© 2018 International Bank for Reconstruction and Development / The World Bank Group 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved. This volume is a product of the staff of the World Bank Group. The World Bank Group refers to the member institutions of the World Bank Group: The World Bank (International Bank for Reconstruction and Development); International Finance Corporation (IFC); and Multilateral Investment Guarantee Agency (MIGA), which are separate and distinct legal entities each organized under its respective Articles of Agreement. We encourage use for educational and non-commercial purposes. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Directors or Executive Directors of the respective institutions of the World Bank Group or the governments they represent. The World Bank Group does not guarantee the accuracy of the data included in this work. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750- 4470; Internet: www.copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. Stimulating Business Angels in the Czech Republic October 2018 CONTENTS ACKNOWLEDGEMENTS III ABBREVIATIONS IV EXECUTIVE SUMMARY 1 CORE FINDINGS 2 RECOMMENDED ACTIONS 3 INTRODUCTION 7 CONCEPTUAL FRAMEWORK 12 METHODOLOGY 15 Limitations 17 INTRODUCING BUSINESS ANGELS 19 THE CZECH REPUBLIC’S INNOVATION AND ENTREPRENEURSHIP PROFILE 22 KEY FINDINGS 26 Supply-side analysis 27 Demand-side analysis 40 Analysis of the local framework conditions 45 POLICY RECOMMENDATIONS 51 Typology of proposed policy recommendations 53 SHORT-TERM RECOMMENDATION 1: DATA COLLECTION AND MAPPING 55 Activity 1.1: Supply-side data collection 56 Activity 1.2: Taxpayer base analysis 58 Activity 1.3: Demand-side data collection 59 Data collection and mapping summary 60 MEDIUM-TERM RECOMMENDATION 2: PROMOTION AND MARKET STRUCTURING 61 Activity 2.1: Launching a national angel association 62 Activity 2.2: Self certification of business angels 70 LONG-TERM RECOMMENDATIONS A: COFUNDS 72 LONG-TERM RECOMMENDATION B: TAX INCENTIVIZATION 75 Alternatives to tax incentives 79 Long term recommendation summary 80 i Contents ANNEX 1. LITERATURE REVIEW ON BUSINESS ANGEL DEVELOPMENT 81 ANNEX 2. PROBLEMS WITH ANGEL DATA 87 ANNEX 3. VENTURE CAPITAL DEFINITIONS 89 ANNEX 4. PROGRAM INSTRUMENTS: EARLY-STAGE GOVERNMENT SUPPORT 93 ANNEX 5. OPERATION OF COFUNDS 98 ANNEX 6. INVESTOR READINESS 103 ANNEX 7. BUSINESS ANGEL TRAINING 105 ANNEX 8. BUSINESS ANGELS: MYTHS AND REALITY 108 ANNEX 9. KNOWLEDGE-INTENSIVE FIRMS 116 ANNEX 10. TAX INCENTIVES TO PROMOTE ANGEL INVESTING 118 ANNEX 11. CZECH ENTREPRENEURIAL LANDSCAPE 122 ANNEX 12. INTERVIEWED STAKEHOLDERS 128 CASE STUDY 1. HBAN BUSINESS ANGEL NETWORK IRELAND 129 CASE STUDY 2. WELSH DEVELOPMENT BANK ANGEL COFUND 131 CASE STUDY 3. SCOTTISH COFUND (TO MAY 2015) 132 CASE STUDY 4. INVEST NI COFUND 135 CASE STUDY 5. UK BUSINESS ANGELS COFUND 137 CASE STUDY 6. NEW ZEALAND SEED COFUND 140 CASE STUDY 7. TARGETED TAX INCENTIVES IN DELAWARE 143 CASE STUDY 8. INVEST – GRANT FOR BUSINESS ANGEL CAPITAL 144 REFERENCES 146 Contents ii ACKNOWLEDGEMENTS This report was produced by a World Bank team The report gratefully benefited from the guidance consisting of: Anwar Aridi (Project Task Team of the World Bank management, Fabrizio Zarcone Leader and Private Sector Specialist), Nelson Gray (Country Manager), Marialisa Motta (Finance, (Senior Risk Finance Consultant), Anne Ong Lopez Competitiveness, and Innovation, Practice Manager), (Innovation Consultant). Annoula Rysova (consultant) Isfandyar Zaman Khan (Lead Financial Sector provided local support. The team would like to thank Specialist) and from comments provided by: Randa the Ministry of Finance of the Czech Republic, Lenka Akeel (Senior Financial Sector Economist, World Dupáková (Deputy Minister) and Aleš Králík (Head of Bank), Ana Paula Cusolito (Senior Economist, World Unit), and local stakeholders for their collaboration Bank), and Karel Obluk (Czech Serial Entrepreneur and inputs. This engagement was made possible by and Tech Investor). the financial support of the Structural Reform Support Programme of the European Commission. iii Acknowledgements ABBREVIATIONS € Euro (currency) $ US Dollar (currency) $NZ New Zealand Dollar (currency) £ UK Pound Sterling (currency) 3Fs Founder, Friends and Family ACA Angel Capital Association AI Artificial Intelligence ALF Angel Lenders Forum, Scotland AMCIF Act on Management Companies and Investment Funds API Application Programming Interface BAE Business Angels Europe B2B Business-to-Business B2C Business-to-Consumer B2G Business-to-Government BAF Business Angel Finding BAN Business Angel Network BBB British Business Bank CEE Central and Eastern European CFM Clarendon Fund Managers Ltd CIFP Caribbean Investment Facilitation Project CMZRB Czech-Moravian Guarantee and Development Bank CoFunds Co-investment Funds CTU Czech Technical University CVCA Czech Private Equity and Venture Capital Association CZK Czech Koruna (currency) DBW Development Bank of Wales EAF EIF European Angels Fund EEA European Economic Area Abbreviations iv EBAN European Business Angel Network EC European Commission EIF European Investment Fund EIS Enterprise Investment Scheme ERDF European Regional Development Fund ESIF European Structural and Investment Funds ESIL Early Stage Investing Launchpad EU European Union EVCA European Private Equity & Venture Capital Association GCI World Economic Forum’s Global Competitiveness Index GEM Global Entrepreneurship Monitor GDP Gross Domestic Product GVA Gross Value Added HBAN Halo Business Angel Network - Ireland IC Investment Committee ICT Information and Communication Technology IoT Internet of Things IP Intellectual Property IPO Initial Public Offering IRR Internal Rate of Return JIC South Moravian Innovation Center (Jihomoravske Inovacni Centrum) KPI Key Performance Indicator LLC Limited Liability Company (US) Ltd Limited Company (UK) M2M Machine to Machine M&A Mergers and Acquisitions MIT Ministry of Industry and Trade NAA National Angel Association NACO National Angel Capital Organisation NZVIF New Zealand Venture Investment Fund OECD Organization for Economic Cooperation and Development OP EIC Operational Program Enterprise and Innovations for Competitiveness P2P Peer to Peer R&D Research and Development v Abbreviations SaaS Software as a Service SAFE Survey on the Access to Finance of Enterprises SCF Scottish CoFunds SCIF New Zealand Seed Co-investment Fund SEIS Seed Enterprise Investment Scheme SEN Strathclyde Universities Entrepreneurial Network SIB Scottish Investment Bank SME Small and Medium Enterprise SRO Limited Company (Czech Republic) SPV Special Purpose Vehicle TACR Technological Agency of the Czech Republic TFP Total Factor Productivity TOR Terms of Reference TTO Technology Transfer Office UKBAA UK Business Angels Association UK United Kingdom of Great Britain and Northern Ireland US United States of America VC Venture Capital Abbreviations vi EXECUTIVE SUMMARY The objective of this study is to assist the Ministry of lending are unsuitable. Thus, external equity of Finance of the Czech Republic1 to capture the investment becomes essential for innovative high current state of angel investment activities in the growth potential firms. In the Czech Republic, the country. This study is carried out in the wider context share of young high growth enterprises measured of developing domestic capital markets, identifying based on turnover growth3 is just 1.4 percent of the gaps and potential, and offering relevant policy active enterprise population, compared to Estonia’s recommendations for increasing risk investment 4.3 percent.4 However the Czech Republic ranks activity in the country to better contribute to private above the European average in terms of the share sector growth, innovation, and consequently of high-growth companies, as identified using the economic growth. This study complements the criteria of growth in employment.5 earlier analysis of the World Bank (2017) Capital Markets Assessment report2, which focused on Equity investors, particularly business angel the broader capital market development agenda investors, bring not only financing to high growth and more traditional financing instruments, with an firms, but also expert advice, post investment emphasis on later stage financing. mentorship, and market connections (‘smart money’). Business angels are typically ‘hands on’ Equity financing is the most appropriate form investors who are either experienced business of funding to support innovative high-growth people or entrepreneurs (or both), and the firms firms. High-growth firms tend to contribute they back also benefit from their advice, insights, disproportionately to job creation and are often knowledge, and contacts. This non-financial at the earliest stages of innovation and looking to assistance is particularly important in the earliest commercialize research and development. Because development stages where the management team these firms do not yet have a saleable product or is incomplete and usually inexperienced. customers (being ‘pre-revenue’), bank or other forms 1 This study is supported by the European Commission’s Structural Reform Support Service. 2 “Capital Market Assessment /Market Development Options Czech Republic,” The World Bank (September 2017). 3 Refers to enterprises which are five years or younger in terms of operations and have turnover growth of at least 10% per annum in the past 3 years. 4 “High growth enterprises (growth by 10% or more) and related employment by NACE Rev. 2,” Eurostat. 5 Growth in this case is defined as annualized growth in employee numbers of more than 10% per year over a three-year period and at least 10 employees when this growth began. “1 in 10 enterprises in the EU recognized as high-growth companies,” European Commission, http://ec.europa.eu/ eurostat/web/products-eurostat-news/product/-/asset_publisher/c2r9i0eawvMY/content/DDN-20171019-1/pop_up?_101_INST%E2%80%A6 1 Executive Summary There are, however, considerable disincentives culture, and low levels of business innovation and and barriers to entry that are likely to restrict the knowledge creation. Issues related to local conditions number of individuals willing to become business are attributable to weak incentive structures among angel investors. This form of investing requires the supporting intermediaries (e.g., incubators/ individual to learn new skills, is potentially extremely accelerators, technology transfer offices (TTOs), time-consuming, and is very risky in comparison to universities, weak business regulatory conditions, and other traditional forms of investment (data from the lack of exit markets). These assumptions of potential US suggests that up to 70 percent of investments gaps shape this assessment of the current situation made by angels fail to return capital, never mind a of the Czech Republic’s risk financing ecosystem. profit6). It is appropriate therefore for governments to consider the introduction of policies and incentives to encourage more individuals to consider angel investing, with the state benefiting from the resulting additional economic growth. Core Findings No assessment of demand for, or supply of, equity On the supply side, the Czech Republic has an investments (particularly from angel investors) emerging early stage investment community. It was available for the Czech Republic. This report is small both in terms of the number of investors attempts to fill this gap by providing a systematic and the amount invested. The market appears assessment of business angel activities, and the dominated by a small pool of very high net worth ecosystem surrounding innovation finance in individuals operating largely individually and general. This report assesses the following three investing directly into companies or via a private components: (i) supply side of investments (banks; personal fund structure or family office. While there founder, friends and family (3Fs); proof-of-concept are one or two for-profit platforms, organizations that competitive grants; crowdfunding; venture capital; charge membership fees for access to investment and business angels), (ii) demand side of investments opportunities, and some private investment clubs, (high-growth firms), and (iii) the local framework there are no visible business angel networks (BANs) conditions shaping demand and supply. The analysis of the type typically found in developed European is based on literature reviews, published data sources, markets. There appears also to be a general lack of and qualitative interviews. syndication of investments (more than one investor involved in funding the company to mitigate Weak risk finance activity in a given market could risk). Further, visible investment activities appear be explained by potential gaps in the supply concentrated geographically in Prague and in the and/or demand-side of investments as well as information, communication, and technology (ICT) issues surrounding local framework conditions. sector. This combination of low levels of syndication On the supply-side, issues relate to the absence and portfolio size and a general concentration in a or low capacity of angels, venture capitalists, and single industry sector, together with low availability crowdfunding platforms. The absence or low of follow on funding from venture capitalists suggests capacity of business angels in turn can potentially that angel investing in the Czech Republic is subject be due to disincentives to investing, such as the to a higher than necessary level of risk. Combined need for angels to learn new skills (correlated with with a low number of individual investors, this high investor experience), information asymmetry, and risk makes the Czech market fragile. A few individuals lack of tolerance for certain attributes associated withdrawing from the market due to bad experience, with investment-making (e.g., lack of liquidity, time- changes in personal or economic circumstances, or consuming, and risky). On the demand-side, possible simply retiring could have a disproportionate impact issues may include a perceived lack of deal flow of on available investment funds. investable ventures that demonstrate capacity to grow and capture markets, weak entrepreneurial 6 The study was funded by Ewing Marion Kauffman Foundation and the NASDAQ OMX Education Foundation and was based on exit data primarily from the period 2010 – 2016. https://angelresourceinstitute.org/research/report.php?report=101&name=2016%20Angel%20Returns%20Study Executive Summary 2 On the demand side, credible deal flows do academic spinoffs are hindered by institutional exist, based on the existence of success stories. issues such as complicated processes in starting Nonetheless, these success stories are relatively few university spin-offs, ineffective TTOs, and weak and concentrated in certain locations and sectors. incentive structure for commercialization of ideas, Most startups are based in Prague and Brno, and although there are government efforts to re-align primarily in the ICT sector. There are relatively few universities’ incentive structure through ‘smart academic spin-offs (these tend to focus on non- funding’. ICT innovations). The lack of detailed structured data makes it difficult to quantify the existing level •• Uncertainty that existing government investment readiness programs, while available and aiming of credible demand. Information made available to improve the quality of potential investable deal through this report indicates that overall, demand flows, sufficiently address the issues investors care falls short of the critical mass needed to support about most, particularly the investability of the a developed market. Existing issues affecting a startup’s proposition and investor engagement. credible pipeline of potential deal flows and shaping Government financing programs aim to stimulate the current set-up of demand in the Czech Republic the supply side by providing direct or indirect include a lack of information and education on the public capital to innovative firms, although part of founders, poor linkages between academia it appears that the Czech government lacks and industry, and weak entrepreneurial culture and experience in the provision of public capital given education. unsuccessful attempts to create financing support platforms. While issues in the local environment may affect the flow of angel investments these are clearly not •• An absence of specific tax incentives or co- insurmountable, based on the Czech Republic’s investment funds currently available to encourage competitive ranking on relevant indicators and or support business angel activities. The inability the evidence that investment deals are being under Czech tax legislation to carry losses incurred conducted. The Czech Republic ranked 31st out on the sale of securities in a given year forward of 137 countries on the World Economic Forum’s to offset against future gains, or against income, Global Competitiveness Index (GCI) 2017-18 and may discourage high risk investing such as that is the highest placed Central and Eastern European undertaken by business angels. (CEE) country in the European Union (EU) 28, ranking 13th (between Estonia and Spain). Key findings on the current local framework conditions include: •• Reported issues in the regulatory environment Recommended Actions regarding perceived difficulties in starting a business, outdated company laws, and expensive This report proposes a number of short- bankruptcy costs. term, medium-term, and long-term policy recommendations for enhancing business angel •• A lack of clarity in terms of exit conditions, especially awareness and investments in the Czech Republic the level of exit opportunity for new technology (see table 1). The recommendations are problem- companies as opposed to more traditional driven (based on the analyses of supply side, manufacturing and engineering companies demand side, and local environment conditions for (dominated by mergers and acquisitions). There business angel investments) and phased (anchored have been only a few examples of technology on administrative and political cost considerations). company exits, such as AVG (which went public They include the following: at the New York Stock Exchange in 2012 and was later sold to Avast Software in 2016) and Cognitive Security (sold to CISCO in 2013), and thus relatively few examples of Czech company Component 1 (short-term) - Data success stories. This is not surprising given that Collection and Mapping early stage investing in the Czech Republic is still relatively young and exits typically take 5 to 8 Available data for the early stage market in the Czech years to achieve in developed markets. Republic on both the demand and supply sides is weak. An essential first step is therefore to create a •• Startups receive varying levels of business systematic understanding of demand and supply development and mentoring support (from none for angel investments. Specifically, data can be used to intensive) despite the availability of support to monitor the risk finance market to better inform intermediaries (e.g., incubators, accelerators). policymaking. The data should be updated annually. Intermediaries supporting the creation of more 3 Executive Summary Recommendation 1.1: Commission time-series tax incentives to both equity crowdfunding investors data on angel investment activity (similar to and business angels, higher protection is given to existing venture capital market data). This helps less sophisticated retail investors.8 provide an accurate measure of market size, investment activity, and the types of investments being made, Recommendation 1.3: Commission a demand among other indicators. An initial “baseline” analysis side survey targeting startup founders/ is required to establish the present situation, both entrepreneurs. This helps provide an assessment to inform policy development (what problem needs of credible demand side needs as well as uncover to be addressed) and to facilitate future program issues and guide policy interventions for different monitoring (what success has been achieved). This types of founders/investment applicants. These can be done using survey interviews (as the New might include reluctant applicants (equity averse Zealand Government did when forming their Seed founders), discouraged applicants (founders who Co-Investment Fund (CoFund)7) and/or compilation do not apply as they do not know how to, or have of secondary data sources. Baseline information fears of being rejected), and unprepared applicants should include international benchmarking of angel (founders who wish to obtain finding, but do not investments, and when updated regularly this will have the skills or collateral to effectively apply, or provide useful information on deal size, number of who do not understand the real needs of investors). investments, levels of syndication, industry sectors, Individual companies need not be identified, rather and geographic location of investors and investee incubators and accelerators could be asked to report companies. how many of their companies have actively sought equity funding, in which industry sectors, and at what Recommendation 1.2: Conduct a taxpayer base values. analysis. This analysis helps quantify the number of individuals who appear to have sufficient wealth / income to be potential angel investors. This will inform Component 2 (medium-term) - Promotion understandings of the potential investment capital and Market-Structuring that may be available in the Czech Republic. Collected data can be used to set reasonable expectations The development of an effective angel investment regarding the likely total pool of investors and market in the Czech Republic is inhibited by a lack create an estimate of their annual investment value. of knowledge about the nature and operations of Ideally, data would consider characteristics that business angels. Individuals may not realize they tend to define the likelihood of an individual being can be an angel investor or know how to start; an angel investor, including disposable income, founders may not know where to find angels, whether demographics (e.g., age, education, gender), and their business is suitable for investment, or what location. This analysis would not seek to identify steps they should take to attract investment. This individual tax payers, but rather produce aggregate recommendation helps to increase market capacity data showing how many tax payers fall into specified and the capability of business angels and develop bands of amounts of tax paid, with the objective of the connection between investors and founders. determining how many individuals pay the highest amounts and may therefore have income levels Recommendation 2.1: Create a Czech National sufficient to support angel investing. Further, this Angel Association (NAA). A Czech NAA can help analysis will inform the development of government improve the efficiency and effectiveness of the policies to help stimulate investment. For example, existing market, improve coordination and linking disaggregated analysis based on geography helps of existing investors, and provide better information, identify regions where specific shortfalls to potential signposting, and access to training and international demand may require additional policy intervention. practices. This organization would not itself make Based on analysis of potential investor’s capacity, investments but fulfil a “market making” function policies can be enacted to provide differing support on behalf of the Government to support economic structures depending on investor types. An example development policy. The Czech Government could is from the UK Government: while offering the same seed fund the establishment of an NAA with the remit 7 Ministry of Economic Development. Baseline Review of Angel Investment in New Zealand (Undertaken as Part of the Formation of the Seed Co- Investment Fund). New Zealand: Research, Evaluation and Monitoring Team, Industry and Regional Development Branch, November 2007. https://www. mbie.govt.nz/publications-research/publications/evaluation-of-government-programmes/Archive/report.pdf 8 Equity-based crowdfunding platforms are required to obtain a license or to have regulated activities managed by authorized parties. They are also required to have a screening process to sort sophisticated and non-sophisticated investors. A “non-sophisticated” investor is not allowed to invest more than 10 percent of their net investable assets through crowdfunding platforms. Executive Summary 4 to facilitate an increase in the capacity and capability (of public funds and private investor funds) occurs of business angels in the country. While all angels at the level of individual deals, not at the level of the and angel organizations would be encouraged to be fund. The objective is to encourage “business angel members of the national association, its status as a type behavior”, involving a hands-on involvement development agency would allow it to be completely by the private investor, as opposed to a passive independent of any one angel’s / network’s interests. involvement in a fund managed by a professional It would encourage individuals to be angel investors, fund manager. Based on the recommendations of but with no vested interest in which angel network the Organization for Economic Cooperation and that individual joins (or does not join). It would be Development (OECD), such a co-fund is appropriate able to deliver policy and programs on behalf of once there is at least a minimal level of existing angel government that a private sector organization may activity9 for the fund to engage with. Information flow not be motivated to engage in. Due to the very early is also a pre-requisite before considering this option. stage of development of the Czech angel market An example of a suitable fund structure for the Czech and the need for government financial support, the Republic would be one similar to that adopted by the more recent Halo Business Angel Network (HBAN) Development Agency in Northern Ireland, where a established by Enterprise Ireland in 2009 could serve professional fund manager is tasked with helping as a good model for the Czech NAA. to coordinate the sourcing of investments, finding and encouraging new and existing angel investors The NAA could potentially become a member to invest in each individual deal, and conducting of Business Angels Europe (BAE). BAE can give a detailed review of the angel co-investors’ due practical support and guidance for the development diligence and proposed deal structure. The fund of the Czech NAA as well as create linkages with manager must fund at least 50 percent of the value other NAAs. BAE’s members include the national of each investment made from private investors. associations of the most developed angel markets in Europe, including Germany, France, Spain, and the UK. Long-term option B - Tax Incentivization Recommendation 2.2: Introduce a self- The tax structure is being used by many countries to certification system for business angels in the encourage individuals to take on the extra investment Czech Republic. Accrediting or certifying business risks of being a business angel.10 The tax treatment angels may help remove any regulatory barriers of capital gains or losses realized on disposal of hindering the easy distribution of early stage an investment will influence the risk appetite and investment propositions to investors or limiting the decision-making process of a prospective investor. number of investors participating in any individual For instance, tax relief for capital gains or the investment. provision of loss relief on a more favorable basis than the baseline tax system could support the de-risking of investments in young, growing, and Long-term option A - Establish a CoFund innovative businesses. Given a general lack of market capacity and under-investment in certain sectors CoFunds are increasingly being used by governments in the Czech Republic, such measures could help to stimulate behavioral changes in current and to increase the number of business angels (and potential investors, encouraging them to take more particularly encourage more angels to become risks. CoFunds lower the risk of investments by “visible” in the market) and widen the pool of angel encouraging syndication, allowing more investments capital by encouraging investment in a broader to be made and providing portfolio diversification. range of sectors. However, this measure can only They are used where there is a lack of market capacity be fully effective within a functioning ecosystem and lack of follow on funding (in less invested-in built upon a free flow of information and a culture sectors or geographic locations) to help encourage of risk-taking and investment. These pre-requisites more individuals to become angel investors, and for take time to be established, matched by appropriate existing investors to invest more. A critical design policy interventions (e.g., general promotion of angel element of these CoFunds is that the co investment investment and facilitating the education of potential 9 OECD, “Financing High-Growth Firms: The Role Of Angel Investors,” (OECD Publishing, 2011), http://dx.doi.org/10.1787/9789264118782-en. 10 A European Commission (EC) report “Effectiveness of tax incentives for venture capital and business angels to foster the investment of SMEs and start-ups”, Institute for Advanced Studies (2017), looked at best practices in tax incentive programs for investors in 36 countries from within Europe and the OECD. 5 Executive Summary new investors to enable them to make informed gains on securities sold in the same year (capital investment decisions). The design of a tax incentive losses cannot be carried forward or offset against for the Czech Republic will need to take account of income). the specific characteristics of the Czech tax structure (generally a flat rate of 15 percent applied on all While these recommendations are primarily taxable income). Existing exemptions from capital focused on the supply-side, improving demand- gains tax on all forms of investments in securities side interventions and framework conditions held for a minimum period of three years are likely are equally important. Effective demand-side to make specific incentivization for “high risk” interventions (e.g., investor ready programs) stimulate investments more difficult. A review of tax legislation and ensure an adequate pipeline of credible deal should also consider any existing provisions that may flows. Ensuring conducive legal framework conditions discourage high risk investing, such as the provisions (underpinned by deeper legal analyses) prior to the allowing losses on the sale of securities (in the case implementation of CoFunds and tax incentivization of a business angel investment characterized by the schemes is likewise a pre-condition for implementing high probability of the failure of the venture and total these long term strategic options. write-off of the investment) only to be offset against Table 1. Recommendations Timeframe Recommendation COMPONENT 1. DATA COLLECTION AND MAPPING Data collection and mapping to create a systematic understanding of demand and supply for angel investments. 1.1. Commission time-series data on angel investment activity to be updated Short-term annually (similar to existing venture capital market data). 1.2. Conduct a taxpayer base analysis to quantify the number of individuals in Czech Republic who have the potential to be a business angel and repeat annually. 1.3. Commission a demand side survey targeting startup founders/entrepreneurs on an annual basis. COMPONENT 2. PROMOTION AND MARKET STRUCTURING Promotion and market-structuring to increase market capacity and capability of business angels, and connection between investors and founders Medium- term 2.1. Create a Czech National Angel Association (and become a member of BAE). 2.2. Introduce a self-certification system for business angels in the Czech Republic. OPTION A. COFUND Establish co-investment funds to encourage more individuals to become angel investors, and for existing investors to invest more because they lower the risk of investments by allowing more investments to be made and providing portfolio Long -term diversification. OPTION B. TAX INCENTIVIZATION Introduce tax incentives to increase the number of business angels and encourage them to invest in a broader range of sectors Executive Summary 6 INTRODUCTION Young firms create the bulk of new jobs and are As in most countries, banks provide the majority the key drivers of productivity and economic of funding for Czech companies. The Survey on the growth. Young firms are the net job creators in 17 Access to Finance of Enterprises (SAFE) 2017 found OECD countries and Brazil11 as well as in the United that top relevant sources of financing for Czech SMEs States12. They also contribute disproportionately are primarily offered by banks: leasing (53 percent), to innovation13 through the new ideas that they credit lines (50 percent), and bank loans (45 percent) commercialize and bring to the market, thereby in 201718. This relationship has been strengthened helping increase productivity and economic growth. in the Czech Republic in particular because of the Of importance for economic growth is a subset of provision of state supported bank loan guarantees. young firms: young innovative companies achieving “high growth14” or “scale up”. For example, while high This report focuses, however, on the needs of growth firms represent a minority of all firms in the companies that require equity funding, something UK (around 7 percent), estimates suggest that they not normally provided by banks, and more generated 50 percent of all net new employment specifically on the equity needs of early-stage between 2002 and 201015. and high-growth technology firms. Often, these firms’ source of equity capital comes from private For high growth firms, the most appropriate form individuals acting as business angels. Such investors of funding to support growth is likely to be equity. make their own personal investment decisions and For such firms it is normal for their revenues to lag the invest money in their control. Their investment in provision of investment significantly, making bank high-growth firms is not made from funds in private or other forms of lending unsuitable. They consume bank deposit accounts allocated for investment large quantities of cash to support increasing working by bank fund managers. The report and policy capital needs, making diversion of revenues to pay recommendations therefore address stimulating back capital and interests on loans inappropriate. investment by individuals19. For example, nearly 50 percent of UK high-growth technology firms use external equity finance 16 Equity investors bring more than just much- in comparison to just 1 percent of the general needed financing to entrepreneurs and high business population17. For companies at the earliest growth firms. One of their main contributions is stages of innovation and looking to commercialize providing expert advice, post investment mentorship, research and development (R&D) but which do not and market connections. This is perceived to be a yet have a saleable product or customers (they are particular attribute of business angel investors, who ‘pre-revenue’), external equity investment becomes are said to provide ‘smart money’. Business angels essential (with the only alternative usually being are typically ‘hands on’ investors who are either a limited level of grant funding). Innovative high experienced business people or entrepreneurs (or growth potential firms in the early stages of their life both), and the firms they back also benefit from their cycle therefore need an appropriate level of supply advice, insights, knowledge, and contacts. This non- of the right type of capital (equity) from investors. financial assistance is particularly important in the earliest development stages where the management team is incomplete and usually inexperienced. The value of this to young firms was evidenced by a survey of German business angel-supported firms who considered business angels’ contacts and know-how to be more important than the provision of finance20. 