, incubators, micro-venture capital and, most recently, initial coin offerings (ICOs). 

To stay relevant, angel investors will need to look for new gaps to fill and step up their offerings when it comes to intellectual capital and mentoring, says Robert Lomnitz, managing director of Thailand-based Bangkok Venture Club. “Angel investing has been around for a very long time, filling the market need of early-stage financing as venture capitalists (VCs) typically would not want to write a cheque for less than US$1 million. It is just not worth their while. But the world has changed. 

“Today, companies can easily raise US$50 million on the back of a piece of paper through ICOs. There are 20 pitching competitions happening at the same time, offering winners a cheque worth US$50,000, with zero equity in return. Angels cannot play in the pre-seed stage anymore. There are too many initiatives filling the gap that angels used to fill. So, the role of angel investing needs to be thought through much more carefully.”

Malaysian Business Angel Network (MBAN) vice-president Azra’i Shu’ib concurs. He says local angel investors will need to explore platforms such as equity crowdfunding (ECF), peer-to-peer (P2P) financing and the Leading Entrepreneur Accelerator Platform (LEAP) market to stay relevant. 

“In fact, ECF is a very good platform for angel investors because if they are accredited, they are eligible for the Angel Tax Incentive, which gives them a tax exemption. The government recognises the importance of angel investors. Since 2015, more than 45 companies have been funded on ECF platforms and almost RM30 million has been raised. Most of the investments are actually from angel investors,” said Azra’i, who was speaking at the session on “Progress of the Angel Investing & Start-up Ecosystems in Asean” during the recent MBAN Summit 2017.

“This is a very good development for Malaysia. It is good for start-ups too because it is possible for them to raise funds easily in a short amount of time. Human resources system Kakitangan.com, for example, raised RM1.5 million in just 24 hours.” 

Angel investing has grown in popularity in recent years. This is seen in the number of angel clubs, networks and syndicates in the country. While the members of these organisations come from various professions, a significant number of them are the second generation of wealthy families, said the panel speakers at the session on “Progress of the Angel Investing & Start-up Ecosystems in Asean”. 

Lomnitz says angel investing appeals to the affluent as it provides them with a constructive way to contribute to society while spurring the growth of the economy. “The majority of the angels in the region are business owners using these investments as a way to give back to the community. However, there is a growing number of angels who are the second generation of wealthy families. They gained an understanding of early-stage investing when they were either studying or working abroad. Now, they are bringing that knowledge back home.”

Petrus Huang, board member of the Business Angel Network (Southeast Asia) Ltd (BANSEA), and Csaba Bundik, partner at Vietnam-based HATCH! Ventures, concur. They say the affluent members of the second generation tend to invest generously. “It is interesting to see this new wave of angel investors and how they assess investments, especially in countries such as Vietnam, where the angel investing landscape is still nascent,” says Bundik.

In its efforts to connect angel investors with start-ups across the region, MBAN — the most structurally advanced angel network in Southeast Asia — has formed the Asean Angel Alliance (AAA), a non-profit collaboration of angel investor networks in the region. The members include HATCH! Ventures, BANSEA Singapore, the Myanmar Angel Network, Cambodia Investors Corporation, Bangkok Venture Club, Angel Investment Network Indonesia (ANGIN) and the Philippines-based 1000 Angels.

The AAA’s objectives include promoting intra-Asean investment in technology-based start-ups or high-growth businesses; facilitating cross-border syndication and co-investment support; promoting the sharing of resources, best practices and investment experience; co-creating capacity building and investment programmes, standards and certification; and serving as a policy lobbyist. 

“With the creation of this alliance, we are encouraging cross-border investments for angel investors. It is a platform for us to understand investment risks in each country,” says Azra’i.

“At the same time, we can co-invest to tap each other’s skills and expertise. For example, Malaysian angels can join the deal pitches facilitated by 1000 Angels in the Philippines and co-invest with other angel investors there.” 

MBAN is currently working on a structured way to inform its members about future pitches in the countries of the AAA members. However, the tax incentive is only eligible for investments made in Malaysia, notes Xelia Tong, vice-president of investment (grants) at Cradle Fund. 

ANGEL INVESTING IN THE REGION 

There has been tremendous growth in angel investing all over the world. According to a report by the University of New Hampshire’s Center for Venture Research last May, angel investments in the US alone reached US$21.3 billion in 2016, with 297,880 active angel investors. 

Meanwhile, early-stage investment platform Go Beyond Investing, which represents investors from 33 countries, says in a report that the amount invested by its investors in 11 countries, mainly in Europe, increased to CHF3.6 million in 2016 — more than double the CHF1.3 million in 2011. 

In Asean, however, angel investing is still considered a niche space, with investors typically not disclosing the number and size of their deals. Developments in each country differ tremendously, with some angel networks more mature than others.

BANSEA Singapore, for example, has been around for 15 years. Yet, the network only has 200 accredited members. The Bangkok Venture Club was only launched in 2014, but it already has about 400 active members. The latest member to join the AAA — the Myanmar Angel Network — was launched early last year and only has 12 members. 

MBAN, which was previously under the auspices of Cradle Fund Sdn Bhd, is Malaysia’s official trade association and governing body for angel investors and clubs. Established in 2013, the network now has about 200 accredited angel investors. Its initiatives include monthly curated pitching sessions and angel education programmes for potential and existing angels. 

There are also different processes for member accreditation. According to Huang, BANSEA members are required to make a self-declaration that will be vetted by the committee. 

“Of course, today everyone is on LinkedIn. So, we can initially check their credibility there. For example, if a committee member says a person is dodgy and further investigation is needed, our secretary will do it for us. That seems to work without requiring them to file their income tax statements to join the association,” he says.

The Myanmar Angel Network has significantly more stringent rules, with multiple core requirements and a hefty annual membership fee, says head Loring Harkness. “When we were setting up, we made the decision to take a more hands-on approach that involved only a small number of investors who would be very active — hence, the strict rules. Our annual membership fee at US$1,000 is chunky enough to turn a lot of people away, although I think we are going to increase it to US$2,000 in the future. We also ask each member to hand us US$25,000 annually to be invested,” he adds. 

For MBAN, one has to be a tax resident and either a high-net-worth individual with at least RM3 million in net assets, have a gross annual income of not less than RM180,000, or have an annual income of RM250,000 jointly with one’s spouse in the preceding 12 months.

Deals and investment amounts also differ from country to country. Tong points out that in Myanmar, there are more investors than there are start-ups to invest in whereas in Thailand, there are more start-ups to invest in than there is capital to be invested. 

In Malaysia, the Angel Tax Incentive provides a tax exemption for accredited angel investors for certain deals. The incentive is similar to Singapore’s Angel Investors Tax Deduction Scheme. However, in other Asean countries, there are no tax incentives for angel investors. 

MBAN’s Azra’i says the network is hoping for an enhancement to the tax incentive, such as eliminating the requirement for angel investors to hold shares in the invested company for a period of two years prior to claiming the exemption. He also suggests that the government could set aside matching funds to help mitigate investment risks. 

“For example, the angel investor puts RM300,000 in a start-up. Immediately, the start-up would get some type of matching funds from the government, say another RM300,000. This would basically extend the deal, leading to higher potential of success for the start-up. Perhaps this is something the government could consider,” says Azra’i.