11 C. Criscuolo, P. Gal, C. Menon, “The Dynamics of Employment Growth: New Evidence from 18 Countries,” OECD STI Policy Papers No. 14 (2009). 12 John Haltiwanger, Ron S. Jarmin, and Javier Miranda, “Who Creates Jobs? Small vs. Large vs. Young,” Review of Economics and Statistics 95, no.2 (2013): 347–61. 13 Zoltan J Acs and David B Audretsh, “Innovation in Large and Small Firms: An Empirical Analysis,” American Economic Review 78 (1988):678-690. 14 The OECD defines a high growth business as ‘a firm of 10 or more employees that grows either its employees or turnover by an average of more than 20 per cent per year for three consecutive years’. 15 NESTA, “Vital Growth: the importance of high growth businesses to the recovery,” NESTA (2011), https://media.nesta.org.uk/documents/vital_growth.pdf. 16 46 of the ‘Sunday Times Tech Track 100, 2016’ draw on external equity. See http://www.fasttrack.co.uk/league-tables/tech-track-100. 17 BDRC Continental found that 1% of SMEs had ‘applied’ for external equity investment in the last 12 months. “SME Finance Monitor Q4 2017” (March 2018), http://www.bva-bdrc.com/wp-content/uploads/2018/03/RES_BDRC_SME_Finance_Monitor_Q4_2017.pdf. 18 European Commission, “SME access to finance conditions 2017 SAFE results—Czech Republic,” (2017). 19 Banks, be they “high street” or “private”, play almost no role in equity investment in early stage companies in any country. Indeed, they often actively discourage individuals making personal angel investments as it removes funds from them that they may otherwise receive fees for managing. 20 KfW Bankengruppe, “Beteiligungsmarkt nach der Krise: Optimistischer Ausblick Aber Angebotslücke beim Wachstums capital wird grosser,” (2010). Introduction 8 Current estimates show that business angels The majority of technology firms which made are the most significant source of risk capital for successful exits have been shown to be funded new and young entrepreneurial businesses in by business angels and not by venture capital. most environments21. Business angel contributions Comparing the relative impact angel investing to the early stage are greater than that of formal and venture funding has on the successes of an venture capital, despite that the majority of scholarly investment, and the realization of entrepreneurial attention has been given to the venture capital wealth, just 14 percent of the 152 technology industry. Invest Europe (formally known as European company exits tracked in Europe in the first quarter Private Equity & Venture Capital Association, EVCA) of 2014 used venture capital funding27. The rest had reported that of the total private equity investing been funded by the 3Fs and business angels. Further, (€71.7 billion) in Europe22 in 2017, only €600,000 CB Insights reported that 68 percent of technology “seed” investments were made by venture capitalists companies that made a successful exit in 2016 did across Europe (spanning 1,081 investments)23. This not raise any venture capital funding but relied on pales in comparison to the €6.6 billion of investment business angels for example28. estimated to have been provided to 38,230 companies by European business angels24. In the From a public policy perspective, business angel United States (US), possibly the most developed investments should therefore be integrated with venture capital market in the world, there were 5,268 other sources of financing29. This will include the venture capital deals valued at $74.2 billion in 2017, creation of mechanisms to facilitate the effective with only $2.5 billion of venture funding into 1,524 deployment of such capital to the highest potential companies being classified as “seed or early stage”25. firms, such as the use of public funds to incentivize In the same period however there were 61,560 angel co-investments with business angels30. Governments deals, valued at $23.9 billion26. In both the European may also wish to encourage new firms to seek and US cases, average deal sizes of venture capital this form of capital, and minimize obstacles and funds even at the ‘early stage’ reflect investments in disincentives to do so. relatively well-advanced companies given that deal sizes are of very significant amounts for most startups In emerging ecosystems, public sector to absorb. In Europe, the 2,193 “start-up” companies intervention is common to encourage individuals received an average investment of €1.6 million. In the to become angels and provide the essential US, seed or early stage investments averaged $1.7 financial and business support needed by high million per company, hardly typical startup funding growth potential startups. This is because of the requirements. These numbers highlight that the vast effort required by potential new angels to learn the majority of early stage investments are made not by necessary skills, the significant time involved in finding venture funds, but business angels. and making investments, the commitment needed to support a company for many years before an investment return is likely31, and the high probability of the investment failing to produce any return at all. 21 Colin M Mason, “The Real Venture Capitalists: A Review Of Research On Business Angels,” (2008). 22 Europe includes: Austria, Baltic countries (Estonia, Latvia, Lithuania), Belgium, Bulgaria, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, Netherlands, Norway, other CEE (Bosnia Herzegovina, Croatia, FYR Macedonia, Moldova, Montenegro, Serbia, Slovenia, Slovakia), Poland, Portugal, Romania, Spain, Sweden, Switzerland, Ukraine, and United Kingdom. 23 Calculations are based on the following: Of €71.7 billion total private equity investment, majority (€65.3 billion) went into company buyouts. Just €6.4 billion was classified as venture capital, of which €0.6 billion was invested at the seed stage, €3.5 billion in startups, and €2.3 billion in latter stage companies. 24 EBAN, “EBAN Statistics Compendium: European Early Stage Market Statistics,” (2016), http://www.eban.org/wp-content/uploads/2017/11/Statistics- Compendium-2016-Final-Version.pdf. 25 PwC, “PwC MoneyTree,” www.pwcmoneytree.com/MTPublic/ns/nav.jsp?page=historical. 26 Jeffrey Sohl, “The Angel Market in 2017: Angels Remain Bullish for Seed and Start-Up Investing,” Center for Venture Research (May 17, 2018), https:// paulcollege.unh.edu/sites/default/files/resource/files/2017-analysis-report.pdf. 27 CBInsights, “Coming of Age: European Tech Exits in Q1 2014,” Research Briefs (May 2014), http://www.cbinsights.com/blog/european-tech- exits-q1-2014. 28 Ingrid Lunden, “CB Insights: 3,358 tech exits in 2016, ‘unicorn births’ down 68%,” TechCrunch (Jan. 31, 2017), https://techcrunch.com/2017/01/31/cb- insights-3358-tech-exits-in-2016-unicorn-births-down-68/?guccounter=1. 29 European Commission, “Best practices of public support for early-stage equity finance,” Directorate-General for Enterprise and Industry (September 2005). 30 Ibid. 31 The time to exit in the UK has been reported to be extending to 9-10 years – The Risk Capital Market in Scotland, 2009- 2010, Scottish Enterprise, 2012, page 5. 9 Introduction The 2016 Angel Resource Institute study on angel This means that merely increasing the supply investing returns in North America32 suggests that of finance will likely have little or no effect on 70 percent of investments made by angels in the a region’s overall business performance. There US, possibly the most developed angel market in is a danger that increasing the funding available the world, failed to return capital to investors (they without at the same time matching it with appropriate incurred losses). investment opportunities will result in money going to poorer quality businesses which do not have the This study considers policy for increasing access potential to grow to a significant scale. This possibility to finance not simply from the perspective of is increased where the investors are inexperienced increasing the supply of capital per se. It looks at and where investment is encouraged through various how appropriate levels of capital can be provided in forms of subsidy (tax incentives or preferential private the most efficient and effective way to entrepreneurs return through government CoFunds). This is what who are most likely to be able to use the funds to might be referred to as the over deployment of create and sustain high growth potential companies. “dumb” money. It is likely to result in poor outcomes The broader scope of the review is based upon the both on the demand side - few growing businesses recognition that increasing sources of capital in will be successful, and few new jobs will be created itself is not sufficient. It must be part of a broader – and on the supply side – investment returns will policy designed to stimulate increased numbers be negative or poor in comparison to other asset of startups with the capability of achieving high classes. Both result in adverse feedback. Potential growth. This involves ensuring that obstacles other entrepreneurs are discouraged by seeing few than just finances are identified and addressed. successes (and possibly many failures), and existing Unless there is a critical mass of companies that and potential new investors are discouraged from either want or need the finance, simply making more future investing due to preserved poor returns. This funds available will likely not result in a significant negative feedback could set back the development increase in business activity. Indeed, the oversupply of an effective entrepreneurial ecosystem by many of funding, particularly by inexperienced investors, years. Policy should therefore be built on a proper can have significant negative effects on the market: understanding of the existing and potential demand valuations are likely to be excessively inflated; and for and supply of funding. This requires that regular poor ideas that are funded increase startup failure effective systematic data collection and analysis are rates. Both scenarios lead to poor experiences by the first step in policy development. both investors and founders, with the result that early stage funding and entrepreneurship receive a poor Adequate data analysis will assist in setting local reputation. realistic expectations regarding likely levels of credible demand and resulting deal numbers. Angel investing is about building companies Scotland is recognized by the OECD as one of the of scale. The number of companies that have the most developed angel markets in Europe. Members of potential to achieve sufficient growth to deliver the LINC, the National Scottish Angel Capital Association, scale of returns sought by venture capital is limited. invested over €42 million into 68 companies in 2017, Most companies do not have the capacity to grow in however, just 21 of these were “new” investments. value to the extent required to offset investment risk. The others were existing portfolio companies receiving follow on investment. This is despite having a strong university commercialization tradition33 and a world-renowned gaming industry34, as two strong sources of deal flow. At this time, the capacity of the Czech Republic to produce investable deal flow is not known. The need for improved data collection and analysis is covered in the recommendations of the report. 32 The study was funded by Ewing Marion Kauffman Foundation and the NASDAQ OMX Education Foundation and was based on exit data primarily from the period 2010 – 2016. https://angelresourceinstitute.org/research/report.php?report=101&name=2016%20Angel%20Returns%20Study 33 Between 2012 and 2016 the Scottish universities of Edinburgh, Strathclyde, Aberdeen Heriot-Watt, Glasgow, and St Andrews produced a total of 57 spinout companies. 34 The city of Dundee in Scotland has produced Minecraft, Grand Theft Auto, and Lemmings, and the industry employs 2,800 people in 91 companies. The Princeton Review rated Abertay University as number one in Europe for undergraduate level gaming courses. Introduction 10 This report provides a systematic assessment of business angel activities in the Czech Republic, and more broadly the ecosystem surrounding innovation finance in general. The report starts by articulating the conceptual framework and the methodology adopted. It then defines business angels and their role and gives an overview of innovation and entrepreneurship performance in the Czech Republic compared to its peers. There follows the study’s findings on the three components of the conceptual framework, namely: supply side of investments, demand side of investments (i.e., startups, high- growth firms), and the local framework conditions shaping demand and supply of investments. Based on these findings, the report concludes by proposing a number of short-term, medium-term, and long- term policy recommendations for enhancing angel awareness and investments in the Czech Republic. A series of annexes offer more detail on specific aspects of business angels and related issues. Finally, the report includes eight cases studies outlining some international experiences of angel investing. 11 Introduction CONCEPTUAL FRAMEWORK A well-developed innovation finance ecosystem The capacity of investors (e.g., business angels or is centered around firms and entrepreneurs. A venture capital) to provide financing is an important mature ecosystem is sustainably fed with innovation component to be considered on the supply side. inputs (R&D) and infrastructure investments, qualified/skilled personnel, research and technology A well-functioning innovation finance ecosystem equipment, etc. that support the creation of a dynamic is also shaped by a set of actors such as: (i) local and networked private sector. The private sector, supporting intermediaries like incubators and represented by firms, entrepreneurs, and investors, accelerators, (ii) a complete spectrum of financial create a push-pull for investments. These non-linear instruments including the availability of market exit interactions among actors within the ecosystem and options such as mergers and acquisitions (M&As) across the boundaries (regional and international and initial public offerings (IPOs), (iii) a well-defined collaborations) over a sufficient period of time lead legal framework regulating the implementation of to the creation of an environment where innovative financial instruments including contract enforcement businesses compete and grow. Conducive framework and minority protection for investors, (iv) a conducive conditions and supportive operating environments business climate including investment friendly tax and institutions, represented by intermediaries, incentives for entrepreneurs and investors, and brokers, specialized service providers, enforceable a well-functioning IP regime. These are cross- intellectual property (IP) regimes, etc., are needed cutting conditions that mediate the interactions for such interactions to grow and come to fruition. between demand and supply of finance and shape The ultimate outcome of these interactions and entrepreneurs and investors’ behavior. investments in skilled labor, technology, and intangibles is increased productivity and economic Finally, networks, collaboration efforts, and social growth. Figure 1 provides an illustration of this capital are important components developed over conceptual framework. time between firms, entrepreneurs, investors, and other actors to cultivate a vibrant ecosystem. More Diversified and competitive industries, success stories, for example, on national, regional, functioning knowledge creation institutions, and and global levels encourage other investors to come innovative businesses create an ideal pull on the into the market. Young entrepreneurs are also more demand side for investments. Investment-ready inspired to follow the path of their role models. startups comprise entrepreneurs who (i) are willing to consider equity financing; (ii) have good business This report adapts the above-mentioned demand- management skills (teamwork and leadership, etc.); supply framework for analyzing the innovation (iii) are able to pitch their ideas to investors (good finance ecosystem by zeroing in on the risk presentation skills); (iv) have a good understanding of financing component, the deal flow of investable what makes their ideas an investable business (have firms, and the local framework conditions. ideas about how to grow (and required growth levels) Following this framework, a weak risk finance activity and exit the market); and (v) address issues related in a given market could be explained by: to investor engagement (clear understandings of (a) The absence or low capacity of angels, venture the investment process and how to prepare for capitalists, and crowdfunding platforms (supply); it). To become credible for financing, startups are also expected to create and generate new ideas (b) The lack of deal flow of investable ventures and knowledge, invest in innovation, and adopt an that demonstrate capacity to grow and capture entrepreneurial mindset and culture that fosters markets; weak entrepreneurial culture; low levels entrepreneurial activity. of business innovation and knowledge creation (demand); On the investment supply side, the right type (c) W eak incentive structures among supporting of financing depends on the firms’ position intermediaries (e.g., incubators/accelerators, along the life cycle. Many firms and entrepreneurs TTOs, universities); weak business regulatory intentionally cap the growth of their ventures at a conditions; and lack of exit markets (framework certain size (lifestyle decisions) while others face conditions). financial, managerial, or market difficulties. Financing can come in the form of early stage grants (public financing), risk financing (e.g., public-private seed These assumptions of potential gaps will shape our or venture capital funds, business angels, loan assessment of the current situation of the Czech guarantees, etc.), or conventional bank financing. Republic’s risk financing ecosystem. 13 Conceptual Framework Figure 1. Framework of analysis for the innovation finance ecosystem DEVELOPED INNOVATION FINANCE ECOSYSTEM NETWORKS, COLLABORATION, SOCIAL CAPITAL Developed Demand Supply of finance across Conditions Firms - Entrepreneurs the life cycle •• Knowledge creation Early Stage Grants •• Entrepreneurial culture Inputs Impact •• Investment readiness Risk Investment Capital •• Business innovation •• Industry maturity Conventional Financing Framework Conditions •• Local intermediaries, incubators, accelerators, tech transfer offices •• Legislation/Legal framework, conducive business climate, IPR, tax regime Source: World Bank Group. Conceptual Framework 14 METHODOLOGY The analytical bases for this report were a literature Thirty-five qualitative interviews were conducted review, published data sources, and qualitative with the main public and private stakeholders from interviews. A literature review was conducted the entrepreneurial and investment ecosystem seeking academic and other papers that might assist (see Annex 11. Czech Entrepreneurial Landscape). in developing an early stage angel investing capacity The purpose of these interviews was to identify the building strategy and associated policy measures. current level of risk investment activities (especially at The review of published literature revealed numerous the early stage), the deal flow of investable startups, papers advocating that government should introduce and the framework conditions governing the market. policies and incentives to encourage business angel In particular, interviews were held with: activity. These papers describe and give examples of, (a) Business angels and business angel networks; in particular, policies such as tax incentives, CoFunds, and financial support for angel networks. However, (b) Venture capital firms; there appears to be little practical advice on how (c) Crowdfunding platforms; to begin implementation, or considerations to be made as to the timing, sequencing, and localization (d) Incubators, accelerators, tech transfer of the differing options. The details of the literature intermediaries, co-working spaces; review are set out in the References and Annex 1. (e) Financial advisors and expert consultants; Desk research was used to establish the details of existing early-stage financing actors in the Czech (f) I ndividual technology entrepreneurs and startups Republic including relevant government and other teams; agencies, venture capital firms, angel investors, (g) G overnment bodies and public support crowdfunding platforms incubators/accelerators, institutions. and entrepreneurs. Secondary data sources come from Invest Europe, European Commission (EC), OECD, and World Bank reports, together with a In addition, the team organized a round-table number of local surveys and reports produced by discussion with several startup CEOs, founders, government and others. and entrepreneurs at a local co-working space to discuss their experiences in setting up and growing Where appropriate these data sources have been technology startups, accessing early stage and used to benchmark the Czech Republic against growth financing, and accessing markets, talent, select structural, regional, and aspirational peers. and specialized services. The team also inquired Structural peers are select peers that have similar about the role of public institutions and support gross domestic product (GDP) per capita as the programs, local universities and research institutions, Czech Republic35. Regional peers are neighboring the entrepreneurial/startup culture, the capacity countries in the EU that do not have similar income of local investors, and practices in the early stage levels as the Czech Republic. Aspirational peers investment process. are select countries the Czech Republic aspires to emulate, based on consultations with the Ministry of Finance. For the purposes of the report the following potential comparator countries were selected: Peers Country Structural peers (based Portugal, Slovenia, on GDP per capita) Slovakia Regional peers Hungary, Austria Aspirational peers Estonia (also structural), Ireland, Belgium 35 Following the report: World Bank, “Capital Market Assessment /Market Development Options Czech Republic,” 110. Methodology 16 Limitations This report has its limitations. Foremost, Similar data collection issues exist when trying qualitative interviews as part of this report were to address the demand side. The firms surveyed conducted in Prague alone due to time and cost can only include those that happen to have come to limitations. While the geographical concentration the attention of the surveyors. These are likely to be of interviews in Prague may skew the findings of the dominated by those in incubators and accelerators report, this is mitigated by asking interviewees who and may result in survey bias based on the sectoral are knowledgeable about activities in other cities focus and geographic location of those institutions. to comment on the business angel landscape in The position is further complicated as a result of these areas (e.g., Brno). Many of the interviewees the data sources not necessarily having consistent are not only focused in Prague but all over the Czech definitions (for example of seed and startup), by not Republic. CzechInvest, for example, have a business differentiating between all startups (including those support mandate for Czech firms all over the country. that are micro businesses) and those that represent Venture capital firms also scout for non-Prague based innovative high growth potential firms appropriate startups to maximize investment opportunities. for third party investment (typically estimated as being just 1 percent of all startups). Further, reliable data relating to business angel activity is unavailable. This is true even in the most Within the Czech Republic, there is no national developed markets. In all countries, the majority association of incubators and accelerators to of business angels (and most of their investment collect data relating to levels of unmet credible activity) are invisible and so virtually impossible to demand. When trying to assess the extent of any identify and track over time. The ability to discern “funding gap” by measuring existing levels of supply investment activity on a systematic comparative and demand, care must be taken to distinguish longitudinal basis is therefore restricted to the “visible between absolute demand and “credible demand”. market”. This tends to comprise angel networks It is a consistent theme of research in this area of and syndicates and data from surveys of individual finance to hear from firms that there is a shortage business angels who happen to have come to the of supply of capital (typically from those who have attention of the survey administrators. .  been unsuccessful in securing any) and investors who complain they are unable to invest all the funds Annex 2. Problems with Angel Data sets out the they have available due to there not being sufficient problems all researchers face when trying to assess investable opportunities. Some of this disparity can angel markets. be attributed to market inefficiencies (often referred to in academic papers as including issues such as On the supply side, there is no NAA in the Czech asymmetric information, connection problems, and Republic. In countries such as the UK, Estonia, and presentational failings). Experienced angels are likely Germany there are NAAs that collect “visible” angel to respond that in practice the reality is that many of data. In the Czech Republic, no government agency the propositions they receive are simply not, and are or other organization is systematically collecting data never likely to be, investable36. This is not because even of the visible elements of the market. of the typically described asymmetric information problem where the startup/firm supposedly has more information about the true success chances (or valuation) of the venture than the potential financiers. Conversely, experienced investors, having reviewed hundreds of propositions and invested in many, are likely to have a better understanding of the true success chances and realistic valuation than the first- time entrepreneur. For the researcher, the difficulty is assessing how much of the unmet demand for funding should be met. 36 The management team is not credible; the product is not novel or compelling, there is no competitive advantage, there is no likelihood of achieving an adequate return on investment, etc. Angel and venture capital investors typically recount how they receive several hundred propositions and invest in only 3% or 4%. The vast majority (75% is normal) are rejected quickly on an initial screening. 17 Methodology This report draws on examples of best practices from a range of countries within Europe and worldwide, not primarily from Czech Republic peers. There has been limited opportunity to use best-practice examples from Czech Republic peers (or the CEE region) due to the lack of examples of specific government policies in support of business angel investing, or the lack of analysis or assessment of such policies (if they exist). For the latter, this is because such policies’ impacts are often too early to assess. Thus, the report has referenced examples from more advanced countries with business angel good practices. The US is often cited as the most developed venture capital market in the world; nonetheless, it has some examples of national or state level public policies to support angel investing (apart from tax incentives). Many examples are also drawn from the UK, as this reflects the assessment by notable institutions such as the OECD that “the United Kingdom has been the most active angel market in Europe”37. Further, the UK has the longest history of supporting angel investing in its policy mix. Scotland established the world’s first national angel association in 1992 and the first angel co-investment fund in 2004. The UK Government initially introduced angel tax incentives in 198338, and has continually evolved these policies to meet changing market conditions. Because of its long history of support, the UK is probably the most studied and assessed market in the world, and one of the few where it is possible to obtain information on the effectiveness of policy at different stages of market development. Nevertheless, in choosing policy examples, the report has taken into account the need to adapt any policy to local market conditions and has drawn applicable examples from Czech Republic peers to ensure their appropriateness. Country examples include those of Portugal, Ireland, Belgium, and Estonia. 37 OECD, “Financing High-Growth Firms: The Role Of Angel Investors,” (OECD Publishing, 2011). 38 This is known as the Business Expansion Scheme. Methodology 18 INTRODUCING BUSINESS ANGELS The European Commission defines a business angel funding. Figure 2 represents the funding escalator as: which plots the different funding mechanisms across “a private individual, often of high net worth, and five different stages: pre-seed/seed, startup, early usually with business experience, who directly growth, growth, developed. While business angels invests part of his or her personal assets in new are often depicted as part of a “funding escalator” and growing private businesses. Business angels bridging the gap between the 3Fs and venture funds, can invest individually or as part of a syndicate relatively few firms go on to secure follow on funding where one angel typically takes the lead role”39. from venture capitalists. Not all firms grow and very few achieve exits or IPOs. Business angels are often referred to as sources of There is increasing recognition that the classically “smart capital” as they typically provide business presented “funding escalator” is now broken, management experience, skills, and contacts for the increasing the importance of business angels entrepreneur, in addition to funding. within the funding ecosystem. In fact, business angels are the primary source of capital for most high Business angels are classically presented as growth potential companies. For example, a mere 14 bridging the gap between pre-seed/seed stage percent of the 152 technology company exits tracked and growth stage in the firm’s life cycle. However, in Europe in the first quarter of 2014 used venture in reality, they serve as the primary source of capital funding. The rest had been funded by the 3Fs financing for high growth firms. An exemplary and business angels40. high growth venture goes through different stages of growth and require different sources and types of Figure 2. Funding escalator Exit or IPO Emerging market PE funds Venture capital Capital requirements Loan Guarantees, Debt/Credit Facilitation, SME funds Seed Grants Angel Investors/Networks Crowdfunding Platforms Seed/startup funds Incubators & Accelerators Friends and Family Pre-Seed / Early Developed/ Start-up Growth Seed growth Established Source: Authors’ illustration from World Bank. 39 European Commission, “Business angels,” https://ec.europa.eu/growth/access-to-finance/funding-policies/business-angels_en. 40 “Coming of Age: European Tech Exits in Q1 2014.” Introducing Business Angels 20 Research shows that angel investors have a positive recently, a panel study between 1992 and 2015 on impact on the growth of the firms they fund, as well as the economic impact of Scotland’s business angel on their survival. Startups funded by angel investors syndicate Archangels showed that companies are 14 percent to 23 percent more likely to survive for backed by Archangels generated close to 3,000 high the next 1.5 to 3 years and grow their employment by value jobs (with salaries above the national average) 40 percent relative to non-angel-funded startups41. since its inception in 1992. The group also generated For countries other than the US, having angel funding high quality deal flows for venture capitalists/IPOs, also seems to matter significantly for the ability of a having exited 18 companies. Further, the study also firm to obtain follow on financing from venture capital showed that for every £1 (pound sterling) of business funds42, in part due to its role in ‘accrediting’ unknown angel investment, business angel-backed companies startups (startups without investment history) and contributed between £7 and £9 of gross value added helping startups become investor-ready43. More (GVA) to the Scottish economy44. Box 1. Who are the business angels? Business angels are often associated with very early stage companies in the technology sectors. In reality, business angels can be found providing funding of many sorts (equity, debt, revenue royalties, and guarantees) in business at all stages of development from pre-seed to pre-IPO, and in all sectors from a single restaurant or coffee shop to the most complex biosciences. Angel investors invest their own personal funds into propositions that they find interesting, both financially and emotionally. Most do it because they enjoy the process and the engagement with entrepreneurs, not just for a financial return. The majority of angel investors are not ‘super’ wealthy but have sufficient income and capital to allow them to do 2 to 3 investments of between €5,000 and €25,000 per year, syndicating with others to provide a typical investment to a company of up to €200,000. Individual contributions tend to be higher in financial centers such as London, where the median individual angel contribution to an investment was £25,00045. The median total investment on all deals done by a typical UK angel in the year was £45,000 (the cost of which to the investor would be at least 30 percent less due to the UK angel tax incentives). See Annex 8. Business Angels: Myths and Reality for more detail about the characteristics, motivations, and operating practices of angel investors. 41 Josh Lerner, Antoinette Schoar, Stanislav Sokolinski, and Karen Wilson, “The Globalization of Angel Investments: Evidence across Countries,” NBER Working Paper No. 21808 (March 2016), http://www.nber.org/papers/w21808.pdf. 42 Lerner postulates that risk capital in the US may be more abundant, and therefore startups have many different avenues of obtaining their initial seed funding, including venture capitalists. As a result, US firms do not necessarily have to raise an angel round before getting funding from larger players. 43 J. J. Madill, G. H. Haines Jr., and A. L. Riding, “The Role of Angels in Technology SMEs: A Link to Venture Capital,” Venture Capital 7 (2005): 107–29. 44 N. MacKenzie and M. Coughtrie, “Archangels Impact Evaluation of Activities, 1992-2015,” Hunter Centre for Entrepreneurship, University of Strathclyde. https://pure.strath.ac.uk/portal/en/publications/archangels-impact-evaluation-of-activities-19922015(428ad4b1-100d-450d-85e2- 7fbc240f212d).html. 45 IFF Research, RAND for British Business Bank (BBB), UK Business Angels Association, “Business Angel Spotlight”, (2017), https://www.british-business- bank.co.uk/wp-content/uploads/2017/12/Business-Angels-2017-Research-Findings-compressed-FINAL.pdf. 21 Introducing Business Angels THE CZECH REPUBLIC’S INNOVATION AND ENTREPRENEURSHIP PROFILE The Czech Republic has been enjoying strong Despite recent economic growth, the Czech economic growth performance in recent years. Republic continues to face long-term challenges Real GDP growth ranged from 2 percent to 4.5 in weak labor productivity and total factor percent between 2014 and 2016, topping 4.5 percent productivity (TFP) growth. GDP per hour reached in 2015 before slowing to 2.6 percent in 2016. Real just over $35 in 2017 (equivalent to about half or GDP growth is forecast to have accelerated to 4.5 less than those of Belgium and Ireland). TFP growth percent in 2017 and expected to grow further by has also been low and more modest than some of 3.2 percent in 2018 and 2.9 percent in 201946. The its peers, averaging 0.1 percent between 2010 and unemployment rate has fallen considerably, reaching 2016 compared to Ireland (1 percent) and Estonia an average of 4 percent in 2016, and is currently the (1.3 percent)48. lowest in the EU. Labor shortages are increasingly becoming a growth constraint, with increasing job vacancies and reported difficulties in recruiting workers47. Figure 3. Labor productivity (GDP per hour worked), constant prices USD PPP 90 80 70 60 50 40 30 20 10 0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Belgium Czech Republic Ireland Estonia 15 Figure 4. TFP growth, The Conference Board 10 5 0 -5 -10 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Belgium Czech Republic Ireland Estonia Source: OECD; The Conference Board. 46 European Commission, “Czech Republic: Strong Growth And Tightening Labour Market,” (2018), https://ec.europa.eu/info/sites/info/files/economy- finance/ecfin_forecast_winter_0718_cz_en.pdf. 47 OECD, “Czech Republic,” OECD Economic Outlook (2018), http://www.oecd.org/eco/outlook/economic-forecast-summary-czech-republic-oecd- economic-outlook.pdf. 48 The Conference Board, “Total Economy Database: Growth Accounting and Total Factor Productivity, 1950-2016”. (November 2017). 23 The Czech Republic’s Innovation and Entrepreneurship Profile Innovation, one of the key productivity drivers, Entrepreneurship, another important productivity revealed modest performance in the Czech driver, is lagging in terms of new business creation Republic. The European Innovation Scorecard and firm dynamism. About 3 new businesses 2017 classified the Czech Republic as a ‘moderate were created per 1,000 people in the working age innovator’ with relative weaknesses in the areas of population in 2016, dwarfed by Estonia at over 15 SME innovation, public-private co-publications, new businesses created (as well as by Ireland and collaboration between innovative SMEs, and sales Portugal)53. Figures on firm dynamism show that of new-to-market/firm innovations49. The country existing enterprises are dominated by SMEs, which ranked 24th globally and 14th in Europe on the Global comprise 99.8% of the population of enterprises. Innovation Index, behind Ireland and Austria but These SMEs employ an average of 2.4 workers, above Belgium, Slovenia, Slovakia, Hungary, Poland, behind peers such as Germany (7.1 workers), Austria and Romania50. The European Innovation Scoreboard (5.8), Estonia (4.7) and the EU average (3.9). The states that the Czech Republic is in this respect at 42 smallest subset of SMEs, “micro” firms represent percent of the EU average. In 2012 the European 96% of Czech enterprises which is a slightly higher Patent Authority received 129 invention applications percentage than any other EU country (93 percent per million of EU citizens, but only 13 applications on average). They employ an average of just 1.1 were received from the Czech Republic. The level people, compared to “small” firms (3.1 percent of of total investment in R&D has come close to the Czech enterprises) that employ an average of 19.8 EU average, however this is largely driven by the people54. public sector, EU funds, and large, foreign-owned enterprises. The Czech Republic displayed a mixed performance in indices relevant to high-growth Challenges remain in the area of cooperation and innovative businesses. The share of young between businesses and research institutes 51 high-growth enterprises measured on the basis of and in the commercialization of university turnover growth55 is just 1.4 percent of the active research. For Czech public research organizations enterprise population, compared to Estonia’s 4.3 (universities, the Academy of Sciences, and other percent (see Figure 5)56. However, the Czech Republic research institutions in the government sector), ranks above the European average in terms of the commercialization of R&D results is perceived as a share of high-growth companies, as identified using relatively marginal discipline52. While patent activity the criteria of growth in employment (see Figure in public research organizations has increased in 6)57. It should be noted though that high growth in recent years, it has been attributed to the current terms of employee numbers does not necessarily methodology for evaluating scientific and research correspond to high growth in terms of economic results, and therefore funding allocations by contribution or investment value, which is more likely government. Commercialization of the research to be related to the strategic value of the technology output is not part of the research performance / product being developed or turnover / profits. assessment and as a result is not rigorously perused. Technology companies are generally not valued on the basis of employee numbers. 49 European Commission, “European Innovation Scoreboard,” (2018), http://ec.europa.eu/growth/industry/innovation/facts-figures/scoreboards_en. 50 Cornell University, INSEAD, and WIPO, “The Global Innovation Index 2017: Innovation Feeding the World,” Ithaca, Fontainebleau, and Geneva (2017). 51 European Commission, “Country Report Czech Republic 2017”, (2017), https://ec.europa.eu/info/sites/info/files/2017-european-semester-country- report-czech-en_1.pdf. 52 Czech Ministry of Trade and Industry and Deloitte Advisory s.r.o., Ex Ante Assessment of Financial Instruments of the Operational Programme Enterprise and Innovation for Competitiveness 2014-2020, 2015. https://www.mpo.cz/assets/dokumenty/54704/62511/648398/priloha002.pdf. 53 World Bank, “World Development Indicators.” 54 European Commission, “Czech Republic 2017 SBA Fact Sheet,” (2017). 55 Refers to enterprises which are five years or younger in terms of operations and have turnover growth of at least 10% per annum in the past 3 years. 56 “High growth enterprises (growth by 10% or more) and related employment by NACE Rev. 2.” 57 Annualized growth in employee numbers of more than 10% per year over a three-year period and at least 10 employees when this growth began. See: European Commission, “1 in 10 enterprises in the EU recognized as high-growth companies.” The Czech Republic’s Innovation and Entrepreneurship Profile 24 Figure 5. Percentage share of young high growth enterprises (Gazelles) in the population of active enterprises, 2015 Estonia 4.3 Slovakia 1.6 Hungary 1.6 Czech Republic 1.4 Portugal 1.3 Figure 6. Percentage of high growth enterprises (active enterprises with at least 10 employees) to all companies, 2015. Ireland 14.9 Hungary 12.5 Slovakia 12.2 Portugal 11.0 Czech Republic 10.6 European Union 9.9 Slovenia 8.7 Belgium 8.1 Estonia 7.7 Austria 6.3 Source: Eurostat. 25 The Czech Republic’s Innovation and Entrepreneurship Profile KEY FINDINGS This section presents the key findings along and Development Bank (ČMZRB)58. As a result, for the three main components of the conceptual the majority of (established) firms, access to finance framework: supply side of investments, demand scores low on the list of problematic factors for side of investments, and local environment doing business. Access to finance issues ranked conditions shaping demand and supply. On 10th with a score of 2.8, well below the top three the supply side, possible sources of finance are issues: tax regulations (17.6), inefficient government assessed, including banks, the 3Fs, seed granting bureaucracy (16.9), and tax rates (10.9). entities, crowdfunding platforms, venture capital, and business angels. On the demand side, the existence of credible deal flows is assessed, Founder, friends, and family funding including characteristics of startups and availability of a conducive entrepreneurial culture and skillsets Similar to most countries, the 3Fs are the primary that affect startups’ potential to obtain investments. sources of funding for the majority of startup firms Assessment of the local environment conditions in the Czech Republic. The Aspen Institute’s 2016 focuses on current regulatory conditions (including survey of startups reported that 78 percent used the market exit conditions), availability of local supporting founders’ funds, and 12.8 percent used friends and intermediaries and government support programs, families59. These numbers are not surprising given and availability of tax incentives to encourage angel that nearly 70 percent of the surveyed startups were investing. in the early stages of development (pre-seed and seed stage), where bank, venture capital, and even Overall, our investigations and interviews did business angel funding is likely to be inappropriate not reveal any significant previously unknown (typically business angels wish to see a minimum data sources. Reliable data specifically relating viable product and some early customer engagement to the early stage market is extremely limited for before considering investment)60. the Czech Republic. The report has been able to use some published data, relating primarily to the venture capital industry, to obtain a proxy measure Proof-of-concept competitive grants of likely angel activity. The interviews highlighted that the lack of reliable data causes some confusion in The availability of capital in the very early stages the market as to the realities of activity and therefore (proof-of-concept stages) tends to be limited. what the critical issues are that need to be addressed Players at the seed stages in the Czech Republic though new policy intervention. include Startup Yard Accelerator, CzechInvest, and South Moravian Innovation Center (Jihomoravske Inovacni Centrum or JIC). There are also business plan competitions that startups can participate in, although these tend to be useful for startups for recognition Supply-side analysis and visibility purposes rather than funding (prize money tends to be small and insufficient). Examples include Startup Summit (annually held in Prague) Bank lending and Idea of the Year competition (sponsored by Vodafone). Access to finance for established revenue generating business does not appear to be a significant problem for Czech firms. According Crowdfunding to the European Central Bank’s most recent survey on enterprises’ access to finance (2016), the success Crowdfunding platforms are used in the Czech rate of applications for credit lines or overdrafts in Republic: although their impact is still relatively the country is the highest of all Member States. SMEs limited, it is growing. The majority of crowdfunding are stated to have ample access to loans thanks to platforms in the Czech Republic are based on the the guarantees from the Czech-Moravian Guarantee rewards model and the platforms are domestic. 58 European Commission, “Czech Republic 2017 SBA Fact Sheet.”. 59 Maria Staszkiewicz and Daniela Havlíková, “Czech Startups Report 2016,” Aspen Institute Prague (2016). 60 For example, Jenny Tooth, chief executive of UK Business Angels Association (https://www.ukbaa.org.uk/) noted: “You should not approach angels when you’re just at the idea stage. As a start-up or early stage entrepreneur, you need to approach them when you have built your business to the point where you have designed and initially tested the business concept”. See Hajra Rahim, “How to find and pitch to an angel investor,” The Telegraph (June 6 2018), https://www.telegraph.co.uk/connect/small-business/finance-and-funding/how-to-find-pitch-to-an-angel-investor/. 27 Key Findings Figure 7. Most problematic factors for doing business, 2017 Tax regulations 17.6 Inefficient government bureaucracy 16.9 Tax rates 10.9 Policy instability 9.8 Corruption 9.6 Restrictive labor regulations 8.3 Inadequately educated workforce 7.3 Insufficient capacity to innovate 6.7 Inadequate supply of infrastructure 4.6 Access to financing 2.8 Government instability/coups 2.6 Poor work ethic in national labor force 1.8 Crime and theft 0.8 Foreign currency regulations 0.3 Inflation 0.2 Poor public health 0 Note: From the list of factors, respondents to the World Economic Forum’s Executive Opinion Survey were asked to select the five most problematic factors for doing business in their country and to rank them between 1 (most problematic) and 5. The score corresponds to the responses weighted according to their rankings. Source: World Economic Forum, Executive Opinion Survey. Currently there are around 10 rewards platforms in Lending crowdfunding is offered on 5 domestically the Czech Republic61. In 2015, Czech entrepreneurs based platforms. These platforms include Fundlift, raised approximately €1.7 million via donations and Pujcmefirme, Zonky, Symcredit, and Benefi. Lending rewards-based crowdfunding. Social and cultural crowdfunding is a type of crowdfunding where projects form a majority of funded ventures, along individuals lend money to a company or project with a smaller number of startup companies. The in return for repayment of the loan and interest on Czech-based Hithit.com platform that supports their investment. Business loans are outnumbered by creative projects in the Czech Republic and Slovakia loans to private individuals. In addition, the Fundlift claims to have helped secure €4 million of funding platform, for example, is offering investments in the since its launch in 2012. Likewise, some Czech form of mini-bonds for business. startups use global crowdfunding platforms such as Kickstarter. Warhorse Studies, the developer of a Fundlift is the first platform to offer equity video game called “Kingdom Come: Deliverance” crowdfunding. This is a relatively new development successfully launched a Kickstart campaign. The facilitated by legislative change63. However in campaign raised over £1 million from over 35,000 comparison to more developed equity crowdfunding backers during its campaign in 2014, exceeding its countries, such as the UK, the legislation is still crowdfunding goal by almost 400 percent62. somewhat restrictive. Investing in return for a share 61 European Crowdfunding Network, “Review of Crowdfunding Regulation 2017,” (2017), https://eurocrowd.org/wp-content/blogs.dir/ sites/85/2017/10/ECN_Review_of_Crowdfunding_Regulation_2017.pdf. 62 Dave Tach, “Kingdom Come: Deliverance funded after two uncertain years,” Polygon (Feb. 21 2014), https://www.polygon.com/2014/2/21/5433100/ kingdom-come-deliverance-kickstarter-funded. 63 This change is partly attributable to new legislation governing corporations (Act no. 90/2012 Coll., the Corporations Act, which took effect on January 1, 2014). The Corporations Act enables more flexibility in setting up the corporate governance structure of target companies, thereby making equity crowdfunding projects more viable in the long term. 64 License under Act no. 240/2013 Coll., on management companies and investment funds, as amended. Key Findings 28 in the profits or revenue generated by a company/ Venture capital67 project is defined by the Act on Management Companies and Investment Funds (AMCIF)64 as a form Access to venture capital in the Czech Republic is of collective investment. Such activity corresponds weak, even in comparison to other CEE countries. most closely to the definition of an investment fund While total private equity funding amounted to over under the AMCIF. Platform operators are required €3 billion between 2007 and 2017, just €129m (4.2 to obtain a license from the Czech regulator (i.e. the percent) was venture capital funding, primarily in Czech National Bank). the startup and later venture stages. The 4.2 percent venture capital share in the volume of private equity Fundlift claims 8,000 registered investors, of investments is lower than the overall level for CEE which 2,500 have been active since its launch in countries (6.2 percent). This figure is even lower than 2016. Most of its issuances are in the form of bonds countries such as Ireland (19.1 percent), Hungary and convertible debts (referred to as investment (15.3 percent), and Austria (14.4 percent) (see Table certificates), and less on equity. This is reflective of 2). the type of firms that they market on their platforms, with the majority being established businesses One defining characteristic of the Czech Republic with recurring revenues. Startups which have yet to market is the number of effectively private reach sustainable revenue generation will tend to “venture capital” funds essentially operating offer convertible debts. Only a minority offer equity as private offices on behalf of “super angels”. investment.65 Based on Fundlift’s 30 projects (either It is likely that transactions by these organizations ‘running’ or ‘completed’), 57 percent of crowdfunding may not be recorded in the Czech Private Equity projects issued minibonds (average investment value and Venture Capital Association (CVCA) and EVCA of 5,100,000 Czech koruna - CZK), 37 percent offered statistics. As can be seen in the visible members of investment certificates (average investment value Invest Europe in 2017, the Czech Republic appears of 5,700,000 CZK), and only 2 projects (6.7 percent) to have a lower proportion of venture capitalists to issued equity shares. For these 2 projects, one project total private equity firms (27 percent) translating to had an investment value of over 8,500,000 CZK, only 3 venture capital firms (see Table 3). Published whereas another project (investing in Startup Yard, data also indicate that venture capital investment is a renowned accelerator in the Czech Republic) was only 0.002 percent of GDP, giving the Czech Republic an exclusive non-public offer (no publicly disclosed the lowest ranking among its comparators (Figure 8). investment amount)66. While the number of active venture capital funds in the Czech Republic has been growing, there is still Czech authorities and regulators offer an apparent shortfall in the startup stage. crowdfunding platforms in the Czech Republic no specific exemption from the standard license Since the private equity market in the Czech requirements for the distribution or sale of Republic, except for the venture capital segment, investments required under the Capital Markets is relatively comparable to its peers, this indicates Act regulations. This mirrors the position in a a lack of investors’ interest in this particular number of well-developed markets, such as the UK, segment rather than an overall lack of funding where the operators of lending and equity investing in the Czech Republic. The share of growth capital crowdfunding platforms are required to be licensed to all private equity between 2007 and 2017 is 19 and monitored by the relevant financial conduct percent, comparable to peers such as Hungary (18 authorities. While some of those who would wish percent) and Belgium (21 percent). The share of to quickly set up and operate platforms offering rescue/turnaround, replacement capital and buyout68 investments to the general public may see this as to total private equity seems disproportionately an inhibitor of market development, others are higher (close to 10 percentage points) in the Czech likely to consider it a reasonable protection for less Republic than Hungary and Belgium but at par with sophisticated or experienced investors attracted to the CEE region (Table 4). Some caution in interpreting such easily accessible platforms. the figures is also required as early stage venture 64 License under Act no. 240/2013 Coll., on management companies and investment funds, as amended. 65 Interview with the CEO of Fundlift, May 10, 2018. 66 Figures are based on projects mentioned on Fundlift’s website: https://www.fundlift.cz/#/projekty 67 Information in this section relies predominantly on publicly available data from InvestEurope. Thus, there are probably investments that are not captured by InvestEurope data. 68 InvestEurope defines rescue/turnaround as “financing made available to an existing business, which has experienced financial distress, with a view to re-establishing prosperity”. Replacement capital is defined as “minority stake purchase from another private equity investment organization or from another shareholder or shareholders”. Buyout is defined as “financing provided to acquire a company”. See Annex 3. Venture Capital Definitions for more information. 29 Key Findings Table 2. Type of investment by the Czech Republic and peers, in thousands of euro, aggregates 2007-2017 Czech Other Baltic Stage Focus Portugal Hungary Austria Ireland Belgium CEE Republic CEE countries Seed 6,775 27,854 35,148 92,611 83,828 65,834 10,592 15,404 91,366 Start-up 26,250 279,505 185,770 321,407 605,080 665,973 62,819 83,770 515,292 Later Stage 95,801 167,801 67,484 324,734 358,811 551,465 33,630 39,407 490,489 Venture Total venture 128,826 475,161 288,401 738,752 1,047,720 1,283,272 107,041 138,581 1,097,147 Growth 580,938 533,176 342,549 600,913 2,239,382 2,739,262 161,480 499,750 3,290,775 capital Rescue/ 475 212,216 1,949 33,730 46,168 93,769 35,988 1,800 64,736 Turnaround Replacement 295,554 128,346 8,640 176,309 20,867 465,511 15,872 14,510 489,166 capital Buyout 2,038,199 2,085,832 1,247,222 3,574,370 2,141,147 8,289,217 1,211,641 531,635 12,706,581 Total 3,043,992 3,434,730 1,888,761 5,124,074 5,495,284 12,871,031 1,532,022 1,186,276 17,648,406 Investment Share of VC 4.2% 13.8% 15.3% 14.4% 19.1% 10% 7% 11.7% 6.2% to total Share of growth to 19.1% 15.5% 18.1% 11.7% 40.8% 21.3% 10.5% 42.1% 18.6% total Share of remaining to 76.7% 70.6% 66.6% 73.9% 40.2% 68.7% 82.5% 46.2% 75.1% total Note: Other CEE countries include Bosnia-Herzegovina, Croatia, FYR Macedonia, Moldova, Montenegro, Serbia, Slovenia, Slovakia. Source: InvestEurope (2017). capital in the Czech Republic has not historically been Investment Fund (EIF) supported funds under the €50 supported by the public sector to the extent of that in million European Structural and Investment Funds other countries such as Poland, Hungary, Slovakia, or (ESIF) Fund-of-Funds Czech Republic project69. The Bulgaria, which have used EU funding (in particular Fund of Funds is intended to increase the available under the European Regional Development Fund equity funding for enterprises throughout the whole (ERDF) and Joint European Resources for Micro cycle of their early stage development, ranging from to Medium Enterprises) to stimulate private sector accelerators for the very first entrepreneurship steps investment in early stage companies by providing to further venture capital for companies that have co-investment at the fund or deal levels. This might already demonstrated interest in their products or change in 2018 with the launch of new European services. 69 European Investment Fund, “ESIF Fund-of-Funds Czech Republic,” (2017), http://www.eif.org/what_we_do/resources/esif-fund-of-funds-czech- republic/index.htm. Key Findings 30 Table 3. Types of private equity firms in 2017 Czech Other Baltic Firms Hungary Austria Ireland Belgium Republic CEE countries Number of private equity firms headquartered in 11 30 43 33 75 23 24 country of which venture capital firms 3 20 14 20 30 13 14 buyout firms 7 2 16 5 22 5 3 generalist firms 1 8 13 8 23 5 7 Share of venture capital firms to total private equity 27% 67% 33% 61% 40% 57% 58% firms Source: Invest Europe (2017). Figure 8. Venture capital investment as percentage of GDP, 2017 Ireland 0.04 Belgium 0.033 Austria 0.026 Hungary 0.021 Baltic countries 0.006 Other CEE 0.004 Czech Republic 0.002 Note: VC investments calculated based on location of the portfolio company. Other CEE countries include Bosnia-Herzegovina, Croatia, Macedonia, Moldova, FYR Montenegro, Serbia, Slovenia, Slovakia. Source: Invest Europe (2017). 31 Key Findings Average investment deal sizes from 2007- Venture capital activity is concentrated in the ICT 2017 are comparable to aspirational Belgium sector in the Czech Republic, compared to peers and larger than regional peers. However, there whose venture capital investments are more were significantly fewer transactions in the Czech diversified. All of the Czech Republic’s venture Republic than peers. This seems to suggest that capital investments in 2017 went into ICT (see Table venture capitalists in the country invest more in well- 6). Peers such as Portugal, Ireland, and Belgium have advanced companies rather than truly early-stage substantial venture capital investments in sectors companies. In the venture capital classification of beyond ICT, including more R&D intensive sectors seed stage for example, average deal size is close to such as biotech and healthcare, etc. This seems to €680,000 (see Table 4). This is about 3 times that of indicate a missed opportunity to boost investments average investments in other CEE countries, Portugal, in a more diversified set of sectors. The Czech and Austria. Conversely, whereas the total number of Republic’s later stage investments however seem deals generated in the seed stage was 10, Austria’s somewhat more diversified (see Table 7), possibly seed deals surpassed the Czech Republic by over 43 reflecting its diverse manufacturing base. times and Portugal by over 13 times (see Table 5). The very low number of deals done in the Czech Republic also seem to indicate that the “private” Czech venture capital firms are not counted in the totals. Table 4. Average investment deal size, 2007-2017 Czech Other Baltic Stage Focus Portugal Hungary Austria Ireland Belgium Republic CEE countries Seed 678 209 272 213 1,524 621 235 157 Start-up 1,010 525 822 1,270 1,157 1,204 654 346 Later Stage 4,790 2,072 668 2,151 2,271 1,751 1,529 616 Venture Total venture 2,300 637 632 882 1,424 1,318 657 343 Growth 12,360 3,271 7,612 3,130 28,710 4,659 2,884 4,852 capital Rescue/ 238 11,169 1,949 1,874 5,771 1,995 5,998 900 Turnaround Replacement 98,518 2,790 8,640 6,781 3,478 8,313 7,936 2,902 capital Buyout 31,357 7,476 49,889 29,298 41,176 32,005 26,925 12,967 Total 17,595 2,741 3,577 4,284 6,245 6,690 5,632 2,137 Investment Notes: Amounts in € thousands. The average between 2007 and 2017 is calculated by summing total investments from 2007-2017 divided by total number of transactions from 2007-2017. Source: Invest Europe (2017). Key Findings 32 Table 5. Total number of transactions, 2007-2017 Czech Other Baltic Stage Focus Portugal Hungary Austria Ireland Belgium Republic CEE countries Seed 10 133 129 434 55 106 45 98 Start-up 26 532 226 253 523 553 96 242 Later Stage 20 81 101 151 158 315 22 64 Venture Total venture 56 746 456 838 736 974 163 404 Growth 47 163 45 192 78 588 56 103 capital Rescue/ 2 19 1 18 8 47 6 2 Turnaround Replacement 3 46 1 26 6 56 2 5 capital Buyout 65 279 25 122 52 259 45 41 Total 173 1,253 528 1,196 880 1,924 272 555 Investment Source: Invest Europe (2017). 33 Key Findings Table 6. Sectorial focus of venture capital investments in 2017 Czech Other Baltic Sector Portugal Hungary Austria Ireland Belgium Republic CEE countries Agriculture 0 0 0 2.3 0 5.7 0 0 Business products 0 12.2 29.9 4.5 1.8 15.9 0 7.7 and services Chemicals and 0 2 0 0 0 3.4 0 7.7 materials ICT (Communications, 100 38.8 26.8 56.8 61.4 29.5 71.4 53.8 computer and electronics) Construction 0 0 0 0 0 3.4 0 0 Consumer goods 0 12.2 15.5 4.5 3.5 8 14.3 23.1 and services Energy and 0 4.1 1 2.3 0 6.8 7.1 7.7 environment Financial and 0 0 5.2 2.3 0 0 7.1 0 insurance activities Real estate 0 4.1 0 0 0 1.1 0 0 Biotech and 0 26.5 15.5 22.7 33.3 25 0 0 healthcare Transportation 0 0 6.2 4.5 0 1.1 0 0 Other 0 0 0 0 0 0 0 0 Note: Distribution in terms of the number of companies invested in by venture capitalists. Source: Invest Europe (2017). Key Findings 34 Table 7. Sectorial focus of venture capital and private equity investments in the Czech Republic, 2015-2017 2015 2016 2017 Sector focus Venture All PE Venture All PE Venture All PE Agriculture 0 0 0 0 0 0 Business products and services 0 16.7 0 0 0 41.7 Chemicals and materials 0 0 0 0 0 0 ICT (Communications, computer 85.7 58.3 100 64.3 100 41.7 and electronics) Construction 0 0 0 0 0 0 Consumer goods and services 14.3 25 0 14.3 0 16.7 Energy and environment 0 0 0 0 0 0 Financial and insurance activities 0 0 0 0 0 0 Real estate 0 0 0 0 0 0 Biotech and healthcare 0 0 0 21.4 0 0 Transportation 0 0 0 0 0 0 Other 0 0 0 0 0 0 Total investment 100 100 100 100 100 100 Note: Distribution in terms of the number of companies venture capitalists and private equities invested in. Source: Invest Europe. Business angel funding In 2016, the European Business Angel Network (EBAN) identified €5m of visible angel investing71. Funding from the 3Fs is insufficient to support Average investment deal size was over €140,000 high growth potential companies, although in an estimated 35 investments. Comparing this to vital for micro startups. According to the Global Estonia, which generated more angel transactions Entrepreneurship Monitor (GEM) 2013 survey70, 8 (145) in smaller deal sizes (over €60,000), the data percent of the Czech population had supported a seems to support the impression from interviews startup of someone else’s business in the previous that the visible angel market in the Czech Republic three years. The funding amounts however were is largely made up of a relatively small number of small, typically under €4,000 and provided to wealthy individuals investing by themselves (what relatives, friends, or colleagues. might be referred to as “super angels”). GEM, “Entrepreneurial Behavior and Attitudes,” (May 2013), http://www.gemconsortium.org/country-profile/55. 70 See EBAN, “EBAN Statistics Compendium”. However, the significant difficulties faced in compiling data relating to angel activity are discussed in 71 Annex 2. Problems with Angel Data. 35 Key Findings The level of syndication (more than one angel In the absence of a representative body for doing the same deal) appears more limited in business angels in the Czech Republic, the the Czech Republic. Angel investing practice in Government does not have a structured way to mature ecosystems encourages syndication. By engage with the industry. There is no easy way to pooling investments, angels are able to participate consult regarding the impact of possible legislative in a larger number of individual investments at a changes. Also, there is no body through which to lower average deal size. This reduces the risks for promote best practice or increase the professionalism the business angel. As an example, 87 percent of of investors. Moreover, there is no source of local reported angel deals in Estonia were syndicated by data in angel investing activities. more than one angel investor in 201772. Hungary has more than double the number of transactions Reports covering angel investing in the Czech than the Czech Republic for a similar aggregate Republic tend to refer to named individual investment amount (see Table 8). investors. Known individual investors include for example Ondrej Tomek, Karel Obluk, Tomas Cupr, There is no NAA in the Czech Republic. An NAA is Martin Kasa, Jan Vsiansky, and Jiri Hlavenka, among of assistance to the Government as a representative others. Compared to other markets, while individual association for the industry and a partner for policy “super angels” are recognized, the investments are development and implementation, in a manner often associated with the name of an angel network similar to that played by a national venture capital or group. This is true even though it is individual association (see Box 2 for an example of an NAA). members of such organizations that make the Not only is there is no NAA in the Czech Republic, investments. This is suggestive of a lack of syndication there is no Czech member of the BAE, the European and visible structured angel networks in the Czech confederation of angel investing73, nor of EBAN74, Republic. There are, however, some angel initiatives the European trade association for business angels. being created (at their infancy stages) particularly in the Brno region. Table 8. Angel investments, 2016 Total Business Angel Country No. of investments Average deal size, € Investment 2016, €M Austria 36 22 611,111 Portugal 47 16.9 359,574 Ireland 50 16.7 334,000 Belgium 50 12 240,000 Estonia 145 8.8 60,690 Hungary 80 5.5 68,750 Czech Republic 35 5 142,857 Slovenia 36 3.3 91,667 Slovakia 21 2.1 100,000 Source: EBAN, 2016. 72 EstBAN, “EstBan 5 Years & 2017 Review!,” http://www.estban.ee/about/annual-reviews/2017. 73 BAE members are business angel federations or national associations that represent, are a recognized voice for, and promote a country’s angel market. For more information, see: http://www.businessangelseurope.com/AboutBAE/Pagine/default.aspx. 74 EBAN is a pan-European represented organization for early stage investor organizations, including individual and networked angels, crowd funders and early stage VC funds. For more information, see: http://www.eban.org/about/who-we-are. Key Findings 36 Box 2. Example of a national angel association: Scotland The first NAA was formed in Scotland in 1993. LINC Scotland’s75 role is to support and improve the functioning of the local business angel market. At individual deal level, it focuses on improving the efficiency of the ‘process’ by making targeted introductions to well matched business angels among its members. It acts as a facilitator and not an investment adviser. It has an executive director, two secretarial support staff, and three part time managers who provide advice to angels and founders at a regional level. LINC is funded by Scottish Enterprise, with support from European ERDF, contributions from LINC member angel groups, and private sector sponsorship by a range (currently fifteen) of corporate partners, mainly professional services companies active in the angel market. It is structured as a not-for- profit company limited by guarantee, with enterprise agency status. A recent formal assessment found that total investment in early-stage businesses by LINC Scotland members was just over £55 million into 114 businesses in the period between July 2015 and December 201776. This was found to have leveraged a further £59.70 million of public sector and private investment. Provision by LINC Scotland of early stage advice, information, and practical support was considered essential by over 70 percent of members to the establishment of their angel syndicate. Particular importance was placed by members on the networking and knowledge transfer facilitated by LINC. Over 90 percent of members considered the market intelligence provided through Young Company Finance Scotland and the identification and dissemination of international best practice in angel investing as important or essential. Structured angel organizations exist only to a very Keiretsu Forum is the world’s largest network limited extent in the Czech Republic. While there of angel investors, i.e. capital and financial are informal and unstructured angel groups, these resources, with 50 chapters on 3 continents. For are effectively invisible, and thus difficult for the Czech based chapter, investors pay an annual those seeking funding to engage with. One such fee of €1,050. The Forum claims a membership group is in Brno, which has about 6 “members” and of 35 and operates the “Angel Academy” (https:// focuses on connecting local companies to Germany. angelacademy.cz/), a web site and associated Another is Startup Yard, which uses its mentorship lectures on aspects related to angel investing, panel as potential investors in its own companies. such as valuation. Startup Yard has about 157-strong pro-bono mentors with a minimum of 15 years of work experience and •• Busyman 77: An introduction platform which includes an “angel club” where members can counts the local executives of Cisco and L’Oreal and see live (as opposed to online) pitches from other entrepreneurs as mentors for its startups. companies. The platform charges investors €777 for membership and a commission on completed Some small and private BANs or syndicate investments. Companies are charged between activities exist. A common feature among these €155 and €388 plus a commission on funds networks is that there is little or no data on these secured. For the first six months of 2018, 14 organizations’ websites regarding their actual level projects were added to the platform, consisting of investment activity, either in terms of amounts of a mix between technology, fashion, and retail invested or names of invested companies. The few products. known ones are listed below: •• Keiretsu Forum in Prague: A Prague-based “for •• Symfonie Capital: Operates the “Symfonie Angel Venture Fund”78. The Fund’s website states that profit” angel management organization. The it offers investments for seed and early stage franchise was started in 2016 and covers the companies between €50,000 and €250,000. The Czech Republic, Slovakia, Poland, and Belarus. fund has focus on UK, Czech Republic, and Poland. 75 LINC Scotland, “About us,” http://lincscot.co.uk/about-us/. 76 Malcolm Watson Consulting, “LINC Scotland Angel Capital Programme Interim Evaluation, July 2015 to December for 2017,” (2018). 77 For more information, see: www.busyman.cz 78 For more information, see: http://www.symfoniecapital.com/services/angel-fund/ 37 Key Findings Box 3. Models of BANs and benefits There are three general models of BAN: 1. The most common in Europe involves a network managed by a professional manager, typically appointed by an economic development agency, incubator unit, or other organization seeking to find investors. This has been called the ‘dating agency’ model. It involves using the network to reduce search costs, providing a pitching platform to introduce would-be investors to companies seeking investment. Once introductions are made, the network tends to step back and let the investors, who may not have worked together previously, negotiate between themselves and with the company regarding who will do the deal, and on what terms. 2. In the second model, the role is undertaken by an investment professional who can put larger deals together while getting a finder’s fee (i.e. 5 percent). This model can be appealing to passive investors, and therefore often does not provide valuable ‘smart money’. The investment professionals can also provide ‘investment readiness’ training to build up human capital. Within the Czech Republic, Keiretsu Forum and Busyman probably fall into this category. 3. A third model, which is common in the US, Australia, and Scotland, involves investors working as a group or club, who collectively vote for investments and get behind the firms to provide them with smart capital. Syndication is normal; often with all members participating in each deal (deals in Scotland will often see as many as 45 individual investors participating in a single round of funding). This model doesn’t require a paid investment manager, as much of the work is done by the members themselves, though as the groups grow it is common to have a paid “front person” or “gatekeeper” to be the public face of the group and manage deal flow. Moreover, the teams work together repeatedly to build up capability and trust allowing them to form more standardized deals more quickly. This provides firms and international co-investors with easier routes to effective due diligence. This structure also allows the networks to co-invest, either with government funds, or with syndicates of other investment institutions or networks. This may be more capital efficient but requires considerable training that can take many years to build up. The Scottish Government encourages the formation of such groups through its funding of LINC Scotland, the Scottish NAA, as does the Irish Government through HBAN, the Irish national angel association established by Enterprise Ireland for the purpose. In countries where BANs are more developed and in common use, significant benefits have been observed. Members benefit from: •• Improved deal flow management (sourcing and screening) provided by the BAN management. •• Information and knowledge exchange with other angels. Inexperienced investors learn by observing their more experienced fellow members. •• Increased participation rates. Individuals who would like to invest but do not wish to be active in the process are able to take a passive investment in a syndicate of active angels. Individuals who wish to be active, but invest individually, are able to see a higher number of pre-screened deals. Economic benefits include: •• Being a member of an angel community increases the amount of wealth of individuals who are willing to allocate to angel investing by up to 24 percent79. Members of BANs tend to have a higher number of companies in their portfolio than non-BAN members (50 percent of the Italian BAN members had in excess of 5 investments compared to just 18 percent of non-BAN members). Overall BAN members are able to invest less in each individual investment, but make a higher number of investments, significantly reducing their risk (as well as increasing the number of companies supported). Stefano Bonini, Vincenzo Capizzi, Mario Valletta, Paola Zocchi, “Angel Network Affiliation and Business Angels’ Investment Practices,” Journal of 79 Corporate Finance 50 (June 2018): 592-608. Key Findings 38 •• Because investors have the opportunity to learn from engagement with other experienced investors the quality of their investments increases, increasing survival rate. •• The investors are more visible, making it easier for founders to access funding. Recognizing their positive effect on the volume and quality of investment, governments have increasingly sought to support the establishment of BANs80. A number of countries have seen an evolution of their BAN structures from simple introductory services to the more intensive group structures. This development process has been encouraged by governments in for example Ireland and Scotland which have recognized the economic development advantage of encouraging more effective investment. BANs can also be channels for government co-investment, such as through the Scottish CoFund and the New Zealand Seed CoFund. Despite the availability of investment capital in •• Have low awareness of startup investment (e.g., the Czech Republic (primarily focused on latter do not think about follow on investments); stage funding), there is a lack of professional capital or ‘smart money’. The availability of capital •• May display a general lack of interest to be educated (given their success, may struggle to and appetite for investments is evident in new and accept that there may be gaps in their business existing “venture capital funds” in the market. Many knowledge). of these tend to be private family offices set up by rich individuals (‘super angels’) looking to generate investments outside their core business operations. In general, ‘smart money’ comes from business However, based on interviews with Czech investors executives and entrepreneurs who have general and entrepreneurs, rich private individuals who are business knowledge and relatively modest investment willing to invest their capital (whether in the early or funds but, critically, can devote the time needed to latter stages) were described as having the following provide mentorship and connections to new and characteristics: upcoming startups. At the present time, there are few Czech networks to facilitate the engagement of •• Impatient (seeking short term investments and such individuals, resulting in a lack of critical mass quick returns in a year or two); needed to develop a well-functioning angel market. •• Risk averse and conservative; •• Lacking in deal flow/investment experience (unsophisticated); Sectorial investment concentration •• Using their successful experience in business, Interviews with Czech based angel investors they seek to control startups by asking for very suggest that they have an almost exclusive focus high levels of equity (e.g., 51 percent) and strong on ICT, as was also noted for venture capital funds minority rights such as veto powers (resulting in the Czech Republic81. Clustering in the ICT sector in over-burdening and over-management that focuses primarily in cyber security, software, and other affects startup growth); mobile applications. Even the oldest accelerator in the CEE region and arguably most successful in the •• Individualistic and secretive (resulting in a Czech Republic —StartupYard—supports (at a very fragmented market where the portfolio of modest amount) primarily ICT startups. While this is investments is much smaller compared to mature not surprising given low barriers to entry and high markets where many invest together in smaller potential scalability, more R&D-intensive sectors are amounts of money over several deals); likely being overlooked. •• View startup investment as charitable work (this is true at least for some investors); 80 Alasdair Reid and Paul Nightingale, “The Role of Different Funding Models in Stimulating the Creation of Innovative New Companies. What is the most appropriate model for Europe?” (October 2011), https://www.researchgate.net/publication/277257785_The_Role_of_Different_Funding_Models_in_ Stimulating_the_Creation_of_Innovative_New_Companies_What_is_the_most_appropriate_model_for_Europe. 81 See Table 6. 39 Key Findings In comparison, while angel investors in other a low number of individual investors, this high risk countries also show a strong interest in ICT, their makes the Czech market fragile. A few individuals overall investments tend to be more diversified. withdrawing from the market due to bad experience, In 2017, ICT accounted for 39 percent of angel changes in personal or economic circumstances, or investing in Estonia82 and 50 percent in Belgium83. simply retiring could have a disproportionate impact HBAN, the NAA started by the Irish Government, has on available investment funds. assisted in the development of a numbers of angel syndicates specializing in activities outside ICT, such While obtaining reliable data on angel investing as the Food Syndicate and the MedTech Syndicate84. is problematic in all countries, (i) the fragmented This diversification of investment does depend upon and individualistic nature of the Czech market the availability of deal flow, and as noted elsewhere in and (ii) the absence of any conventional BAN the report there is little visible deal flow in the Czech structures or a national association makes Republic other than ICT. assessing and monitoring the Czech market particularly challenging. The present number, location, and capacity of Czech angels is not known, Overall supply-side assessment nor is there any estimate of the number of individuals who have the capacity to become angel investors if Looking specifically at the business angel market, suitably motivated. the Czech Republic has an emerging early stage investment community. It is small both in terms of the number of investors and the amount invested. The market appears dominated by a small pool of very high net worth individuals operating largely Demand-side analysis individually and investing directly into companies or via a private personal fund structure or family office. Credible deal flows are present in the Czech There are no visible BANs of the type typically found Republic based on the existence of success in developed European markets. There are a number stories. However, interviews with investors and of largely invisible groups, either associated with a entrepreneurs acknowledged that these success specific accelerator or acting independently, but they stories are relatively few and are concentrated do not have web sites or appear to solicit for deal in certain locations and sectors. Box 4 provides flow. There are two for profit organizations promoting examples of such successful startups. These angel type investing, Keiretsu Forum and Busyman. examples, as well as qualitative interviews, suggest The latter combines a company fund raising advisory that most startups are based in Prague and Brno, and service, introduction platform, and an “angel club”. primarily in the ICT sector. There are also relatively There is no NAA or federation. Visible investment few academic spin-offs (these tend to focus on non- activities appear concentrated geographically in ICT innovations). Overall, demand falls short of Prague and in the ICT sector. representing a critical mass, which is a characteristic of a mature market. In comparison to more developed European markets and international best practice, there is This section elaborates on existing issues affecting a lack of syndication85. Given the limited value of credible demand for investments in the Czech investments being made and the lack of syndication Republic. Issues appearing to be primary demand it is likely that the level of portfolio diversification side concerns during interviews and literature is also less than best practice would recommend. reviews include: market failures such as lack of This combination of low levels of syndication and information and education on the part of founders, portfolio size and a concentration in a single industry weak linkages between academia and industry sector, together with low availability of follow on (thereby affecting knowledge creation and business funding from venture capital suggests that angel innovation especially in non-ICT sectors), and lack of investing in the Czech Republic is subject to a entrepreneurial culture and education. higher-than-necessary level of risk. Combined with 82 EstBAN, “EstBan 5 Years & 2017 Review!.” 83 BeAngels, “Rapport d’activité 2017.” 84 HBAN, “Meet our Syndicates”, http://www.hban.org/Syndicates/Meet-Our-Syndicates.166.html. 85 The Estonian Angel Association (ESTBAN) reports that 87% of their deals are syndicated between 2 or more angels. (http://www.estban.ee/about/ annual-reviews/2017). Be Angels, the Belgium association, reports that on average each of their investments involves 3.3 angels (Taking the pulse of the business angel market Be Angels 2000 – 2015, Deloitte). In Scotland, 60% of investments involve syndication between multiple networks / groups of angels (The Risk Capital Market in Scotland Prepared for Scottish Enterprise by Beauhurst and Young Company Finance Annual Report 2017). Key Findings 40 Box 4. Czech Success Stories Avast.com, originally from Prague and one of the world’s largest antivirus software developers, acquired fellow Czech startup AVG.com (Grisoft) for $1.3 billion in 2016 and became the second Czech unicorn. AVG.com was the first Czech unicorn (Brno-based) that went public on the New York Stock Exchange in 2012 with a valuation of over $1 billion. The company also returned to shareholders over $1 billon in dividends over time. Kiwi.com is an online travel agent based in Brno. It is currently one of the top 5 online airline ticket seller in Europe. It achieved a turnover of around €700 million in 2017. Socialbakers.com is a Prague-based social media analytics developer with over 2,500 clients in 100 countries. It is named in the 2018 Inc. 5000 list of the fastest-growing private companies in Europe (based on revenue growth) which counts Intuit, Microsoft, and Oracle as alumni in earlier rankings. Apiary.io, an application programming interface (API) development platform based in Prague, was sold to Cisco in 2017 for a price believed to be between $50 million and $100 million. TCPCloud.eu, an IT cloud infrastructure headquartered in Prague, was acquired by Mirantis.com for about $40 million in 2016. Cognitive Security, a cybersecurity company, was acquired by Cisco systems (a US-based technology multinational) in 2013. This resulted in Cisco opening their R&D center in Prague, with over 100 new high-skilled jobs created and support provided to the Czech Technical University. Equity financing limitations growth potential companies in comparison to more developed capital markets. Further, figures provided Access to finance does not appear to be the can be overestimated as the survey did not seek primary concern of Czech Republic startup to further ascertain the level of failed application founders. The Prague-based founders interviewed for funding (disappointed demand), nor did it seek cited more binding constraints they faced in growing to classify or verify the credibility of the funding their companies: access to talent in a tight labor demand. Also, the small survey sample size (just 125 market appeared to be a greater issue, for example. fully completed responses were received) was open These founders are also generally inclined to take a to any self-certifying startup in any business category. relatively long term approach to the development Given the nature of qualitative interviews and survey and funding of their business, consistent with the interviews cited, care must be taken in extending this findings of the 2016 Czech Startups Report86. The to the wider population of existing and potential new report found that 78 percent of the surveyed founders entrepreneurs, and in particular those outside Prague used their own resources as a form of financing, only and the ICT sector. 13 percent of the startups had used friends and family (the report included “business angels” in the family Another survey result, focused on early stage member category). Going forward, 57 percent intend funding, found that startups are not necessarily to finance their projects from their own capital, while looking for finance. However, there appears to be 40 percent intend to seek angel or venture capital some market failure issues (i.e., lack of information). A (a larger proportion than the above-mentioned survey of startups asking wider questions regarding 13 percent). This level of use and intended use of access to finance was conducted for the 2015 Ex angel/venture capital funding appears low for high Ante Assessment of Financial Instruments. It uses only a small returned sample size (64)87. This survey 86 Maria Staszkiewicz and Daniela Havlíková, “Czech Startups Report 2016.” 87 To put the responses into context, the median age of companies that took part in the survey was two years. 80% were micro-companies with up to 10 employees and just 16% were university spin-offs. 39% of the companies were classified at the post-creation stage, 35.6% at the growth stage (these responses were mainly driven by companies older than three years), 11.9 % at the startup stage, and 6.8 % at the seed stage. In terms of sector orientation, 51% are in ICT, 17% in R&D activities, and 5% in processing industry and trade. Three companies from creative industries also answered the questionnaire survey. 41 Key Findings reported that founders’ own capital had been used Results also suggest that a critical area of market by 46 percent of respondents. 22 percent had failure is one of information and education on the secured friend and family (excluding business angels) demand side. Founders do not understand the typically in combination with their own funding. Just 9 benefits and uses of equity funding, or how or percent claimed angel funding, despite 35.6 percent where to get it. It is perceived as too difficult for small being in the growth stage and more than three years companies to apply. When asked what could improve old. Venture capital funds were ticked off as a source access to financing, the most popular responses of finance by only one respondent. However more related to improved information, signposting, and than 51 percent of entrepreneurs had searched for preparation assistance (see Table 9). information about financing opportunities from business angels and venture capital funds, and Seen as less important were securing a guarantee presumably either decided not to apply or had been for the loan (7.8 percent), joining a hub, business unsuccessful in doing so. In total, 41 percent of the incubator, better cooperation with a university, target respondents (24 out of 62 responses) said etc. (7.8 percent) and improving the conditions for they planned to use venture capital in the coming the loan – less strict guarantee requirements (7.8 three years to fund their investments. This means percent). that the majority (59 percent) did not. The reasons cited for not seeking an external equity investor were The tech entrepreneurs interviewed did two-fold: not express overt aversion to taking equity investment. Nor did they express opposition to •• the company is too small; giving up some control of the company in exchange •• raising equity is too demanding in terms of time for equity at some time in the future. They did and administrative work. have concerns regarding their perceptions of the experience and value of potential Czech Republic investors (in comparison to their perceptions of Based on these results, it appears that many those to be found in more developed markets such startups are postponing securing funding until as the US). This may represent a form of unconscious they have reached the point of being able to equity aversion brought on by a mix of their own generate a stable cash flow, which they believe lack of experience and understanding of investment will give them access to bank debt. This represents and their perception, rightly or wrongly, that Czech a potentially significant lost economic opportunity. investors are somehow less experienced compared Companies that could potentially grow, and grow to those in more developed countries. significantly, if they had the correct funding in the appropriate form (and for high growth potential companies this is most likely to be equity funding), prefer a gradual start of their business to one that they perceive as being a complicated and often unsuccessful negotiation with investors. Table 9. Policies to increase access to finance, 2016 Raising awareness of available sources of financing in the Czech Republic, getting new 68.6% contacts Raising awareness of available sources of financing from abroad, getting new contacts (e.g. 49% via support of business trips in foreign destinations) Reduction of the administrative barrier to fundraising 49% Assistance at preparation of the project (e.g. business plan or specialized consultancy) 29.4% Source: 2015 Ex Ante Assessment of Financial Instruments. Key Findings 42 Industry-academia linkages domestic market, this sector is primarily concentrated in the business-to-government (B2G) and business- Industry and academia linkages, which are a to-business (B2B) markets, rather than the business- requirement for transforming innovative ideas into to-consumer (B2C) market. investable deal flows, are weak in the Czech Republic. There are few academic spin-offs. The Czech Republic ranked 41st out of 137 countries in terms of industry- Entrepreneurial culture and skills university collaboration in R&D, behind aspirational Belgium (9th), Ireland (13th), and Estonia (40th)88. One The lack of entrepreneurial culture stems from the of the few successful examples of research-based lack of a history of entrepreneurial education in spin-offs in the country was a profitable technology schools. In Estonia and Scotland, by comparison, transfer via the Czech Academy of Science Institute this type of education is available (see Box 5). of Organic Chemistry and Biochemistry’s patent of Further, entrepreneurship in the Czech Republic drugs for treatment of HIV/AIDS, Hepatitis B, and is not championed or celebrated publicly by small pox89. Another example of a successful tech the Government, the press, or the media (one transfer center is the South Moravian Innovation notable exception is the Czech edition of the Center90 in Brno. In general, weak collaboration Forbes magazine). The public is still suspicious of between industry and academia may contribute to entrepreneurial success and capitalist investors due the lack of startups in more advanced fields such to a tainted period in the early 1990s characterized as biotechnology, internet of things (IoT), etc. As an by the privatization of public assets. example, only 14 percent of surveyed respondents in the Czech Republic Startup Report 2016 claim to In terms of skills quality, Czech graduates possess be a university/research center spin-off91. good technical skills but less developed soft skills. Good technical skills are attributable to government Startups’ focus on ICT means there are missed priorities in building a technology and engineering- opportunities in specific sectors which could boost based workforce. Yet, strengths in Czech workers’ productivity. The Czech Republic National RIS3 technical skillsets are offset by weaknesses in Strategy (Smart Specialization Strategy)92 highlights entrepreneurial skills and related soft skills, including six key application areas of economic specializations managerial skills and sales and marketing skills. in which the Czech Republic shows comparative These weaknesses are attributable in part to a rigid advantage and growth potential: curriculum (e.g., facts-based and with little room for •• manufacture of transport means and equipment; creative thinking that helps develop the soft skills) as well as a lack of entrepreneurial culture. Because •• mechanical engineering; of constraints related to soft skills, 90 percent of •• electronics and electrical engineering (e.g., Startup Yard activities focus on improving startup industrial automation, communication, founders’ business development skillsets (e.g., sales identification, control equipment, robotics, and marketing, and pitching to potential investors). artificial intelligence [AI]); In terms of the availability of specific technical •• IT services and software (e.g., network skills, there is a shortage of good local technology technologies and network security, antivirus developers (reflected in high salaries and low labor software); turnover rates for developers). This risks affecting •• electricity production and distribution; deal flow generation in the future. Entrepreneurs are facing difficulties accessing good local developers •• drugs and medical products. as they must compete with established companies that are willing to pay higher salaries with good To date, the focus has been on only one of these benefits. Talent spotting is also difficult due to high sectors: IT services and software. Given the small coordination costs; there are for example very few alumni networks to tap into. 88 Klaus Schwab, ed., “Global Competitiveness Index 2017-2018,” WEF (2017), http://www3.weforum.org/docs/GCR2017-2018/05FullReport/ TheGlobalCompetitivenessReport2017%E2%80%932018.pdf. 89 Roman Pasek, “The Greatest Science Story in the Czech Republic,” CzechInvest (2017), http://www.czech-research.com/greatest-science-story-czech- republic/. 90 For more information, see: https://www.jic.cz/en/about-us/ 91 Maria Staszkiewicz and Daniela Havlíková, “Czech Startups Report 2016.” 92 Government of the Czech Republic Department for Analysis and Coordination of Science, Research and Innovation, “National Research and Innovation Strategy for Smart Specialisation of the Czech Republic (National RIS3 Strategy),” (2016). 43 Key Findings Box 5. Scotland’s entrepreneurial education Scotland has developed a range of projects to encourage entrepreneurship from an early age: •• Young Enterprise Scotland (https://yes.org.uk/) offers entrepreneurship education at primary school, secondary school, and university levels. •• The Scottish Institute for Enterprise (https://www.sie.ac.uk/) funded by the Scottish Funding Council and Scottish Enterprise targets undergraduate students in each of the Scottish universities, and in every subject. It helps students develop enterprise skills, discover their entrepreneurial talent, and start up their own ventures. It has a small fund to cover the cost of undergraduates applying to patent their ideas (the intellectual property of university staff, doctoral students, and researchers belongs to the university – but this does not apply to undergraduates). •• Entrepreneurial Scotland offers an internship program to university students between their third and fourth years of study to work overseas with an international company for two months. •• Informatics Ventures (https://www.ed.ac.uk/informatics/innovation-industry/informatics-ventures) has a mission to support Scotland’s technology entrepreneurs from all the Scottish universities and wider business community. There is a consistent and long term message to young Scots that no matter what their degree is, their interests, or current involvement with business, they can make enterprise an active part of their life and that they have the potential to be a successful entrepreneur. Estimated total demand Given the lack and unreliability of data, it is difficult to Spreading the Ex Ante Assessment estimated estimate actual demand for equity investments. The funding requirement of €120 million out over 6 2015 Ex Ante Assessment93 includes a calculation years would give an annual demand of around €20 suggesting that the demand for equity investment million a year. Average 2016-2017 venture capital from SMEs at the seed and startup stages for the investment was estimated to be €4 million94 and period up to 2023 would be €120 million. This the EBAN estimate of business angel investing was however was partially based upon 2013 GEM data €5 million95, suggesting a shortfall of €11 million. (relating to for example entrepreneurial intention), However, the venture capital data only includes funds now somewhat out of date, and on then existing run by members of the European venture capital estimates of absorption capacity. In addition, while association, Invest Europe (not all funds operating this calculation gives an estimate of the total funding in the Czech Republic), and the EBAN data is only an requirement it does not break it down by sector or estimate of the visible angel activity. In practice the location. value of existing investment into seed and startup SMEs is unknown, i.e., the real level of actual and potential credible demand or therefore the present or projected future funding gap. 93 Czech Ministry of Trade and Industry and Deloitte Advisory s.r.o. Ex Ante Assessment of Financial Instruments of the Operational Programme Enterprise and Innovation for Competitiveness 2014-2020, 2015. 94 InvestEurope, “2017 private equity Activity Data,” (2017). 95 See Table 8. Key Findings 44 Analysis of the local framework doing business (wages, rent etc.) making the same investment last longer for Czech-based startups conditions than places with more expensive environments. The country ranked 31st out of 137 countries on the GCI This section discusses current local environment 2017-18 and is the highest placed CEE country in conditions in the Czech Republic: regulatory the EU 28, ranking 13th (between Estonia and Spain). conditions for equity investment along the firm’s Some complaints exist in relation to difficulties in life cycle (including starting and exiting a business), starting a business, outdated company laws, and availability of local supporting intermediaries (e.g., expensive bankruptcy costs. incubators, accelerators) and government support programs, as well as availability of tax incentives for The Czech Republic’s overall ease of doing entrepreneurs and investors to encourage angel business ranking is comparable to many of its investing. peers, with a general ranking of 30. However, it ranked weaker in the starting a business category, (ranking 81 out of 190 countries). The low ranking Regulatory conditions for equity is related to the length of time it takes to incorporate investment a business and the need for simplification of startup procedures. The World Bank estimates that the time Interviewees suggest that there are no significant needed to start a business has fallen by around 40 regulatory or business-related issues in the Czech percent since 2015. Yet it still takes 9 days, compared Republic, which is consistent with a competitive to 4 in Belgium and 3.5 in Estonia (and half a day in ranking on relevant indicators. This sentiment is New Zealand, the best performer in this measure). reflected by the fact that investment deals are being It also takes more than double the number of conducted. Some of the Czech Republic’s strengths procedures to incorporate a business in the Czech include a favorable 19 percent corporate tax rate Republic compared to these countries. Overall the (which stands competitively against the OECD use of e-government services in the Czech Republic, average of over 24 percent) and lower costs of while improving, remains one of the lowest in the EU. Table 10. Starting a business, 2018 Starting a Time Cost (% of income Paid-in min. capital (% Country Procedure Business ranking (days) per capita) of income per capita) Ireland 8 3 5 0.2 0 Estonia 12 3 3.5 1.2 16 Belgium 16 3 4 5.6 16.8 Slovenia 46 4 7 0 39.6 Portugal 48 6 5 2.1 0 Hungary 79 6 7 5.4 43.8 Czech 81 8 9 1 0 Republic Slovak 83 7 12.5 1.1 17.2 Republic Austria 118 8 21 5.1 12.5 Source: World Bank Doing Business database. 45 Key Findings Although the country has in the past scored poorly there is no ‘authorize and issue later’ capital). Yet, in the area of “second chance” for entrepreneurs, share option schemes are frequently used in early it has improved and now performs in line with the stage companies in other jurisdictions to attract EU average on this principle97. The time needed to senior talents to join a company98. Because of resolve insolvency has fallen from 6.5 years in 2008 to this issue, many Czech startups are encouraged 2.1 years in 2016. However, the costs associated with to incorporate in the UK and the US. insolvency remain high, at 17 percent of the debtor’s estate compared to Belgium (3.5 percent), Estonia (4 •• Current employment law discourages formal employment (hiring official employees) due to percent), and the EU average of 10.3 percent. its rigid structure and relatively high employer’s social security contributions (34 percent), in Interviewees considered Czech corporate laws addition to related employment taxes. Firing outdated and complex, especially as they relate to employees is perceived to be rather difficult, equity financing. Issues raised by the interviewees similar to France. As a result, startups tend to use were the following: individuals classed as ‘external consultants’. These •• While the s.r.o. status for a company in the consultants are responsible for their own health Czech Republic is similar to that of ‘limited insurance, can offset 60 percent of revenues and liability company’ (LLC) in the USA or ‘limited pay income tax on their remaining 40 percent of company’ (Ltd) in the UK, it is costly to set up income, and can be given ‘30 days or less’ notice a s.r.o. company that distributes equity shares. (when employers choose to lay off their workers) At present it requires about €77,000 (2 million depending on negotiated conditions. Lack of CZK) as minimum capital for a company that can flexibility in startup work contracts provides distribute shares, although it requires only €0.04 disincentives for both workers (who may prefer to (1 CZK) as minimum capital for one that does pay lower income taxes and social contributions) not require share distribution. Nevertheless, it and startup entrepreneurs (who may prefer to is difficult to set up a shareholder scheme in an hire consultants for short-term roles, to provide s.r.o. given a lack of clear rules involving stock flexibility given their uncertainty of future growth option schemes. For example, an s.r.o. does not and reduced cost). This can potentially affect the recognize employee stock option plans (and innovation process of quality startups. Table 11. Resolving insolvency, 2018 Resolving Recovery rate Time Cost (% of Strength of insolvency Country Insolvency (cents on the (years) estate) framework index (0-16) rank dollar) Slovenia 10 88.7 0.8 4 11.5 Belgium 11 84.6 0.9 3.5 11.5 Portugal 15 63.8 3 9 14.5 Ireland 17 85.8 0.4 9 10.5 Austria 23 80 1.1 10 11 Czech Republic 25 67 2.1 17 13 Slovak Republic 42 47.3 4 18 13 Estonia 44 40.6 3 9 14 Hungary 62 43.7 2 14.5 10 Source: EBAN, 2016. 96 ‘Second chance’ ensures that honest entrepreneurs who have gone bankrupt get a second chance quickly. 97 European Commission, “Czech Republic 2017 SBA Fact Sheet.” 98 In practice, this scheme is not commonly used for most staff in the majority of startups in other countries. This is often reserved to attract new member of senior management (e.g., CEOs). Key Findings 46 Exit conditions Supporting intermediaries Exit markets are dominated by M&A with very few IPOs. A recent survey by Mergermarket (2017)99 Incubators and accelerators on M&A in the CEE region showed that the Czech Across the Czech Republic there are reported to Republic ranked second for M&A (behind Austria). be 51 business incubators (a mix of publicly and This is in part attributed to positive economic growth privately owned) and 80 co-working spaces103. rates for both countries (the Czech Republic for Each of these intermediaries provide varying levels example grew by around 4 percent in 2017). Overall, of business development and mentoring support the Czech Republic ranked third in M&A deal values, for startups (from none to intensive). Start-up Yard behind Austria and Poland.100 These figures reflect appears to be one of the few accelerators offering the high proportion of private equity finding devoted any form of funding to startups joining its program to later stage M&A activity in the Czech Republic. (they also operate an informal angel investment What is unclear is the level of exit opportunity network made up of some of the members of their for new technology companies as opposed to pool of business mentors). more traditional manufacturing and engineering companies. In the last five years there have been few examples of technology company exits. One notable example is AVG which was sold to Avast Software, Intermediaries supporting R&D and another Czech-born enterprise, in 2016101. Another commercialization example is Cisco’s acquisition of Cognitive Security While intermediaries supporting R&D in 2013. Early stage investing in the Czech Republic is commercialization exist (e.g., universities still relatively young however, and with exits typically and TTOs), few are effective in supporting taking 5 to 8 years to achieve in developed markets, it innovative projects. Universities tend to work in is unsurprising that there are relatively few examples silos and lack cooperation with the private sector of company success stories yet. to transform innovative ideas into investable companies. Key challenges reflective of weak A recent innovation in the exit market is the START industry-academia linkages include: low levels of program launched by the Prague Stock Exchange. public research contracted by the private sector The START program is an IPO market for SMEs. It (about 3 percent), underutilization of intellectual is branded as a “market for smaller businesses” property (IP) rights instruments (in spite of availability valued at between €1 million and €80 million102. The of legislation), low applicability of public research, market allows shareholders to hold non-controlling poor commercialization of research outputs, lack shares of three SMEs currently in the market, allows of knowledge transfer, weak entrepreneurial a minimum investment of about €19,000, and allows culture, and weak interaction between domestic trading once every three months for 20 minutes. This private sector and research entities to create new measure encourages concentrated liquidity for SMEs technologies104. as liquidity tends to be derived from the size of the company. Given the nascence of this IPO market, it remains to be seen whether it can be effective. 99 Mergermarket (2017) conducted the survey of 150 senior-level executives who are either based in the CEE region or outside. These executives are part of private equity firms (1/3) and the rest are corporate executives. Respondents have either made at least one acquisition during the past year or are considering making an acquisition in the next 24 months. 100 Mergermarket, “M&A Spotlight: CEE,” Wolf Theiss Corporate Monitor (2017), https://www.wolftheiss.com/fileadmin/content/6_news/Guides/2018/ MnA_Spotlight_CEE_WolfTheiss_Corporate_Monitor.PDF. 101 Deloitte, “CVCA Private Equity Report: Summary of deal activity in 2015-2016,” (June 2017), https://www2.deloitte.com/content/dam/Deloitte/cz/ Documents/survey/cvca-private-equity-report-2015-2016.pdf. 102 Prague Stock Exchange, “START Market,” https://www.pse.cz/en/trading/markets/start-market/. 103 University of Economics Prague (VŠE) statistics via Maria Staszkiewicz and Daniela Havlíková. “Czech Startups Report 2016.” 104 Martin Shrolec and M. Sanchez-Martinez, “Research and Innovation Observatory country report 2017: Czech Republic,” European Union (2018), https://rio.jrc.ec.europa.eu/en/library/rio-country-report-czech-republic-2017. 47 Key Findings Within universities and TTOs, institutional issues systems for research commercialization. There is also hinder the creation of more academic spinoffs. a growing number of university incubators, such as These issues include complicated processes in the xPORT at the University of Economics in Prague starting university spin-offs, ineffective TTOs, and and Point One at the Czech University of Life Sciences weak incentive structures for the commercialization in Prague. of ideas105. •• omplicated processes to create spin-offs C stem from complicated laws related to whether Existing government programs universities can own equity shares in spin-offs as well as rigid procedures necessitating obtaining The Czech Government offers a suite of programs clearances from different academic senate and aimed at helping startups become ‘investable’ or administrative levels. ‘investor-ready’ as well as providing initial public capital. These direct support programs can be •• TTOs in the Czech Republic have no special classified as follows, along with their corresponding purpose vehicle (SPV) to accommodate investors government agencies: interested in supporting commercialization of R&D results, as is common in more developed •• I nvestment readiness programs: CzechInvest, markets (although the success story related to Technological Agency of the Czech Republic HIV/AIDS treatment was made possible through (TACR), Ministry of Industry and Trade (MIT), the creation of an SPV). university incubators (xPORT (University of Economics) and Point One (CTU in Prague)) •• There are low incentives for public sector researchers to commercialize their ideas, as •• Financing programs: Czech-Moravian Guarantee researchers are evaluated primarily on scientific and Development Bank (CMZRB), EIF supported publication outputs with little emphasis on funds commercialization106. Most funding opportunities are also concentrated in basic research instead of Investment readiness programs aim to strengthen commercialization. In general, the mindset and the demand side by helping improve the quality entrepreneurial inexperience of people working in of potential investable deal flows. In addition, universities is problematic, as university personnel these programs address market failures related tend not to understand what it means to conduct to asymmetric information and coordination an IP transfer and set up a business. For example, failures. Common intervention mechanisms in Czech even though Cognitive Security spun out of the programs include business advisory services (e.g., Czech Technical University (CTU), the university business planning), training, mentoring, networking does not necessarily use this as a success story (e.g., access to investors and foreign accelerators), (having been sold to Cisco)107. and matching services. There is also an emphasis on addressing presentational failings by helping There are nonetheless Government efforts to re- founders prepare for pitch days. In some programs, align universities’ incentive structure through non-financial support is also coupled with financial ‘smart funding’. For example, the Technological support. For example, CzechInvest (a government Agency of the Czech Republic (TA CR) which is in agency in charge of boosting startup development) charge of R&D cooperation between state agencies, provides mentorship, consultancy, and training as academia, and industry, provides competitive well as small competitive grants to boost startup funding to universities to support practical capacities in the pre-seed stage (e.g., prototype application, commercialization of R&D, and business development). Annex 4. Program Instruments: collaboration as part of its GAMA program108. This Early-stage Government Support provides project provides incentives for universities to set up information on these current investment readiness programs. 105 For more details on constraints to academic entrepreneurship in the Czech Republic, see: V. Machacek and M. Srholec, “Knowledge Transfer through Academic Entrepreneurship in the Czech Republic,” (2016). 106 Martin Shrolec and M. Sanchez-Martinez, “Research and Innovation Observatory country report 2017: Czech Republic,” (2017). 107 For more information on Cisco’s acquisition of Cognitive Security, see: https://blogs.cisco.com/news/cisco-to-boost-network-security-platform-with- acquisition-of-cognitive-security 108 For more information on TA CR’s GAMA Program, see: https://www.tacr.cz/index.php/en/programmes/gama-programme.html Key Findings 48 It is unclear whether these investment readiness 2013, using operational program “Business and programs emphasize issues investors care Innovation” (OPPI) funds, was unsuccessful and had about the most: the investability of the startup’s to be cancelled110. This experience is helping inform proposition and investor engagement. Even if the establishment of a new venture capital support founders know how to pitch their ideas, for example, scheme (EIF Fund-of-Funds project) under a different there are inherent concerns underlying what it means implementation model111 through ESIF resources to be an investable business. Investor’s concerns (operational program “Enterprise and Innovations for include: the likelihood of achieving the required Competitiveness” (OP EIC) 2014-2020). Yet, another growth (that will match the investor’s return on successor project that sought to establish a state investment requirements), having clear exit plans, owned investment platform (National Innovation having a credible management team (who can Fund) was scrapped recently. handle financial accounts, IP protection, market demonstration, etc.), having a novel and compelling Qualitative interviews suggest that these product/service, etc. There are also issues related government measures are piece-meal, to investor engagement such as how to prepare limited/non-consequential, and riddled with for the fundraising process. Given that government administrative uncertainties. Early-stage grants investment readiness programs tend to be managed are insignificant and cannot support the actual by career public servants (along with the nascence of financing amount startups need. R&D grants (as well the local market), it is unlikely that program managers as R&D tax credits) involve considerable paperwork, have a clear understanding of the investment process administrative delays (with implementers forcing and know what it means to be ‘investor ready’. recipients to observe original project terms despite these delays), and tax agents have subjective Financing programs stimulate the supply side interpretations of what R&D is (discouraging R&D by providing direct or indirect public capital to firms from actually applying this credit in their tax innovative firms. Common intervention mechanisms forms). Some interviewees stated that some firms in the Czech Republic include the provision of have been asked to pay back R&D incentives, notably early stage grants (direct) as well as fund-of-funds, when government agents decide that what firms loan guarantee schemes, and tax credits (indirect). thought was an R&D activity was not considered by For example, CMZRB provides loan guarantees the official to be so. Public support and perceptions to certain expenditures of innovative businesses. about startups are often negative, as Czech citizens The EIF supported funds under the €50m Czech tend to associate putting government money into Republic ESIF Fund-of-Funds project109 is intended to startups as a loss (‘public money wasted again’). increase the available equity funding for enterprises Governments are seen as slow moving, the opposite throughout the whole cycle of their early stage of the fast-paced environment of startups. Some development. Annex 4. Program Instruments: founders suggested there is a social stigma against Early-stage Government Support also provides receiving state grants: grantees were viewed information on these current financing programs. negatively as ‘incapable of earning money’112. These factors combine to give some founders a negative It appears that the Czech Government lacks view of government, making them less likely to experience in the provision of public capital. engage in support programs. The Government’s first attempt to establish an early stage venture capital support scheme (the SEED fund) during ESIF programming period 2007- 109 European Investment Fund, “ESIF Fund-of-Funds Czech Republic.” 110 A complaint to the anti-monopoly office by an unsuccessful contender for the Ministry’s public tender to select financial intermediaries for the SEED fund resulted in long proceedings, such that the project could not be implemented within the OPPI time limit. 111 Rather than publicly administering the fund, the government is working with EIF which will manage the project. 112 Focus group discussion with entrepreneurs (May 16, 2018). 49 Key Findings Availability of incentives to encourage realized for five or eight years or more. As increasing angel investing tax on tobacco may be used to discourage smoking (and deliver a saving on the cost of health care), so a suitably structured tax incentive can persuade Tax incentives individuals to invest in high growth potential companies, relieving the state of the responsibility There are no targeted tax incentives in the Czech for supporting this element of economic stimulation. Republic to specifically encourage business angel investing. The EC recently published a report looking at best practices in tax incentive programs for Co-investment funds (CoFunds) investors in 36 countries113 from within Europe and the OECD. The report found that the Czech Republic There are at present no CoFunds in the Czech does not provide specific tax incentives related to Republic targeted at encouraging or supporting boosting angel investing compared to countries such business angel activity. CoFunds are increasingly as Belgium, Ireland, and the UK in Europe. Even in being used by governments to stimulate behavioral the US, possibly the most developed early stage changes in current and potential investors, funding market in the world, around 50 percent of encouraging them to take more risks. The EBAN 2016 states have some form of angel tax incentives114 and compendium of CoFunds116 lists details of funds in in May 2018 China announced the expansion of their 22 European countries. tax incentives for angel investment115. Annex 5. Operation of CoFunds includes an analysis The tax structure is being used by many countries of the nature of a number of different fund structures to encourage the desired change in behavior for that have been developed to reflect differing local individuals to take on extra investment risks. A conditions. critical difficulty in persuading more individuals to divert part of their wealth to investing as a business CoFunds are seen as a potential tool to encourage angel is the very high risk area of startups as opposed more individuals to become angel investors, and for to the much lower risk investments available through existing investors to invest more because they lower real estate equities and bonds. Not only is the risk the risk of investments by allowing more investments high, but the investments are illiquid. They cannot to be made and providing portfolio diversification. A be easily sold, even at a loss, as would be the case paper produced for the EC described CoFunds for if the investment was in a listed equity or bond. business angels as representing an added value for Investment returns, where they happen, may not be public authorities in comparison to grants because their leverage effect is higher117. 113 Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Israel, Italy, Japan, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, South Korea, Spain, Sweden, Switzerland, Turkey, United Kingdom, and United States. 114 For more information, see: https://www.angelcapitalassociation.org/aca-public-policy-state-program-details/ 115 Li Yan, “New policies to help small firms,” Ecncs.com (2018), http://www.ecns.cn/business/2018/05-04/301404.shtml. 116 EBAN, “Compendium of Co-investment Funds with Business Angels 2016,” (2017), http://www.eban.org/wp-content/uploads/2017/06/Co- Investment-Funds-2016_EBAN-website.pdf. 117 European Union, “Fostering business angel activities in support of SME growth,” Guidebook Series: How to support SME Policy from Structural Funds (2015), http://www.eban.org/wp-content/uploads/pdf/Guidebook-FosteringBusinessAngelActivities.pdf. Key Findings 50 POLICY RECOMMENDATIONS This section proposes a list of short-term, medium- In general, there are significant challenges in term, and long-term policy recommendations drawing up policy to stimulate business angel for enhancing business angel awareness and activity. Policy needs to address multiple and investments in the Czech Republic. Proposed very heterogeneous groups - business angels, recommendations are problem-driven and based entrepreneurs, and small companies, simultaneously on the analyses of supply side, demand side, and to be effective118. Looking specifically at business local environment conditions for business angel angels, not only does each angel differ in terms investments discussed above. Phasing of specific of available investment amounts, industry focus, recommendations are also anchored in administrative preferred role in the investment process etc., each of and political cost considerations. Further, these policy them often takes on different roles depending on the recommendations are supported by case study investment, investment partners, and circumstances. examples from various countries (e.g., UK, Germany, Moreover, they also change their role in the course New Zealand). While this report acknowledges the of their career as business angels. High level lessons lack of evidence of success in some of these case in regard to policies aiming to boost angel investing studies (due to the lack of rigorous impact evaluations are discussed in Box 6. and assessments of such programs and because they are new), they are included for consideration and possible application given their relevance to the Czech context. Box 6. Lessons from literature reviews on business angel development •• There appears to be little practical advice on how to begin implementing policy for the development of an effective early stage investment market, or the timing, sequencing and localization of the differing options. •• Many of the ‘headline’ policies, such as co-investment funds and tax incentivization, need a reasonably well functioning angel market to be in place before implementation for them to be effective. •• Significant flexibility in approach is needed to take into account local circumstances, culture, and practice. Needs and challenges are likely to vary not just by country but by regions within countries. •• It is important to attract the right type of investor not just a volume of investors. Early stage investing requires patience and an affinity with founders. •• Angel investing takes many forms and angels organize themselves in many ways. There is no single right solution or methodology and policy should be structured to support and guide market development, not dictate it. •• Developing an angel community cannot be done in isolation, but requires the development of entrepreneurial activity, and critically the “right type” of entrepreneurial activity. It also requires the development of a support community (lawyers, accountants, incubators, etc.). This needs to be a coordinated and integrated activity, and it needs to evolve as the local market evolves and develops. •• Policy should be focused on the development of the market rather than on the provision of direct funding to companies. •• Simply increasing the volume of funding available, without providing a structure within which that funding can be easily connected to appropriate investment opportunities, will do little to improve overall investment levels. •• High growth firms are found in all sectors of the economy, not just in high-tech sectors. Development policy should be agnostic in terms of business sector. Swedish Agency for Growth Policy Analysis, “Business Angel, Co-investment Funds and Policy Portfolios,” (2013), https://www.tillvaxtanalys.se/ 118 download/18.700b9665156832afbae1de28/1471261058898/Report_2013_08.pdf. Policy Recommendations 52 Typology of proposed policy be achieved initially, and again at relatively low cost, through promotion and awareness raising recommendations activities. More complex and expensive policies to increase capacity and influence capability such as Proposed policy recommendations address the tax incentives and CoFunds should be considered gaps identified in the supply side and demand in the long term. side of business angel investments based on the analytical exercise (outlined in “Key Findings”). Administrative and political costs differ across These gaps include a lack of demand-supply data, the the suggested phased recommendations. Short invisibility and/or inexperience of potential investors, and medium-term policy recommendations (i.e., and a lack of diversified credible demand for data collection and awareness measures to increase investments. A typology of these recommendations existing market efficiency) should be relatively is discussed in Table 12, which summarizes potential inexpensive to implement. These recommendations objectives, problems, and policy interventions that do not require legislative change. Long term may be considered. Although not the subject of this policy recommendations include potential tax report, non-binding constraints mentioned in the incentivization and CoFunds. Both of these are likely analysis of local framework conditions, such as on to have more significant costs, are complex to set starting a business and resolving insolvency, should up and implement, and involve varying degrees also be addressed. of legislative change. Ideally, short term policy proposals should be implemented immediately. The policy recommendations are structured to Their impact and outcome will influence the choice, permit a phased approach to implementation design, and timing of the longer term policies. (i.e., short, medium, and long term). Short term recommendations begin with improved data The following subsections of this report collection of the supply and demand sides to allow a elaborate in further detail on recommendations better calculation of the extent to which the capacity to stimulate business angel investing in the Czech of either side needs to be stimulated. This data will Republic. Figure 9 presents a schematic diagram also help identify possible measures to increase of the short-term, medium-term, and long-term the efficiency and effectiveness of the existing proposals discussed. While beyond the scope of market. Improved efficiency and effectiveness this report, the importance of effective demand-side can be achieved at relatively low cost through interventions and conducive framework conditions better information and signposting and access to is acknowledged in ensuring a healthy innovative knowledge and training. Increased capacity can finance ecosystem. Figure 9. Schematic diagram of elaborated policy recommendations Increase business angel investments to foster potential of high-growth firms Short-term Medium-term Long-term Component 1. Data Component 2. Promotion Collection and Mapping and Market Structuring 1.1. Supply side data collection Option A. Co investment 2.1. Launch National Angel 1.2. Taxpayer base analysis Funds Association 1.3. Demand side data 2.2. Certification of Business Option B. Tax Incentivization collection Angels 53 Policy Recommendations Table 12. Menu of Possible Government Interventions Objective Problem Possible Policy Intervention SUPPLY SIDE Increase number Low awareness of potential to •• Awareness raising/publicity of business angels become a business angel •• Establishment of NAA (short term) (market capacity) High risk of financial losses •• Business angel training119 (short term) •• Tax incentives (long term) •• CoFunds (long term) Lack of business angel related •• Training and mentoring (short / medium term) skills, i.e., knowledge and •• Syndication of deals: new business angels learn competence barriers discourage from those with experience (short / medium term) participation Increase connection Angels are often invisible •• Support establishment and operation of BANs between investors and (medium / long term) founders Encourage business •• Concentration of investment •• Awareness raising / education (short to medium angels to invest in in ICT term) a broader range of •• Lack of funding for technology •• Support for specialist syndicates (e.g. subsidized sectors due diligence on IP) (medium term) transfer in knowledge intensive sectors •• Knowledge intensive tax incentives (long term) •• Knowledge intensive co-fund (long term) Increase effectiveness •• Inexperienced investors may •• Training and mentoring of investors (short / of angel investing make poorly structured or medium term) (knowledge and researched investments •• Dissemination of international best practices and capability) for higher •• Low returns discourage new standards documentation (short / medium term) company success investments •• Company performance may be suboptimal Increase availability of Companies fail to scale due to •• Increase networking (short / medium term) follow on funding to lack of follow on funding from •• Encourage syndication (short / medium term) promote scale up existing or new investors •• Investor education regarding lifetime funding of companies (short term) •• Introduce CoFunds (long term) DEMAND SIDE Increase demand for Not all founders who would be Policy measures to address this will include: funding suitable for equity investment •• Investment readiness programs, highlighting the apply due to: benefits of equity finance (faster value growth) and •• Reluctant applicants explaining / demonstrating how equity investment •• Discouraged applicants works in practice, including founder success •• Unprepared applicants stories (short / medium term) •• Improved signposting120 (short / medium term) Broaden range of While patent activity in public •• Continue development and implementation industry sectors research organizations has of policies/programs that support research receiving funding increased in recent years, this has commercialization (short / medium term) not been matched by an increase in commercialization / spinouts 119 See Annex 7. Business Angel Trainings for nuances related to business angel trainings. 120 Signposting refers to informational activities that guide startup founders on how to apply for funding. Policy Recommendations 54 SHORT-TERM RECOMMENDATION 1: DATA COLLECTION AND MAPPING Effective policy recommendations should build Despite these challenges, the first priority for upon a proper understanding of the existing policymakers must be to develop time-series and potential demand for and supply of funding. data on angel investment activity that parallels Having a clear grasp of the demand for and supply what already exists for the venture capital market. of business angel investments requires regular, Time series data helps provide an accurate measure effective, and systematic data collection and analysis. of market size, investment activity and the types of Data collection and mapping addresses the lack of investments being made. This is needed to identify information about angel investments in the Czech the need for intervention and the impact of such Republic. Existing data for the early stage market intervention. An initial “baseline” analysis is required on both the demand and supply sides in the Czech to establish the present situation, both to inform policy Republic is weak. development (what problem needs to be addressed) and to facilitate future program monitoring (what success has been achieved). This data then needs to be updated annually. Caution must also be taken in deciding the data implementation partner and Activity 1.1: Supply-side data procedures123. collection An example of an angel market baseline Policy Objective assessment was undertaken by the New Zealand Develop baseline measure of market size and existing Government as part of the formation of their Seed in-vestment activity CoFund124 using survey interviews. The purpose of the assessment was to “describe the then current Priority level state of New Zealand’s angel investment market High – precedes other recommendations and future and analyze performance expectations of the Seed policy development CoFund to use as a basis for subsequent evaluation”. It included international benchmarking of angel Implementing partners121 investments. The angel data was largely collected by Statistics Office, Technological Agency, private data interviews. It is recognized that many angel investors service provider firms, NAA share a desire for anonymity and may be unwilling to divulge information about their investment activities. Measuring the level of angel activity in any Further, all inferences about the true and potential size environment is difficult122, and in the Czech of angel investment markets are based on guesswork, Republic this may well be particularly challenging. and there is no way of knowing whether a sample of The angel market is largely invisible and fragmented. angels is representative or not. Caution is therefore There are no directories of angel investors and their needed when drawing conclusions concerning an investments are not recorded in any systematic way. angel market. However, the New Zealand survey did Even where individuals may be known or thought to provide useful information on deal size, number of be angel investors details of their investments are investments, levels of syndication, industry sectors, usually not disclosed. Many angel investors will be and geographic location of investors and investee unknown. Some of those individual and networks companies. During the interview process, more that are known may well exaggerate their actual level “invisible” investors became known to the survey of activity (particularly networks seeking to recruit as they were revealed as syndicate partners of the members to increase membership fee income or already known investors. A number of previously encourage more entrepreneurs to pay to apply for “invisible” syndicates were revealed. The survey also funding). Conversely, other investors may wish to addressed the characteristics and motivations of New stay ‘invisible’ and not disclose their investment Zealand investors, enabling policy to be developed activities so as not have to managed large numbers to help identify and motivate new potential of unsolicited applications for funding. investors. The interviews also revealed previously unappreciated barriers holding back angel activity. 121 The implementing partner is the delivery partner, and it is responsible for organizing and delegating tasks, as appropriate, to others they need to partner with. For example, the implementing partner may need to bring in specialists to devise the terms of reference, develop programs, assess potential delivery partners, etc. 122 See Annex 2. Problems with Angel Data for an explanation of the difficulties of developing reliable data relating to angel activity. 123 For example, given that business angels are likely to be turned off by disclosing investment information to tax authorities, data collection may be conducted by independent and/or private service providers. 124 Ministry of Economic Development. Baseline Review of Angel Investment in New Zealand (Undertaken as Part of the Formation of the Seed Co- Investment Fund). Short-term Recommendation 1: Data Collection and Mapping 56 Table 13. Regular studies on business angel activities Country Studies Link •• Taking the pulse of the business angel market, Be Angels 2000 Belgium – 2015, Deloitte, 2015 www.beangels.com •• Be Angels annual report 2017 http://www.estban. Estonia •• Annual activity reviews, 2013 – 2017 ee/about/annual- reviews/2017 •• Taking the pulse of the Angel market, Deloitte, 2014 •• A Nation of Angels, Assessing the impact of angel in-vesting UK across the UK, ERC 2015 •• Business Angel Spotlight, Research by IFF Research and RAND for BBB together with UK Business Angels November 2017 Other examples of regular general studies •• Split between initial and follow on investments. of countries’ angel activities are available for Belgium, Estonia, and the UK. Table 13 provides •• Number of individual investors in each deal (level of syndication). information on these studies. •• Detail of any co investment with venture capital Obtaining information on angel investment and other funding sources (grants, bank loans activity in the Czech Republic will be problematic etc.). until the industry becomes more structured (e.g., when there are more formal networks). As a result, •• Gender of investors (to measure female angel participation). it may not be possible to obtain accurate and up- to-date data on angel investment for some time. •• If investors are part of a network / group. However, it is likely that once a regular (annual) report •• Industry sectors. begins to be prepared, data collection methods and participation rate will improve. Other potential policy •• Geographic location. interventions, such as support for BANs, CoFunds, •• Details of exits (positive and negative) would also and taxation incentives are also likely to provide be useful. access to better data. Initial attempts for data collection should include Apart from survey interviews, another plausible the following indicators: data collection method is compilation of secondary data sources. For example, an annual •• Number of investments. quantitative data collection and analysis on the angel •• Total value of investments. market in Scotland has been commissioned by the Scottish Government since 2003 in the form of the •• Average deal size. Risk Capital Market in Scotland Annual Report125. It is •• Form of investment (equity, debt, convertible “intended to identify the contribution made by risk note, etc.). capital investment to business ventures in Scotland •• Percentage of ownership taken by investors. and to provide evidence for the development and evaluation of policies to stimulate the market”. Unlike •• Stage of company (pre-seed, seed, etc.). the previously mentioned reports, the data in the Young Company Finance, “The Risk Capital Market in Scotland: Annual Report 2016,” (March 2017), http://www.evaluationsonline.org.uk/evaluations/ 125 Documents.do?action=download&id=835&ui=basic. 57 Short-term Recommendation 1: Data Collection and Mapping Scottish report is built from press reports, winners Activity 1.2: Taxpayer base of grants and business plan competitions, pitching events, tenants of science parks and incubators, analysis and companies supported by government Policy Objective departments and agencies. The Government’s Determine scale of potential angel investors company registration database is checked for all these companies, to establish the dates of any returns Priority level indicating the issue or allotment of shares, which High – precedes other recommendations and future usually represent new investment. policy development Once some understanding of the existing levels Implementing partners of angel activity is gained, this can address Statistics Office, Technological Agency, private data questions related to the appropriate focus, and service provider firms, NAA changing focus of policy, such as: •• The extent to which it is necessary to stimulate As part of the annual data collection process, an angel investing generally; analysis of the tax base should be conducted to determine the number of individuals who appear •• Measures to encourage investment in particular to have a taxable income of a sufficient level to sectors (e.g. life science); potentially engage as an angel investor. This •• Measures to address regional shortfalls of funding data can be used to set reasonable expectations (e.g., outside Prague); regarding the likely total pool of investors and create an estimate of their annual investment value. To •• Measures to increase the effectiveness of ensure anonymity of these potential angel investors, investment, for example by encouraging individual names should not be recorded, and only increased syndication. the magnitude of this target pool and their average characteristics. For example, the taxpayer base Further, up to date data on business angel activity analysis may take into account other demographics, can inform the effectiveness the individual policies such as age, educational base, and gender as these are having in achieving the desired stimulation of the are all characteristics that tend to define the likelihood market. The availability of annual data also gives the of an individual being an angel investor126. While opportunity to promote the industry through events income levels are a reasonable initial indicator of and press reports. potential capacity this measure alone is not sufficient. Early stage investing is extremely risky. International practice suggests that an investor should only invest amounts they can afford to lose entirely. A more accurate indicator therefore is marginal disposable income, quantified after deducting all living expenses, mortgage and loan payments, “safe” savings and investments, and pension contributions. Age may be considered as a high-level filter, as older individuals tend for example to have lower levels of family dependency. The analysis may also be split on a geographic basis to identify regions where specific shortfalls to potential demand may require additional policy intervention. The Statistics Office, Technological Agency, NAA, and other private data service providers could serve as implementation partners in this endeavor. 126 See Annex 8. Business Angels: Myths and Reality for a review of angel characteristics Short-term Recommendation 1: Data Collection and Mapping 58 The data will inform the policies required to Activity 1.3: Demand-side data stimulate the total investment value estimated as needed from the demand side analysis. Different collection support structures and stimulus may be required Policy Objective to encourage equity crowdfunding investors and Credible assessment of demand side needs business angels. The UK Government, for example, while offering the same tax incentives to both equity Priority level crowdfunding investors and business angels have High – precedes other recommendations and future different requirements for different activities and policy development types of investors reflecting their desire to offer higher protection to less sophisticated retail investors127. Implementing partners Individuals with less than €10,000 a year to invest Statistics Office, Technological Agency, local are likely to be best advised to consider equity intermediaries, private data service provider firms, crowdfunding or some form of pooled investment NAA fund in order to be able to make the number of investments needed to adequately mitigate risk. The supply side data on angel funding needs to be complemented with an assessment of Consideration could be given to establishing a credible demand side needs. This needs to be on pooled investment fund structure similar to the a deeper basis than for example the Czech Startups UK Enterprise Investment Scheme (EIS) funds Report 2016130, which was based on around 141 self- enabled by the UK Government128. These are selected respondents to an online survey. This survey professionally managed funds essentially making was open to all entities which identify themselves as “angel type” investments on behalf of passive startups, and there was no opportunity for them to be investors and those who have insufficient funds to screened to determine for example their suitability make direct investments themselves. The investors for angel or venture capital investment. It would be in the funds benefit from the same tax incentives as appropriate for the Czech authorities to commission directly investing business angels. a more rigorous annual demand side survey. The Risk Capital Market report prepared for the Scottish Individuals with larger amounts to invest on a Government serves as a good model131. regular basis (say from €10,000 upwards), and who wish to be more active in the investment Available estimates132 of the equity financing gap process should be encouraged to become a need to be brought up-to-date based on current member of an angel network or group. Provided levels of e.g. entrepreneurial intention. These there are a sufficient number of members willing estimates also need to take into account the impact to syndicate in each deal, this level of investment of the continuing expansion of business incubators capacity could allow an individual to build up the and accelerators. recommended 10 to 15 minimum investments over a 3 to 5 year period129. While available data and interview results suggest an over-concentration on the ICT sector, a policy Geographic analysis of the tax base will help focus on encouraging investment beyond the ICT to identify whether there is a sufficient pool of sector will only be appropriate if analysis shows individuals likely to have sufficient disposable that there is likely to be investable deal flow to income in a region to create the critical mass match the created demand. Given the finding that necessary for such a network to be sustainable. there are only a small number of good university The ability to grow to 25 or more members is spin-offs to which investments could be channeled desirable, although this depends on individual (attributed in significant part to inability of public investment capacity. entities to support commercialization of plans in 127 Equity-based crowdfunding platforms are required to obtain a license or to have regulated activities managed by authorized parties. They are also required to have a screening process in order to sort sophisticated and non-sophisticated investors. A “non-sophisticated” investor is not allowed to invest more than 10 percent of their net investable asset through crowdfunding platforms. 128 Syndicate Room, “What is an EIS fund?” https://www.syndicateroom.com/crowd-investing/eis-funds. 129 These minimum numbers will depend on the required deal size, which in turn will be dependent on local costs of developing a business, availability of follow on funding, co-funding, and the nature of the industry sectors. 130 Maria Staszkiewicz and Daniela Havlíková, “Czech Startups Report 2016.” 131 “The Risk Capital Market in Scotland: Annual Report https://lincscot.co.uk/wp-content/uploads/2017/10/The-Risk-Capital-Market-in-Scotland-Annual- Report-2016.pdf. 132 See: Czech Ministry of Trade and Industry and Deloitte Advisory s.r.o. Ex Ante Assessment of Financial Instruments of the Operational Programme Enterprise and Innovation for Competitiveness 2014-2020, 2015. 59 Short-term Recommendation 1: Data Collection and Mapping research centers),133 creating more available funding Specific areas of soft development support can will in itself not be effective. The structural issues need also be identified. These might include addressing to be addressed first to free the flow of investable specific investor ready134 issues (as opposed to the companies, allowing appropriate structures and more traditional “investment readiness” programs), sources of funding to be developed to match the the need for improved promotion of angel investing needs of these emerging companies. as an investment class, or the introduction of training and support to “professionalize” the activities of local While there is an apparent particular weakness of investors. Policies to support such activities are both supply and demand outside the ICT sector, wider simpler and less expensive to implement than, for demand issues should not be ignored. While ICT example, tax incentive schemes or CoFunds, but may investment is relatively strong, this does not mean have significant impact on the volume and efficiency it is at its full potential. It is appropriate to consider of angel activity. policy measures to increase the credible demand for finance in all sectors by stimulating various classes of inactive founders to apply for equity funding: •• Reluctant applicants: Founders who are equity averse, typically due to concerns of sharing control Data collection and mapping of the business. Policy measures to address this summary will include education, highlighting the benefits of equity finance (faster value growth) and explaining By bringing a detailed analysis of both the supply and / demonstrating how equity investment works in demand side together, it will be possible to better practice, including founder success stories. determine the level and nature of interventions •• Discouraged applicants: Founders who do not needed to bring the two into balance without apply as they do not know how to or have fears unnecessary market distortions. Specifically, this of being rejected. Policy measures would include section recommends the following: improved signposting. •• Commission time-series data on angel investment •• Unprepared applicants: Founders who wish activity to be updated annually (similar to existing to obtain finding, but do not have the skills or venture capital market data). collateral (business plans, financial forecasts, •• C onduct a taxpayer base analysis on an annual pitch decks) to effectively apply, or who do not basis to engage potential investors as business understand the real needs of investors (levels of angels. growth required to achieve target rates of return). Policy measures include enhanced investor ready •• Commission a demand side survey targeting and investor engagement training and resources. startup founders/entrepreneurs on an annual basis. A proper market analysis will ascertain the extent to which each class of inactive founder represents a significant block on demand. Resources can then be appropriately allocated to address them, by founder class or geographically. 133 Czech Ministry of Trade and Industry and Deloitte Advisory s.r.o. Ex Ante Assessment of Financial Instruments of the Operational Programme Enterprise and Innovation for Competitiveness 2014-2020, 2015, page 53. 134 The difference between investor ready and investment ready is set out in Annex 6. Investor Readiness. Short-term Recommendation 1: Data Collection and Mapping 60 MEDIUM-TERM RECOMMENDATION 2: PROMOTION AND MARKET STRUCTURING The development of an effective angel investment A number of governments have introduced market is inhibited by the general lack of policies to support the establishment and knowledge about the nature and operations of operation of a national umbrella organization business angels. Significant misunderstanding exists designed to facilitate the development of regarding the typical profile of the individuals who a structured angel market. While each varies become angel investors, the amounts they invest, according to local circumstances, they all have the the ages and stages of companies they invest in, and same general objective of increasing the number, even their underlying motivations. Individuals do not capacity, and effectiveness of angel investors. In some know they can be an angel investor, or how to start. well-developed markets, such as the US, national Founders do not know where to find them, whether associations have been formed by existing (and their business is suitable for investment, or what is often numerous) regional angel networks. The US the best way to attract investment. Government face Angel Capital Association (ACA) was initially funded difficulties in engaging with an informal and largely by the charitable Kauffman Foundation as part of invisible market. Few individuals who are active as their mission to support entrepreneurship. Where angel investors have had access to training, support angel investing is less developed it is appropriate materials, or interaction with other angels to learn for a national association to be seen as an economic and develop best practice. delivery mechanism and, at least initially, be funded by government. The first national association, LINC Scotland, was formed in 1993 as an enterprise agency by the Scottish Government. Activity 2.1: Launching a The Czech Government could seed fund the establishment of an NAA with the remit to national angel association facilitate an increase in the capacity and capability Policy Objective of business angels in Czech Republic. Its role Increase number of business angels (market would be to facilitate the development of the market capacity), capability of angels, and connection through enabling frameworks, implementation between investors and founders support, information dissemination, knowledge transfer, and public policy development. It would Priority level have responsibility for identifying existing active High – precondition to address supply-side issues in angels and encouraging them to become more angel investing visible, of providing information and signposting to those wishing to become angel investors, and Implementing partners as a source of support. Support measures for Government (e.g., CzechInvest, Technological angel investors include the provision of standard Agency, JIC), investing community documentation, training materials, and links to other angels (domestic and international). Its task would be Launching a Czech NAA could help address supply- to increase the number of active angels investing in side issues, including: lack of information that one the Czech Republic, increase the amount invested can be a business angel, lack of business angel- by active investors, and increase the effectiveness related skills and experience, and lack of visible of the investments made. business angels. A Czech NAA would help improve As a “market maker”, the NAA would not itself the efficiency and effectiveness of the existing hold pitch events but rather direct potential market, improve coordination and linking of existing investees to its members. Members would be made investors, provide better information, signposting, up of individual angels, angel funds networks, and and accesses to training and international practices. syndicates. It would also signpost those wishing to CzechInvest, Czech Technological Agency and/or JIC become angels to those of its members looking to may serve as implementation partner and possible recruit new angels. It would have a specific objective host/incubator of the Czech NAA. Leveraging private of assisting the development of new angel networks sector players in the day-to-day operations of the and syndicates nationally. As such it would provide NAA could reduce the risk of it being perceived as training advice and template documentation to another government body or a bureaucratic body. individuals and organizations wishing to establish investment networks and syndicates. It would also have responsibility for promoting angel investment in the media. Medium-term Recommendation 2: Promotion and Market Structuring 62 The HBAN established by Enterprise Ireland in Recommended tasks for NAA 2009 could serve as a good model for the NAA135. The HBAN model is relevant given the very early Host awareness raising activities at government stage of development of the Czech angel market level and the need for government financial support. The model allows the Government to set the framework, •• Place angel investing at the core of enterprise and economic development thinking by increasing objectives, and targets, while delegating delivery to the profile and awareness of business angel a private sector contractor who can be appointed investing amongst key decision makers. on a rolling contract based on performance (HBAN is described in more detail in Case Study 1: HBAN •• Host an annual high-level round-table event Business Angel Network Ireland). with ministers, senior officials, and advisers from the Government, and representatives from the The Czech NAA could potentially become business angel community. The theme of the a member of BAE 136. BAE is the European events should be ‘dialogue and discussion’ Confederation of Angel Investing, representing (not lobbying/promotion) in order to develop the European national business angel federations a relationship of trust and commitment on both and trade associations. BAE works with national sides, and to inform strategic policy making. associations to promote the growth of the angel market in Europe. Its members include the national •• Host an annual meeting between economic development practitioners and active business associations of the most developed angel markets in angels to facilitate mutual understanding and Europe, including Germany, France, Spain, and the help inform the practical design and delivery UK. BAE can give practical support and guidance for of economic development interventions on the development of the Czech NAA. the supply and demand-side, ensuring those responsible for policy and execution are fully informed of business angel thinking and activities. •• Appoint a chairperson of the NAA to act as a national champion and recognizable figure head for the business angel community. The role would focus on raising the profile of business angel investing and providing expert advice to government. Box 7. Examples of government endorsement of business angel’s activity from the UK Endorsement of angel investing from government can provide a useful signal that this form of investing is credible, legitimate, and appreciated as a driver of economic growth. Visible support from politicians encourages government agencies to consider the value and appropriate support for angel investment when developing policies and regulations. The UK Prime Minister hosted a reception for over 100 representatives of the angel community around the UK in 2012. The Prime Minister emphasized that the Government was keen to hear the ideas from the angel community on what more could be done to support their role in the UK. Also in 2012, the Scottish First Minister hosted a reception to mark the 20th anniversary of the Archangel angel group in Edinburgh castle. In 2014 His Royal Highness The Duke of York initiated Pitch@Palace137, introducing early stage companies to angel investors at St. James’s Palace. 135 For more information, see: http://www.hban.org/ 136 For more information, see: http://www.businessangelseurope.com/AboutBAE/Pagine/default.aspx 137 For more information, see: http://pitchatpalace.com/what-is-pitch-at-the-palace/ 63 Medium-term Recommendation 2: Promotion and Market Structuring Increase the number of Czech business angels •• Highlight success stories from both investors and founders. •• Support the development of new BANs across the country. These may include networks linked •• Aim to promote the idea that angel investing is to universities, incubators, and accelerators. This normal, respectable, celebrated, appreciated, and would include advice on how to set up, manage, “cool”. and fund a new network, and training for network managers. •• Organize an annual Czech angel conference to promote networking and education of both •• Promote the idea of being a business angel to demand and supply sides. Include high quality a wider audience, using promotional activities (well screened) pitching activities. Celebrate including a website with inspirational videos from angel investing through award ceremonies for active angel investors. Angel of the Year, Deal of the Year, etc. Box 8. Example of support to create an angel network: Scotland LINC Scotland, the Scottish NAA, supported the establishment of the angel network Gabriel138 at the University of Strathclyde business incubator. The network lists 16 investors. The network meets six times per year to consider pitches. The network focuses on the very early, pre-seed stages of a com-pany’s development. One idea is chosen to be invested in, nurtured, and supported through to the next level of investment, ideally within six to nine months. The selected firm gets a small invest-ment (minimum £20,000), plus matching funding from Scottish Enterprise. The Strathclyde Univer-sity Incubator, which also houses a larger number of companies that have not received investment from the Gabriel syndicate, provides physical space, business planning, financial projections, market-ing strategy, administrative and secretarial support, and IP advice, as well as mentoring to ensure that the company stays focused on the benchmarks agreed at the outset of investment. The key focus is to prepare the company for follow on founding from larger angel syndicates of venture capital funds. Box 9. Angel promotion An example of an ‘inspirational video’ is “Angel Investing for You” . It was prepared for the EC funded project Early Stage Investing Launchpad (ESIL). The video aims to encourage potential an-gels and further inspire existing angels to become active. It is delivered by a highly experienced angel investor who explains her motivation over the previous 15 years, and her recommendations of the best ways to get started. Box 10. Example of angel celebration: Germany A further example of celebrating angel activity is the German Business Angel Day, initiated in 2001. The 2018 event included a conference and exhibition held in the Hamburg Chamber of Commerce on June 17-18. Discussions by experienced angels covered best practice, deal stories and successful exits, current trends, and benchmarking of the German industry against international examples. Business angels and other early stage finance providers, service providers, commercialization offices, accelerators, and government agencies met for an exchange of ideas, networking, market evaluation and analysis, as well as for maintaining contacts. There was an exhibition area for companies seek-ing finance and a “Hotspot Tour” took place on June 16 ahead of the Business Angel Day in coopera-tion with Hamburg Invest and local accelerators to visit local companies and provide an impression of the investment opportunities in the region. 138 For more information, see: http://www.gabriel-is.com/ 139 “ESIL-Angel Investing, is it for you?” YouTube. Video File. Feb. 14 2018. www.youtube.com/watch?v=p5oP7jwFGkE. 140 ESIL is an EU funded project aiming to improve angel investment market. For more information, see: https://www.europeanesil.eu/About-us_a71. html. Medium-term Recommendation 2: Promotion and Market Structuring 64 Increase the capability and effectiveness of active Support policy development by collecting market angel investors data •• Provide an angel training program with a focus on •• Establish a ‘Business Angel Monitor’, seeking to knowledge transfer on developing a diversified- capture all business angel investment, both the portfolio and exit-focused investing. ‘visible’ market, and as far as appropriate the ‘invisible’ market. •• Develop a program of study visits for Czech business angels to engage with other successful •• Publish an annual report on business angel business angel markets. The objective of the visits investing in the Czech Republic, setting out would be to develop relationships with other the scale and nature of market activity, and places internationally to both generate learning highlighting ‘success stories’. and potentially attract investment interest. Box 11. Examples of government endorsement of business angel’s activity from the UK The UK Business Angels Association, the UK NAA, provides an online training facility for its members141. The course is designed to give guidance and insights into the world of angel investing through experienced angels and professional experts, giving new angels a better understanding of how to back small businesses and helping them avoid common pitfalls and mistakes. Topics covered include: •• How to Approach Angel Investing; •• How to Develop a Comprehensive Investing Strategy; •• How to Choose the Right Business; •• How to Structure a Deal Correctly; •• How to do your Due Diligence and Research; •• How to Build an Effective Exit Strategy. Box 12. Example of a study visit program: New Zealand The New Zealand Angel Association, with sponsorship from New Zealand Trade & Enterprise, has for the past ten years provided financial support for up to 12 New Zealand angels to attend the Amer-ican ACA annual summit. Organizing a group visit by a significant number of individual investors is seen as helping to build cooperation and common purpose within the New Zealand angel communi-ty. The objective is to assist New Zealand angels obtain access to best practice and experience, benchmark their own methodologies and practices, and make contacts who may be useful in assisting the international expansion of their portfolio companies. The 2018 ACA summit was held in Boston and included an international exchange workshop over half a day, attended by angels from 44 coun-tries. In addition to attending the summit, the New Zealand Angel Association arranged meetings with well-known angels from the US and other countries, a tour of the MIT Label Free Research Group, and joined a TiE Scale- up pitch event142. 141 UK Business Angels Association, “Welcome to The Effective Angel Investor: How to get the most out of angel investing,” https://www.ukbaa.org.uk/ effectiveangelinvestor/. 142 A report by one of the New Zealand angels who took part is available at: www.angelassociation.co.nz/wp-content/uploads/2018/05/ACA-Trip-Report- 2018-Phil-Southward-1.pdf 65 Medium-term Recommendation 2: Promotion and Market Structuring Box 13. Example of market data collection: Scotland LINC Scotland, the Scottish Angel Association, publishes a monthly magazine Young Company Finance though its subsidiary LINC Scotland Ventures Ltd. The magazine provides news, comment, and analysis on the Scottish young company market. It lists details of investments (including available details of the company’s activities, the names of the investors, the amount invested, and the advisors involved in the transaction), details of companies that have received innovation and other grants (a way of highlighting potential deal flow to investors), events, and investment exits. The June 2018 edition included details of a new digital development loan launched by the Scottish Government and an article highlighting the work of Strathclyde Universities Entrepreneurial Network (SEN), which comprises the University’s extensive investment, commercialization, and enterprise activities. SEN is dedicated to helping students, staff, and alumni to launch new business ventures, commercialize research, and develop entrepreneurial skills. Young Company Finance is published as a pdf, available on subscription from LINC Scotland Ventures Ltd, www.ycfscotland.co.uk. Box 14. Example of publication of annual angel activity data EstBan, the Estonian Angel Association, publishes an annual review of its activities143. This highlights the growth of angel activity since the network was launched in 2013 with 25 individual members, to over 125 in 2017 who made a combined annual investment of €8.8 million. The report highlights the sectors invested in (39 percent ICT, 12 percent finance and business services, 11 percent creative in- dustries); the investment by stage (57 percent initial investment, 42 percent follow on); the structure of the investments (61 percent equity, 33 percent convertible loan); and the stage of the companies (16 percent pre-seed, 13 percent seed, 41 percent early stage, 29 percent expansion, 1 percent buy-out). The 2018 report highlights that 87 percent of the deals done were by syndicates of investors, with just 13 percent of investors acting independently, a useful educational point. The report pro-vides some motivation to new and existing angels, highlighting some exit data and profitable returns. Build a national angel community •• The NAA should seek to build a national angel community by encouraging cooperation and syndication, reflecting the environment in the most effective angel markets. All angels and angel groups are encouraged to become members of the association and given free access to events and training resources. An advisory group could be established made up of representatives of business angel syndicates and high profile entrepreneurs. The role of the advisory group will be to provide feedback and advice to the NAA. Volunteer members would be appointed for a two year period. Within all of its activities the NAA would seek to be inclusive and supportive of angels in the Czech Republic, and not competitive or controlling. 143 EstBAN, “EstBan 5 Years & 2017 Review!” Medium-term Recommendation 2: Promotion and Market Structuring 66 Box 15. Example of building an angel community: Scotland LINC Scotland hosts and facilitates the Angel Lenders Forum (ALF)144, a bimonthly meeting of the leaders of Scotland’s angel networks and groups. The meeting is divided into two parts, with the first session being devoted to enabling organizations, such as local and government agencies, venture capital funds, and service providers with new products to present and engage with the Scottish angel community. It is not a forum for company pitches. The forum is regularly used by representatives of the UK Treasury and the Financial Conduct Authority to consult with the angel community over proposed legislative and tax changes. Scottish Enterprise uses it to brief angels on developments in economic support programs for SMEs. The second, closed, session is used for the angels to exchange information on present developments in the market, and raise any concerns or opportunities. This engagement has fostered a strong atti-tude of mutual support and increased investment syndication. Support the establishment of business angel have the opportunity to increase their investment networks skills and to mitigate risk. Visible angel networks reduce the difficulty of connecting founders seeking In developed markets, angel investing is evolving capital to investors. Investments made by syndicates from a largely invisible market dominated by of angels in groups tend to be larger, have greater individuals and small ad hoc groups of investors capacity for follow on, and come with a greater who strive to keep a low profile to a more range of advice, mentoring, and other soft support. organized and professional market place in which The availability of experienced angels in structured angel syndicates (sometimes termed ‘structured organizations provides a delivery mechanism for angel groups’) are becoming increasingly government support, such as CoFunds. The EC significant. In such markets, new angels are now described support for creation of a BAN as an most likely to get involved through angel groups important precondition for co-investment schemes147. rather than via the influence of informal relationships, individual endeavor, or emerging online vehicles. 89 The Czech Government could provide initial percent of US angel investors identify prospective funding support for the establishment of angel investments through angel groups145. The reliance on networks on a regional basis. Funding would angel groups to discover investment opportunities is be provided on the basis of competitive tender, particularly prominent among angels who have less provided for a limited period (say three years), than two years of investing experience. subject to annual review against specific targets (such as member numbers, investments reviewed, Angel networks have emerged because investments completed), and provide a maximum individual angels find advantages in working of 50 percent of qualifying operating expenses. together. These advantages include better deal flow, Examples of funding to support the operating costs superior evaluation and due diligence of investment of angel groups is provided by LINC Scotland (funded opportunities, and the ability to make more and via ERDF support), the Belgium Government which bigger investments, as well as social attractions. funds 40 percent of the costs of BeAngels, and the Groups typically range from 25 to 75 members. Multilateral Investment Fund of the Inter-American Angels who are members of networks and groups Development Bank which funds the Xcala program invest more of their wealth than those who are that supports over 40 angel investors networks in not, invest in more individual companies146, and Latin America and the Caribbean148. 144 For more information, see: http://lincscot.co.uk/about-us/ 145 For more information, see: http://www.theamericanangel.org/access-full-report 146 A study of Italian angels showed that being a member of an angel community increases the amount of wealth of individuals who are willing to allocate to angel investing by up to 24% and BAN members tend to have a higher number of companies in their portfolio than non-BAN members (50% of BAN members had in excess of 5 investments compared to just 18% of non-BAN members). Stefano Bonini, Vincenzo Capizzi, Mario Valletta, Paola Zocchi, “Angel Network Affiliation and Business Angels’ Investment Practices,” Journal of Corporate Finance 50 (June 2018): 592-608. 147 European Union, “Fostering business angel activities in support of SME growth.” 148 For more information, see: http://xcala.org 67 Medium-term Recommendation 2: Promotion and Market Structuring Help improve investment efficiency structure deals that align their interests, position the company for future investment and growth, •• The NAA (following the examples of LINC Scotland protect the rights of each party, and reduce some and the National Angel Capital Organization of of the friction inherent in negotiating deal terms. Canada (NACO)149) could develop and publish standard deal documentation to help speed •• The NAA could assist in improving the investor up deal completion, reduce legal costs, and readiness of Czech companies seeking funding promote international best practice. The standard by publishing guidance on how best to approach NACO term sheets150 are designed to develop business angels, and examples of best practice standards that guide investors and founders to pitch decks. Box 16. Example of financial support for angel networks – Xcala The aim of Xcala is to encourage the creation of angel investor networks as well as to professionalize management of the existing ones, helping to guarantee their survival, and economic sustainability. To do so, it provides selected angel investors networks with: (i) training – on-site and online for in- vestors, entrepreneurs, and network managers, (ii) partial subsidy for the development of networks; (iii) participation in specialized events for members of the region’s entrepreneurial and angel invest-ment ecosystem; (iv) the Angel Monitor, a publication that promotes the main results of angel in-vestment in the region and its features, and (v) privileged access to knowledge products and to the “angel network dashboard” to improve networks’ operations. Selected networks must meet the following requirements: a) a minimum of 5 investors with an ac-tive participation within the network; b) in the spirit of the institution there is a mentoring vocation to support and assist entrepreneurs; c) investment amounts per project vary from $10,000 and $1,000,000; d) a methodology to capture new projects (“dealflow”) and/or spread their activities. Financial help (a non refundable grant) consists of a partial subsidy of up to $240,000, to be distrib-uted over a maximum term of four years. Box 17. Example of publication of annual angel activity data Tech Coast Angels is one of the largest and most active angel organization in the US, with 300 members. Since its formation in 1997, members have invested $180 million into 300 companies. They receive a large number of applications for funding from across the USA. To help improve the efficacy of their screening and investment process, they publish extensive advice for founders seeking angel funding. This includes detailed instructions on how to complete and use their standard pitch deck – 12 slides for 12 minutes of presentation and 12 minutes of questions. 1. Company Introduction 8. Financial Projections 2. Identification of Problem 9. Management Team 3. Solution/Technology 10. Product Development Timeline – Milestones 4. Features & Benefits and Use of Funds 5. Business Model – Current Situation/your story 11. Market Validation, Testimonials, Press and how you got here 12. Proposed Deal Terms – Valuation and Exit 6. Market Opportunity – Sales & Marketing Strategy 7. Competition – Feature Comparison Matrix, Barriers to Entry Ensuring applicants hit all the areas considered important by investors significantly increases the applicants’ chances of success151. 149 For more information, see: https://www.nacocanada.com/cpages/home 150 For more information, see: https://www.nacocanada.com/cpages/common-docs 151 The presentation guide is freely available in the group’s web site: https://www.techcoastangels.com/wp-content/uploads/2016/05/SDTCA- Presentation-Guide-2016.pdf Medium-term Recommendation 2: Promotion and Market Structuring 68 Box 18. Example of an investment readiness program in the Western Balkans A recent World Bank study provides evidence on the effectiveness of investment readiness pro-grams152. The five-country randomized experiment in the Western Balkans (Croatia, Kosovo, FYR Macedonia, Montenegro, and Serbia) found that firms which participated in an intensive investment readiness program were scored higher in investment readiness by judges during a pitch event (based on team, technology, traction, market, progress and presentation) than firms that received an online program offering simple investment readiness concepts. These scores also predicted positive invest-ment readiness and investment outcomes over the next two years, such as receiving more media mentions, social media attention, and external financing. The investment readiness program was delivered by Pioneers JFDI GmbH (an Austrian firm experi- enced in providing personalized training and advice to small businesses in the region) and aimed to help founders become investor-ready (i.e., ready to attract and accept external equity financing) through tailored individual mentoring, master classes, and pitch trainings. The intervention included: •• Individual mentoring: Firms were asked about customers, the solution/technology, business model, competitor analysis, market size, and financials which were used to match them to suitable mentors. These mentors involved a mix of traditional teachers and mentors (i.e. business consultants, university and business school professors), successful entrepreneurs (i.e. company CEOs), successful young enterprise investors (e.g. business angel investors, venture capitalists etc.), leading public speakers and pitch trainers, with expertise across dif-ferent sectors and significant business mentoring experience. Mentoring sessions were con-ducted either by phone, video call, or on-site, lasting about 1.5 hours on average. Entrepre-neurs received a total of 30 hours of mentoring. •• Master classes: Master class weekends (for 2.5 days) offered classes and lectures in four loca-tions in key Western Balkan cities. Each master class weekend had a primary theme but also dealt with other topics related to general business education courses (e.g., sales, marketing, finances) as well as soft courses such as team building and body language. Examples of con-tent included “research and networking” for the best business model, “rapid prototyping” (ideation to market validation), and “B2B marketing”. •• Pitch training: These aimed to help entrepreneurs prepare in the two weeks before their pitch day in front of independent judges. The training followed an iterative process: (i) entrepre-neurs uploaded pitch decks for review by a mentor; (ii) pitch practice between entrepreneur and mentor through a video call with mentor feedback on pitch deck and initial oral perfor-mance; (iii) more pitch practice to review progress; (iv) assigning each entrepreneur two ad-ditional mentors to provide more feedback on latest pitch deck version; and (v) assessment of entrepreneurs’ preparedness based on mentors’ feedback. Entrepreneurs could request addi-tional support on body language, slide deck design, and rhetoric with other specialists. 152 Ana Cusolito, Ernest Dautovic, and David McKenzie, “Can Government Intervention Make Firms More Investment-Ready? A Randomized Experiment in the Western Balkans,” World Bank Policy Research Working Paper 8541 (August 2018). 69 Medium-term Recommendation 2: Promotion and Market Structuring Activity 2.2: Self certification of As an example, the “certified business angels” regulation was introduced by the UK Government business angels in 2000. Recognizing the importance of business Policy Objective angels to the development of the economy, the Increase number and effectiveness of business Government introduced specific provisions within angels the Financial Services and Markets Act 2000 that specifically enabled the distribution of “unauthorized” Priority level business plans to certain categories of investors. As a Medium result of this legislation, the restriction on circulating financial promotions (business plans or business Implementing partners plan presentations / pitch decks) does not apply Ministry of Finance (or another public financial to those sent to a business angel association, or to authority)153 a member of such an association. Membership of the association is deemed to provide reasonable A number of countries with developed financial grounds to believe that the members are wholly or markets seeks to protect inexperienced predominantly certified high net worth individuals, investors from potentially purchasing financial or certified or self-certified “sophisticated” investors. products / investments that are inappropriate for their circumstances or which they do not A certified high net worth individual under UK fully understand (sometimes referred to as legislation has signed a declaration stating that “misselling”). It is often the case that advertisements s/he understands the risks involved in accepting for investment products (or “financial promotion”) promotions which are not authorized by the must be reviewed and signed off by a person Financial Conduct Authority and that, during the regulated (or authorized) by the local financial financial year immediately preceding the date in services control authority. That person takes which the certificate is signed, the individual had responsibility for effectively “auditing” all claims either (i) an income of not less than £100,000, or and statements therein, in a similar manner to, and (ii) net assets to the value of not less than £250,000 with the same level of resulting liability, to a formal (excluding principal residence and pension perspective for the listing of a company on the stock provision). market. Under many jurisdictions, a business plan by a startup is technically a “financial promotion”, which, A certified sophisticated investor is an alternative in the absence of other provisions would need to be qualification. Under this, the individual must reviewed by a regulated person, a process that would sign an annual declaration stating that s/he likely be prohibitively expensive. This would severely understands the risks involved in accepting limit the ability of companies seeking angel funding promotions which are not authorized by the to distribute business plans. Other restrictions can Financial Conduct Authority and that s/he: relate to the amount a company can raise from •• has been a member of a network or syndicate of private sources, or the number of investors it may business angels for at least six months prior to the have. Such restrictions can significantly inhibit the date of signing; or operation of an effective angel investment market. •• has made more than one investment in an unlisted It is appropriate that existing and any future company in the two years prior to the date of proposed financial regulations within the Czech signing; or Republic be reviewed to identify any that may •• is working (or has worked in the two years prior inadvertently be causing unnecessary restrictions to the date of signing) in a professional capacity on funding new companies. Where it is not possible in the private equity sector, or in the provision to modify such regulation and to minimize its negative of finance for small and medium enterprises; or effect on angel investing, consideration should be given to providing a specific exemption from such •• is (or has been in the two years prior to the date of signing) a director of a company with an annual regulation to angels meeting certain minimum turnover of more than £1 million. criterion. Such individuals would be referred to as “certified business angels”. 153 The legislation would need to be put in place by the ministry responsible for managing / controlling financial regulations. Once the legislation is in place, no ministry has to do any work since the process is “self-certification”. Medium-term Recommendation 2: Promotion and Market Structuring 70 The term “sophisticated investor” therefore Angel certification needs to only be introduced relates only to an assessment that the individual where the review of financial legislation reveals is “sufficiently knowledgeable to understand existing or potential blockages to a well operating the risks associated with that description of angel investment market. investment”. It is not a test or reflection of the individual’s experience or knowledge of the Potential policy measures such as CoFunds and investment process or ability to make investment tax relief do not need a certification process for decisions. There is no necessity to demonstrate business angels. Rather it is the nature of the activity, knowledge of valuation, due diligence, or deal for example making an investment in a qualifying structuring. It is a test considered equal to that of company, which triggers the tax benefit, not the “certified high net worth individual”, which requires nature of the individual making the investment. no experience of investing whatsoever, and is simply intended to allow individuals to receive unauthorized It is not recommended that business angels be investment promotions. In the case of business required to appear on a register. Angel investing angels, they receive business plans. is a personal and voluntary activity. Angel investors generally value their privacy and independence. The Thus, becoming a “certified business angel” only country known to operate such a centralized merely means that they claim to understand register is Turkey. The requirement to appear on such that the investment they are going to look at is a register is likely to put individuals off becoming an risky. They can receive financial promotions that angel as such individuals often prefer anonymity. An have not been approved by a person authorized unpublished paper recording the experiences of by the Financial Services Authority, and therefore the ESIL project in developing angel capacity across the content of such financial promotions may not European countries suggested that the needs for conform to rules issued by the Financial Services registration in Turkey was an inhibitor to effective Authority. They are accepting that in relation to market development. them “volunteering” to receive such Financial Promotions, they will not have any right to be able to complain to the Financial Services Authority or the Financial Ombudsman Scheme and have no right to seek compensation from the Financial Services Promotion and market structuring Compensation Scheme. summary Self-certification is considered adequate as, should In order to increase both the scale and effectiveness they be misrepresenting their circumstances, the of business angels at the same time, this section only person they are defrauding is themselves. recommends the following: Self-certification also means there is no need for government to be involved in the process. Thus, no •• Launching a Czech NAA (and potentially joining cost is involved for the state. BAE). •• Introducing a self-certification system for business A similar process operates in the US, where angels angels in the Czech Republic. can declare that they qualify as an “accredited” investor. The thresholds are: (i) individual net worth or joint net worth with that person’s spouse at the time of his investment as an angel exceeds $1,000,000 excluding the value of the primary residence, or (ii) an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year. 71 Medium-term Recommendation 2: Promotion and Market Structuring LONG-TERM RECOMMENDATION A: COFUNDS Policy Objective Increase the number of business angels. Encourage A critical characteristic of these funds is that them to invest in a broader range of sectors. Increase they co-invest at the level of the individual deal, availability of follow on funding not at the fund level. In this regard, they differ significantly from existing or previously proposed Priority level funds in the Czech Republic. Co-investing at the Low – there are important pre-requisites that need deal level means that the fund and the private to be established first, such as information flow, an sector invest in the same company at the same existing level of angel activity, and conducive legal time. A private sector investment into a fund that framework conditions for equity financing was otherwise financed by the public sector (the EIF, for example) would not normally be considered Implementing partners a CoFund155. The EC identified a key success factor Ministry of Finance (or another public financial for CoFunds as participation at the ‘deal level’, not authority); NAA at the ‘fund level’156. Co-financing schemes where private investors can participate only at the ‘fund There is increasing use of CoFunds by governments level’ have been found to be less attractive for private to stimulate business angel investing and other investors who wished to be actively involved with forms of early-stage investing. The EBAN 2016 the companies. compendium of CoFunds lists details of these 154 funds in 22 European countries. The primary objective of CoFunds depends on the level of development of the local market. In an CoFunds have been described as providing undeveloped market, the primary objective is likely ‘stretch funding’ to enable more rapid access to to be to seek to create an angel investment market larger amounts of funding in conditions where where previously there was none157. there is an equity gap. Although the specifics will depend upon local circumstances and policy A CoFund for the Czech Republic would likely objectives, CoFunds tend to operate by matching be targeted at addressing the existing general funds in deal sizes ranging from €56,000 up to €2.3 lack of market capacity and follow on funding million. and encouraging investments in less-invested sectors or geographic locations. Introducing CoFunds are also being used to stimulate a CoFund in the Czech Republic can encourage behavioral changes in current and potential more individuals to become angel investors, and investors. CoFunds are seen as a potential tool for existing investors to invest more because they to encourage more individuals to become angel lower their risk by allowing more investments to be investors, and for existing investors to invest more made and providing portfolio diversification. This is because they lower the risk of investments by recommended once the earlier short- and medium- allowing more investments to be made and providing term recommendations are implemented and data portfolio diversification. collected. Based on OECD recommendations, such a CoFund will be appropriate once there is at least a minimal level of existing angel activity158 for the fund to engage with. 154 EBAN, “Compendium of Co-investment Funds with Business Angels 2016,” (2017). 155 It is common for EIF and other public sector-financed funds to require an element of private sector matching funding. This matching funding at a fund level would not normally be referred to as a CoFund. 156 European Union, “Fostering business angel activities in support of SME growth.” 157 If the primary objective is to provide funding to startups it is likely that a simple standard (non-CoFund) structure would be used. 158 OECD, “Financing High-Growth Firms: The Role Of Angel Investors.” 73 Long-term Recommendation A: CoFunds The timing and form of a CoFund for the Czech The Northern Ireland model may be an appropriate Republic will also be informed by the outcome basis for the Czech Republic fund (see Case Study of the data collection and mapping process, the 4: Invest NI CoFund). Launched by Invest Northern ongoing assessment of market development Ireland in June 2011 with initial capital of £7.2 million needs, the budget available, and legal framework (increased to £12.5 million in 2014), the NI CoFund analyses on equity financing. The CoFund can be is managed by an independent professional fund introduced once structures are in place (i.e., NAA) to manager (following tendering processes). The model provide wider market development work and support requires that deals are sourced and structured by to ensure that the CoFund has suitable partners to co- business angels and then taken to the fund for co- invest with. It is likely however that the fund structure investment. In a relatively undeveloped local angel will be similar to that adopted presently in Northern market the fund manager provides assistance Ireland, where a professional fund manager is tasked and support, where required, to help facilitate the with conducting at least a detailed review of the investment process but without leading deals and angel co-investors due diligence and proposed deal making investment recommendations. Specifically, structure. It is likely to be some years before there is the fund manager: a sufficient base of lead angel investors or structures angel groups to allow the effective adoption of the •• Assists private investors with setting out term sheets, discussing valuation principles, and delegated Scottish co-fund model. A more detailed providing guidance on due diligence and the description of the operation of CoFunds is provided investment process. The fund does not do its own in Annex 5. Operation of CoFunds. Moreover, while due diligence, but expects all due diligence done not the scope of this report, deeper legal assessment by the angels to be shared. The fund manager should be conducted and appropriate measures will comment on these documents and guide enacted to ensure successful implementation of a suggested additional work. CoFund. •• Works with firms and investors post-investment Given the existing dominance of individual to plan for follow on investment rounds. “super angels” in the Czech market it is likely that the primary purpose of a Czech CoFund This is intended to provide education and could be to stimulate new angel investors to encouragement to new business angels, as well enter the market rather than to provide additional as the benefits of additional investment cash. The funds to the existing established investors. fund can provide up to 50 percent of the total funding The intention will be to significantly broaden the requirement of each round of funding. This therefore base of angel investors in the Czech Republic and requires equal participation from private investors encourage increased syndication. For this reason, in each deal. the structure of funds used by the EIF’s European Angels Fund (EAF)159 is unlikely to be suitable. The It may be appropriate to focus the Czech fund EAF operates in developed investment markets on sectors other than ICT which appears relatedly (presently Austria, Denmark, Finland, Germany, well provided for at present. The fund could also be Ireland, the Netherlands, and Spain). It co-invests with specifically targeted at the earliest stages of funding, pre-selected individual angels, who must be able to particularly the knowledge creation, idea generation, demonstrate adequate experience and a track record prototype development, and market demonstration of successful investments. This is difficult to do with stages. Further, it may be appropriate to broaden new investors, given that it is likely to take up to 8 the scope of investments outside Prague in order or more years to archive a demonstrable “success”. to spread the benefits of economic development regionally. 159 For more information, see: http://www.eif.org/what_we_do/equity/eaf/index.htm Long-term Recommendation A: CoFunds 74 LONG-TERM RECOMMENDATION B: TAX INCENTIVIZATION Policy Objective Increase the number of business angels. Encourage Tax incentivization is considered an appropriate angels to invest in a broader range of sectors government policy given the exceptionally high risks involved in early stage investing. Up to 70 Priority level percent of angel investments in the US result in a loss Low – there are important pre-requisites that needs to the investor161. to be established first, such as information flow, a conducive risk-taking culture, and conducive legal Policies such as tax incentivization can, however, framework conditions for equity financing only be fully effective within a functioning investment ecosystem. It is not appropriate to Implementing partners launch a tax incentive program until the foundations Ministry of Finance of such an ecosystem have been put in place. Thus, it is recommended that this policy be implemented The tax structure is being used by many countries once the necessary data collection and market to encourage individuals to take on the additional analysis has been completed. This is to ensure investment risks of being a business angel. The that the tax incentive is structured in an optimum EC recently published a report looking at best manner to attract a sufficient level of funding to practices in tax incentive programs for investors in match credible demand, and that it is targeted 36 countries160 from within Europe and the OECD. at the most appropriate industry’s sectors (likely The report concluded that the tax treatment of capital to be knowledge-intensive firms) and stages of gains or losses realized on disposal of an investment development (seed and startup). will influence the risk appetite and decision-making process of a prospective investor. For instance, tax It is recommended that the introduction of a relief for capital gains or the provision of loss relief on tax incentive scheme be preceded by a period a more favorable basis than the baseline tax system of preparation. Preparation includes the general could support the de-risking of investments in young, promotion of angel investment and the facilitation growing, and innovative businesses. of education of potential new investors to enable them to make informed investment decisions. It is Investment tax incentives typically offer investors appropriate to try and ensure that those encouraged some combination of up-front tax benefit, relief on by the tax incentive to make investments have some income generated over the life of the investment, knowledge and understanding of the process. The and relief on gains realized upon disposal of the danger is that without sufficient preparation a tax investment. However, the specifics of how these incentive will encourage “dumb money” to enter schemes operate, and who can access them, vary the market, resulting in inappropriate investments considerably from country to country. being made and potentially significantly distorting the market. The result could be a significant level of Introducing a tax incentive scheme targeting finical loss by investors, resulting in angel investing angel investors addresses lack of market in general receiving a bad reputation, setting back capacity by encouraging wider participation efforts to increase its economic impact. in angel investing. The objective is to change investor behavior, motivating them to invest in An incentive at the time of initial investment is high growth potential companies that may have likely to be the most effective at addressing new a disproportionate positive impact on economic investor risk aversion. This is because the amount growth, as an alternative to relatively safe investments and timing of the tax credit is more certain for the (e.g., stock market, real-estate, etc.). investor. Tax relief on income generated during the holding period is less relevant in the context of venture capital and business angel investments in startups, which may not generate any income in the earlier stages and so be unable to pay dividends. 160 PricewaterhouseCoopers LLP (PwC), “Effectiveness of tax incentives for venture capital and business angels to foster the investment of SMEs and start-ups,” Institute for Advanced Studies (2017). 161 Robert E. Wiltbank and Wade T. Brooks, “Tracking Angel Returns,” Angel Resource Institute (2016), https://angelresourceinstitute.org/reports/angel- returns-full-version-2016.pdf. Long-term Recommendation B: Tax Incentivization 76 The primary financial objective of most angel There are few independent assessments of the investors is to significantly grow the capital value impact tax incentives have had on stimulating of a business, which will result in a capital gain angel investment. Much seems to depend on the on exit. Therefore, the capital gains tax treatment structure of the tax incentive, the nature and form of of an investment will influence the risk appetite of the local investment environment, the effectiveness a prospective investor. For instance, tax relief for of the policy introduction, and the length of time capital gains or the provision of loss relief on a of operation. An assessment of the UK Enterprise more favorable basis than the baseline tax system Investment Scheme (EIS), a tax incentive ranked can support the de-risking of investments in young, in the top five in the EC report, suggested that up growing, and innovative businesses. Tax incentives to 87 percent of the finance provided through EIS reduce the effective marginal cost of investing in is “additional”, i.e. would not have been invested smaller companies. As a result, in theory, more anyway164. This suggests that, assuming a tax incentive investors should be willing to supply more capital of 30 percent of the amount invested, a tax cost of to smaller companies. An incentive provided via the €30,000 on an investment of €100,000 results in up tax system may be seen as similar to an incentive to €87,000 of investment that would otherwise not provided through a grant program to influence the have been made, a leverage of 2.90. A more recent behavior of companies to invest in activities they study suggested that 60 percent of companies would might otherwise consider too risky. not have been able to secure funding without the existence of the tax incentive scheme165. Consideration may be given to specifically using a tax incentive to encourage angel investors to Whenever tax incentives are considered, there diversify their investments into areas other than will be concerns regarding their ‘cost’ to the ICT, and in particular to fund commercialization government, both in terms of the timing of cash of institutional research. A model for this would receipts and potential overall loss of tax revenues. be the UK Government’s focus of tax incentives on The specific impact will depend upon the design “knowledge-intensive firms”, those which are R&D structure of each individual scheme, and such costs intensive, defined collectively in terms of the amount will need to be monitored to ensure the cost / reward spent by the company on R&D, the number of patents is appropriate. A report prepared by accountancy held, and the academic qualifications of its staff162. firm Mazars for FNABA, the Portuguese National Angel Association166 suggests that, depending on The EC report sets out a set of “good practice” the scheme design and the timing of proving the design features for tax incentive schemes163. tax credits to investors, cash flow for government These include: could be positively impacted (i.e., by the time the •• Upfront (at time of investment) relief granted to tax credit is taken by the investor, resulting in the eligible investors. investor paying less tax, the Government may have already received a cash inflow from additional payroll •• Relief on capital gains. and value added tax greater than the value of the tax •• Loss relief granted to eligible investors on more credit given). favorable terms than the baseline tax system. The specifics of how tax incentives are structured •• Targeting genuinely “high risk” high growth and operate, and who can access them, vary potential companies. considerably from country to country. While the •• Targeting equity investment. EC report includes a “top five” tax incentive scheme list (see Box 19), it is important that any scheme for •• Restricting eligibility to the issue of new shares the Czech Republic takes account of the existing tax by the company. structure and the specific market needs identified following the data collection. The “top five” are dominated by schemes that offer upfront tax relief on the amount invested. This shows the importance of 162 A description of the UK government’s knowledge intensive company policy is provided in Annex 9. Knowledge-intensive firms. 163 PricewaterhouseCoopers LLP (PwC), “Effectiveness of tax incentives for venture capital and business angels to foster the investment of SMEs and start-ups,” Institute for Advanced Studies (2017), page 12. 164 Nic Boyns, Mark Cox, Rod Spires and Alan Hughes, “Research into the Enterprise Investment Scheme and Venture Capital Trusts,” PACEC (April 2003). 165 Matt Colahan, et al, “The use and impact of venture capital schemes,” Ipsos Mori (February 2016), https://assets.publishing.service.gov.uk/ government/uploads/system/uploads/attachment_data/file/497288/Venture_Capital_Schemes_report_v11_PUBLICATION.pdf. 166 Mazars, “Study on the impact on the State Fiscal Revenue of tax incentive of 30% granted to Business Angels’ investments,” FNBA (November 2011), http://www.eban.org/wp-content/uploads/2013/09/Study_Mazars_Tax_Break_30-_2011_English_Final.pdf. 77 Long-term Recommendation B: Tax Incentivization subsidizing the cost of initial investment in order to 5. Once the impact of these soft measures is known, influence investor risk aversion. Conversely, the high and the remaining gaps in meeting funding probability of failure of such investments, resulting in demand identified, a tax incentive to address no capital return, never mind a gain, makes offering these gaps can be considered and designed. tax relief on investment returns much less effective. The “top five” are also mostly schemes that target The existing provisions of the Czech tax system direct investment in SMEs and startups, rather may restrict the options available to provide than indirect investment through a fund structure. incentives to invest in targeted high risk This reflects the desirability of encouraging active companies. For example, capital gains on disposal “hands on” investors able to provide expertise to of any securities are tax-free after the securities have companies, not just cash (and recognizing that been held more than three years. This removes the most angel investors want a direct say in making option, as used for example in the UK, of promoting investment decisions, rather than these being left to investments in high risk companies by providing a a fund manager). tax relief on holding a security for three years only The introduction of tax incentives should be seen on such high risk companies. A starting point for the as part of, and integrated with, the wider policy Czech Republic could be to consider allowing any mix for supporting business angel development. capital losses from the sale (or closure) of securities The specifics of implementing a tax policy should be in a high risk company to be offset against income. based upon the outcome of the following preliminary At the present time, such losses can only be offset work: against gains from sale of other securities and cannot be carried forward. Given that there is no tax on gains 1. Collect data to measure, as much as possible, the on securities held for more than three years, there funding gap. seems little opportunity for a business angel investor 2. Use publicity, national angel organizations, and to offset losses in the Czech Republic. other soft measures to increase investment. Finally, the introduction of a tax incentive should 3. Organize angels to invest in groups, as those in be supported with an extensive awareness raising groups invest more. campaign highlighting the existence and benefits of 4. Use a national association and others to educate the tax incentives. This should be run in cooperation the investors so that they make wise and more with the BAA and legal, financial, and accounting effective investment decisions. professional bodies. Box 19. European Commission’s top five tax incentives scheme Rank Scheme Country 1 Seed Enterprise Investment Scheme UK 2 Enterprise Investment scheme UK 3 “Madelin” tax reductions France 4 Social Investment Tax Relief UK 5 Venture Capital Trust UK 6 “INVEST” - Venture Capital Grant (see Case Study 8) Germany Source: PricewaterhouseCoopers LLP (PwC), “Effectiveness of tax incentives for venture capital and business angels to foster the investment of SMEs and start-ups,” Institute for Advanced Studies (2017). Long-term Recommendation B: Tax Incentivization 78 Alternatives to tax incentives tax free grant of 20 percent of the value of an investment into a qualifying company by an angel investor, on investments of a minimum of €10,000 The introduction of any form of tax incentives and up €500,000. The maximum grant per individual can be politically difficult. While the ultimate per year is €100,000. The investment must be held for beneficiary of a tax incentive for investment is the a minimum of three years before exiting (otherwise economy (as a result of increased numbers of high it is repayable). In addition, there is an exit grant, growth potential startups), this can be difficult to consisting of a non-repayable tax-free grant of 25 explain to an electorate who may rather perceive a percent of the profit earned on an exit. This grant tax benefit for “rich people”. The Government is also effectively repaid the capital gains tax that would be likely to resist adding complexity to the tax code. This due under German tax law. may be a particular factor in countries such as the Czech Republic which operates a relatively simple The use of a grant structure may be seen as flat rate tax structure with minimal allowances. This much simpler to implement and manage. It could reluctance to add complexity may at least partially be implemented on a trial basis more easily than account for the lack of examples of tax incentives changes to the tax code, and its budget could be within the CEE region. Of the EU-15 Member States167 controlled by setting a maximum amount that all nine operate tax incentives, compared to just three angels could claim in a year (allocated on a first come of the remaining EU-13 Member States168 (i.e., Malta, first served basis), although this might discourage Poland, and Slovenia—none of these were identified investment after the year’s allocation has been paid in the top five as good practice examples by the out and before the beginning of the next year’s EC). It may also be that the EU-13 countries tend to allocation. It could be paid for from existing budgets try and support investment in other ways, such as by reallocating existing grant programs that do subsidies or loan guarantees (loan guarantees may not achieve the same public / private leverage to not however be particularly effective in supporting companies (if the grant value is set at 20 percent of high growth potential technical companies for whom the investment, every €20,000 of grant would be equity is the more appropriate form of funding). leveraging in €80,000 of private funding), something not likely achieved by existing conventional grants. Using the tax code to provide an investment Alternatively, it may be possible to provide the grant structure may be considered too complex for out of as yet unallocated ERDF. public authorities. It is also not a policy lever available to economic development agencies or regional / city It is also appropriate to ensure a proper analysis government which do not have influence over the tax is used to target the most appropriate market regulations. An alternative would be to introduce an failures to be addressed. Tax incentive schemes only angel investment grant. This would provide a grant provide additional investment when the investment payment to an investor who makes a qualifying would not have taken place in the absence of the investment, rather in the same way as a company tax relief. It is therefore appropriate for government might receive a grant in return for incurring certain to analyze which sectors and geographies they expenditure, for example on R&D. The grant can be particularly wish to target. For example, if the level highly targeted, for example only relating to “life of investment already going into ICT companies is science companies based outside Prague” or “only considered adequate, it would be appropriate to for companies at a pre-revenue stage”. The cost of exclude such investment from the tax advantage. such a grant program can be controlled by setting Similarly, it may be considered appropriate to an annual budget. provide tax incentives only for those investments happening in geographic regions that are particularly An example of such a grant scheme is the starved of funding. A precedent for this already exists INVEST grant introduced in 2013 by the German within the Czech Republic, where certain economic Government for business angel capital. This grant development programs are not operated in the city is described in Case Study 8: INVEST – Grant for of Prague. Business Angel Capital. It provides a non-repayable, 167 EU-15 refers to the pre-2004 Member States: Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, United Kingdom, Austria, Finland, and Sweden. 168 EU-13 refers to the following 13 Member States that joined the EU after 2004: Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, and Slovenia. 79 Long-term Recommendation B: Tax Incentivization Long term recommendation summary In order to increase the number of business angels and encourage angels to invest in a broader range of sectors, this section recommends the following options for consideration: •• Establishing CoFunds. •• Implementing tax incentivization schemes for angel investors. Long-term Recommendation B: Tax Incentivization 80 ANNEX 1 LITERATURE REVIEW ON BUSINESS ANGEL DEVELOPMENT The review of published literature revealed much What appears to be missing from the literature is a support for governments to introduce policies “how-to” manual to guide the initial actions to start and incentives to encourage business angel the process of creating that required “functioning activity. Examples of advocated policies include angel market”. tax incentives, CoFunds, and financial support for angel networks, although there appears to be little There appears also to be very little literature practical advice on how to begin implementation, relating specifically to “developing” or or the considerations to be made as to the timing, “emerging” angel markets. This is perhaps not sequencing, and localization of the differing options. surprising given that in order for something to be As an example, Chapter 4 of the 2011 OECD studied it needs to be identifiable and quantifiable. publication “Financing High-Growth Firms: the Role Thus the majority of studies have focused on the UK of Angel Investors” is entitled “The Role of Policy in (Scotland in particular) and the US. Facilitating Angel Investment”. The chapter describes a number of policy interventions on the supply The majority of policies reported in the literature side policy interventions (tax incentives, CoFunds have evolved in what are now developed support to angel associations, networks, and groups, markets. The OECD paper included interviews with training and development of angel investors) and individuals drawn from 32 countries but included no the demand side (investment readiness). The report angels from Eastern Europe. The 2016 publication notes (page 120) however that: “there needs to be “Angels without Borders” includes entries from 26 some level of organized angel activity, in the form countries setting out how policies and programs of groups, networks, or very active individual angel are supporting angel investing activities within their investors, before certain policy measures can be a nations. None were from Eastern Europe. While the catalyst for further developing the market”. In relation book provides descriptions of the angel markets to specific policies (page 127): “once a functioning within these countries as they exist today there is no angel market has been established, coinvestment description of how they evolved to their present state funds can help in leveraging and encouraging more or information on how the journey to a developed private investment”. market was begun or what interventions worked and which did not. 81 Annex 1. Literature Review on Business Angel Development Academic research initially focused on addressing High level lessons from issues such as “how large is the business angel market” and tried to characterize the behaviors publications of angel investors (attitudes, behavior). Later studies turned to trying to understand how angels make decisions and to assess the impact of Need for flexibility specific government interventions (for example, tax policy). There are numerous academic papers A common theme that emerges from the literature reporting on studies of what angels do and how they on developing angel activities is that there is no make decisions. The 2016 publication “Handbook “one-size-fits-all solution” approach or set menu of Research on Business Angels”169 brings together of interventions. The World Bank guide highlights no less than 14 research papers yet provides little in that in establishing angel organizations a diversity the way of practical “how to” advice. For example, in of models and structures have been successful the chapter looking specifically at BANs it concludes worldwide. that “research on BANs is scarce and concentrates on It is essential that each intervention into each assessing whether the government should support country is tailored to the specific needs and BAN activity (financially)”. There is no guidance as to wishes of that individual group of investors, as which BAN structures work most effectively in differing well as local regulation, custom, and culture that may circumstances, how to finance a BAN, operate one influence structure and day-to-day operations. effectively, or any other practical information. The World Bank has produced a practical guide “Creating Your Own Angel Investor Group”170 Attracting and working with the “right” aimed at “emerging and frontier markets”. people It is based on the Kauffman Foundation’s 2004 publication, “A Guidebook to Developing the Right There is a trade-off between encouraging the Angel Organization for Your Community”, which was development of the angel market and attracting crafted for a U.S. audience. The World Bank publication too many people who are not really angel is designed to address the additional challenges investors. Angel networks that are not initiated by a that angels face outside the U.S., particularly in credible local champion, who is an investor, are rarely emerging economies. In this guide, “angel group”, successful. The need for the initiative to be led by the “angel network”, and “angel organization” are used private sector was highlighted in the OECD report: interchangeably. The guide contains many insights “One of the key success factors for the development into a wide range of practical topics, from carrying of associations, networks, and groups identified out initial community assessments to see if an angel during the interviews, was initiation by local private group is appropriate to group structuring and day players. It is difficult for the government and also for to day operation. well-intentioned foreigners from outside a country or region to “create” an angel market without leadership from local private angel investors.”171 A report on a recent EU funded project172 to develop angel capacity in Europe commented on the existence in a number of countries of what it referred to as “empty networks”. These networks had been started by individuals who themselves were not investors but thought there might be an opportunity to make money running a network or that it might be otherwise beneficial to run a club for “rich people”. These networks often attract service providers and other non-investors as members. 169 Handbook of Research on Business Angels, Edited by Hans Landstrom and Colin Mason, Edward Elgar publishing, 2016. 170 Creating Your Own Angel Investor Group: The World Bank, 2014. https://www.infodev.org/infodev-files/angelgroups_guidbook_final_0.pdf 171 OECD (2011), Financing High-Growth Firms: The Role of Angel Investors, OECD Publishing. http://dx.doi.org/10.1787/9789264118782-en 172 ESIL, Unleashing the potential of early stage investing in Europe, Consolidate Lessons Learnt From Existing Research and On the Ground Experiences, Prepared by LINC Scotland Ventures Limited, May 2017. Annex 1. Literature Review on Business Angel Development 82 Some claim the title to be the NAA of a country. Inhibitors to developing angel investment Unfortunately, the nature of the membership is off- putting to genuine potential investors, who often not It is important to consider the specific local only don’t join, but are discouraged from being an environmental factors that may be inhibiting local angel investor altogether. angel activity before developing policy. These are likely to vary not just from county to country, The report recommended that before engaging but between regions within countries. For example, with a local organization to act as the angel four regional based CoFunds operate within the UK, development champion in any country, a reflecting the differing levels of angel development thorough investigation must be made to ensure in these regions. Potential barriers will include: that that organization has a good local reputation and does represent actual angel investors. Specific •• People factors; data on number of members, number and nature of •• Government and politics; investments made, number of active members etc. should be collected. •• Access to opportunities; •• Legal framework; •• Economic situation; Format of angel organizations •• The entrepreneurial ecosystem. There seems to be general agreement that angels operating in a collective, organized manner are The importance of each factor will differ in each more effective than those acting as individuals. country. An example of the different rankings of One study suggests that being a member of an implementation challenges in some Asian countries angel community increases the share of wealth (taken from a presentation to the World Bank174) is invested by between 16 percent and 30 percent173 shown in Figure 10 below. . Such organized angels tend to have access to a higher number of better deals, a more efficient deal screening processes, can make a larger number of individual deals so spreading risk, and can learn from experienced angel investors. There are however many A holistic approach different models of angel organization, including: •• One-off syndicates of two or more individuals. It is clear that developing an angel community •• BANs, some of which are only introduction cannot be done in isolation, but requires the services, and some of which provide significant development of entrepreneurial activity, and additional services to members. critically the “right type” of entrepreneurial activity. It also requires the development of the •• Business angel groups – private clubs of support community (lawyers, accountants, BDOs individuals who repeatedly invest together. etc.). This needs to be a coordinated and integrated activity, and it needs to evolve a structure and focus There are advantages and disadvantages to as the local market evolves and develops. Policy each form of organization, and within each form implementation must therefore include actions to individual entities can have significant variation develop not only angel activity (the supply side) but in operation. The key is to help local investors find also the demand side (deal flow) and the support the model that best fits their personal objectives side (particularly those looking to provide support and local conditions. Policy proposals need to be and advice to entrepreneurs). aware of and cater for the different options for angel organizations and be able to assist in selection and Problems with the demand side (e.g., availability establishment of the most appropriate for local of quality investable deal flow) is seen as the circumstance. most significant inhibitor to the development of sustainable angel activity, with concerns over this far exceeding any other issue (such as angel training or network organization). 173 Stefano Bonini, Vincenzo Capizzi, Mario Valletta, Paola Zocchi, “Angel Network Affiliation and Business Angels’ Investment Practices,” Journal of Corporate Finance 50 (June 2018): 592-608. 174 A Journey Of Discovery: Business Angel Investing In Emerging Markets, Professor Richard T Harrison, University of Edinburgh Business School, presentation to World Bank, Washington, May 2016. 83 Annex 1. Literature Review on Business Angel Development Figure 10. Angel program implementation challenges in Asia Importance Philippines Thailand Malaysia Vietnam Convince Competitive Weak shareholder 1 foreigners to business Weak deal flow protection invest environment Undeveloped Finding the Unstable political Government 2 entrepreneurial right people environment corruption ecosystem Unprofessional Finding High financial risks Inexperienced 3 entrepreneurs and opportunities increase costs entrepreneurs board members Weak Poor economic Weak legal Takes time to 4 shareholder performance framework restructure a business protection “The critical make or break issue going forward The development of policy is that of deal flow quality. While technical skills for the angels and the group managers are important, without a steady flow of interesting Policy should be focused on the development of investment opportunities the members are likely the market rather than on the provision of direct to become disillusioned and leave the groups. funding to companies176. It is only by encouraging Without exciting investment opportunities no the private sector to enter the market, either as a group is sustainable.”175 result of policy interventions showing that the market is viable, or through subsidies, that market failure can be addressed for the long term. The alternative Angel investing thus depends on good deal is a permanent need for government intervention, a flow. Without interesting companies and exciting continuing need to allocate resources to the market. investment opportunities, enthusiasm among new Policies must therefore be designed to “crowd in” angels can quickly dissipate. The lack of proper the private sector, not crowd it out, and provide preparation of entrepreneurs and their inability government with an “exit” option from permanent to effectively engage investors contributes to a market support. Policy needs to focus on creating perception of poor quality ‘deal flow’, leading to the right conditions to provide an environment the disengagement of new angel investors. It is conducive to private investors177. appropriate therefore for policy to address issues of deal flow quality and “investor readiness” while simultaneously addressing the supply side issues. 175 Donor report for infoDev’s A2F Business Angel Skills Development Project, December 2015. 176 Policy Lessons from Financing Young Innovative Firms, OECD, 2015. 177 European Union, “Fostering business angel activities in support of SME growth,” Guidebook Series: How to support SME Policy from Structural Funds (2015). Annex 1. Literature Review on Business Angel Development 84 Need for simultaneous market particularly acute in under-developed angel markets characterized by largely “invisible” private investors development with limited ability to spend time and money hunting for investment opportunities, and companies lacking A viable early stage investment market requires signposting to investors or specific skills in how to a number of constituent parts to be developed engage them. Again, simply increasing the volume together. It is only after they have been operational of funding available, without providing a structure for some time that investor skills and confidence can within which that funding can be easily connected to be built, financial success demonstrated, and new appropriate investment opportunities, will do little to investors attracted to the market. In addition to a improve overall investment levels. market mechanism to ensure connection between investors and companies, there needs to exist: •• A strong deal flow of investable high growth companies, sufficient to provide critical mass to investor portfolios. High growth firms are •• Informed private investors willing to accept the heterogeneous in terms of level of risk associated with early stage investing. sector •• Private investors organized in such a way as to enable them to collectively have the capital funds Much public policy is concentrated on stimulating and managerial competencies sufficient to make the creation of and investment into ‘high tech’ initial and follow on funding to be able to grow firms. This is based on the assumption that it is these companies to a point of profitable exit. companies that will provide the most significant economic growth. Such a focus is misplaced: •• A network of high quality advisors capable of supporting both the demand and supply side. •• Particularly in emerging investment markets, only a minority of potential angel investors will have a •• Access to an efficient exit market. background in “high-tech”. Public policy should therefore concentrate on enabling these potential All of these elements need to be developed investors to become actual investors, irrespective simultaneously for any one element to survive and of the industry sector they choose to initially invest be effective178. in. The policy objective should be increasing the number of investors rather than dictating the industry sector in which they invest. •• High growth firms are found in all sectors of the economy, not just high-tech sectors180. Focusing The thin market problem policy on just high-tech will likely potentially deprive innovative businesses in more traditional It has been suggested that concerns over sectors that have high growth potential of the inefficient capital markets should not be seen opportunity to raise finance. only in terms of the supply or demand for finance. A key contributor to the problem is likely Public policy should therefore focus on stimulating to be one of ‘thin markets’179. Thin markets are investment in high growth potential companies characterized by a limited number of investors with irrespective of their industry. appropriate support skills and a small number of high growth potential businesses having difficulty A bibliography of references used during the finding and connecting with each other. This issue is literature review is listed below. 178 “Bridging The Equity Gap For SMEs In Scotland”, Gordon McLaren, Nelson Gray, New Horizons in Graz, Best Practice IV Conference, DG REGIO, 2006. 179 From Funding Gaps To Thin Markets, NESTA, 2009. 180 High Growth Firms in Scotland, Colin Mason, Ross Brown, 2010. 85 Annex 1. Literature Review on Business Angel Development Additional Resources: Public •• Lerner, The Consequences of Entrepreneurial Finance: Evidence from Angel Financings. Policy Literature on Business Angel Stimulation •• Lerner, The Globalization of Angel Investments: Evidence across Countries (NBER Working Paper No. 21808). •• Gianni Romanı, The development of business angel networks in Latin American countries: the •• Mason, The Transformation Of The Business Angel case of Chile, 2012. Market: Evidence From Scotland, 2013. •• Mason, Public Policy Support for the Informal •• NESTA, Why Business Angels Are More Important Venture Capital Market in Europe: a Critical Than Ever before, 2013. Review, 2009. •• 1NESTA, The Rise of Group and Online Investing, •• Hwang, The Rainforest: The Secret to Building the 2013. Next Silicon Valley, 2012. •• OECD, Financing High-Growth Firms, the Role of •• The World Bank, infoDev, Creating Your Own Angel Investors, 2011. Angel Investor Group, 2014. •• Stacy Kanaan, Overview of Effective Policy •• May / LIU, Angels without Borders: Trends and Implementation of Angel Investor Tax Credits, Policies Shaping Angel Investment Worldwide, 2015. 2016. •• Directorate For Science, Technology And •• University of New Hampshire: Angel Groups: Innovation Committee On Industry, Innovation Developing a Regional Economic Development And Entrepreneurship, Policy Lessons From Strategy for Robust Seed Capital Ecosystems for Financing Young Innovative Firms, 2015. Entrepreneurs, 2016. •• NGA Centre for Best Practices, State Strategies to •• Angel Resource Institute: Angel Investing Basics Promote Angel Investment for Economic Growth, for the Startup Community, 2016. 2008. •• ACA, Angel Investors – Critical Initiators of Startups •• UKBAA, Nation of Angels, 2015. and Job Creation., presentation, 2013. •• Ministry of Economic Development, New Zealand, •• Josh Lerner, Best Practices in Creating a Venture Baseline review of angel investment in New Capital Ecosystem. Zealand, 2007. •• Lerner, Boulevard Of Broken Dreams, 2009. •• NESTA, Increasing “The Vital 6%”, Designing Effective Public Policy to Support High- Growth •• Cumming, The Oxford Handbook of Firms, 2014. Entrepreneurial Finance, 2012. •• Josh Lerner and Antoinette Schoar, Rise of the •• Joseph R. Bell, Examining the Effectiveness of Angel Investor: A Challenge to Public Policy, State Funded Angel Investor Tax Credits: Initial September 23, 2016. Empirical Analysis, 2013. •• Josh Lerner, Stanislav Sokolinski, Antoinette •• B e rt h o l d , N o r b e rt ; G r ü n d l e r, K l a u s , Schoar, Karen Wilson, The Globalization of Angel Entrepreneurship and economic growth in a Investments: Evidence Across Countries, February panel of countries, 2012. 2016. •• EVCA Venture Capital White Paper, closing gaps •• Taking the pulse of the business angel market Be and moving up a gear: the next stage of venture Angels 2000 – 2015, Deloitte, Be Angels, 2016. capital evolution in Europe, 2010. •• Angels Without Borders, Trends and Policies •• Centre for Strategy and Evaluation Services, Shaping Angel Investment Worldwide, John May Evaluation of EU Member States Business Angel & Manhong Mannie Liu, 2016. Markets and Policies, Final Report, 2012. •• Angel Network Affiliation and Business Angels’ •• VOX, New Cross-Country Evidence on the Role Investment Practices, Stefano Bonini, Vincenzo of Young Firms in Job Creation, Growth, and Capizzi, Mario Valletta, Paola Zocchi, Journal of Innovation, 2014. Corporate Finance 50 (June 2018): 592-608. •• EC, Fostering Business Angel Activities in Support of SME Growth, 2015. Annex 1. Literature Review on Business Angel Development 86 ANNEX 2 PROBLEMS WITH ANGEL DATA When setting out to develop policy to support •• Most business angels (and most of their angel investment it is appropriate to base it on a investment activity) are invisible and so measure of existing and potential activity levels. virtually impossible to identify and track over Having appropriate levels of data will assist both in time183. The ability to discern investment activity determining activities within the target geography on a systematic comparative longitudinal basis is and within comparative geographies. therefore restricted to the “visible market”. This tends to comprise angel networks and syndicates Unfortunately, there are no reliable sources of and data from surveys of individual business angels data relating to angel activity. When asked about who happen to have come to the attention of the the level of angel activity in the UK, Jenny Tooth, CEO survey. Some surveys attempt to compensate for of the NAA of the most developed angel market in this by making an assumption regarding what is Europe, the UK Business Angels Association (UKBAA) the likely relationship between the visible and said “we just don’t know”181. invisible components of the market. EBAN for example uses the assumption that the visible There are significant difficulties with the data that market (that which they can identify) represents 10 is reported on business angel activity, creating percent of the total in each country184. In practice significant risk when making policy decisions. These this percentage will be dependent on the level problems include: of angel organization and data collection in each •• The definition of “angel investor” varies country. In developed markets such as the UK, among surveys. Many surveys do not provide France, and Germany, the visible market is likely to any definition of the nature of the investor for be far higher given the prevalence of visible angel which data is being collected. As a result, it may organizations at the regional and national level. not be clear that respondents are using the same definition. This makes comparison between countries difficult182. 181 Jenny Tooth, CEO of UKBAA at the launch of the Welsh Development Bank Angel Co Fund. May 2018. 182 “Fools Gold?”, The Truth behind Angel Investing in America, Scott Shane, 2009. 183 Annual Report On The Business Angel Market In The United Kingdom: 2008/09, Colin M Mason, Richard T Harrison, June 2010. 184 EBAN Statistics Compendium, European Early Stage Market Statistics, 2016, page 8. 87 Annex 2. Problems with Angel Data •• Survey data tends to be biased in relation to the •• Angel investment research suffers significantly nature of investors sampled, simply because from survivorship bias. Investors who have they are the angels that can be easily identified. failed and ceased to be angels are generally The fact that they are visible does not mean that not sampled. Surviving and successful investors they are necessarily the most active or experience are over sampled. investors. Many angels are not members of groups or formal networks185. An example of this •• Angel investment research suffers from “backfill bias”. When completing a survey or sort of sampling bias is seen in the Business Angel reporting upon their actions and achievements, Finding (BAF) report “Understanding the Nature many will tend to report only what they want to and Impact of the Business Angel in Funding report and the most likely to report the results that Research and Innovation”186. This claims to be a make them look good. study of European angel activity but of the 592 survey responses 29 percent were from France, 18 •• Due to the difficulty of identifying individual percent from Germany, and 7 percent from each (solo) angels (as opposed to those in groups), of Belgium and Portugal. Just 5 percent came larger deals and deals involving multiple from the UK, which has the largest visible angel angels are more likely to be reported accurately market in Europe (15 percent), and 6 percent from but are likely to be over represented. This is Spain, which represents 10 percent of the visible likely to bias data regarding the average size of market. France represents just 6 percent of the deals done, and probably the industry sectors (as visible market187. investments in some sectors, particularly those that are IP heavy such as life science tend to •• In the US, most angel data comes from angel require higher levels of funding than for example groups who are members of the ACA. There is service companies). a resultant bias towards the type of angels and the type of investments done by such groups – i.e. •• One of the most common forms of selection “accredited” investors doing equity investment. bias in angel investing is the focus on exited By other definitions of “angel”, as much as 40 investments. This is because data on exited percent of investment may be by way of debt investments is likely to be much easier to gather (i.e. simple lending, not convertible debt)188 (e.g. news releases related to IPOs, sales, etc.). Studies that examine only exited investments are •• Many investors simply do not respond to a not representative of the overall returns to angel survey (non-response bias). Most researchers investing. believe that angels who do respond to surveys have done better than the “average” angel investor189. Angels who invest in failed projects While therefore it is desirable to use available data are unlikely to take the time to publicize the fact to support the development of policy, extreme to researchers. The response rate of 592 usable care is needed to understand the difficulties answers used to generate the BAF report needs involved in generating all such data. Before to be considered in relation to EBAN’s estimate of using data to support a proposed policy measure there being 321,500 European angels, a sample it is appropriate to investigate the specific sampling size of 0.18 percent. methods and definitions and response rate and size of each data set. •• Surveys of angel returns frequently fail to distinguish between equal and value -weighted returns. Thus if an angel obtains a 2X return on a £10,000 investment in one year (a 100 percent net return) and earns zero on a £100,000 investment that same year (for a 0 percent return) then the equally weighted average is a return of 50 percent, while the value weighted average is only 9 percent. 185 “Fools Gold?”, The Truth behind Angel Investing in America, Scott Shane, 2009. 186 Understanding the Nature and Impact of the Business Angel in Funding Research and Innovation, A study for the European Commission, INOVA=, 2018. 187 EBAN Statistics Compendium, European Early Stage Market Statistics, 2016, page 11. 188 See “Fools Gold?”, Scott Shane, 2009. 189 The Oxford Handbook of Entrepreneurial Finance, Douglas Cumming, 2012, page 412. Annex 2. Problems with Angel Data 88 ANNEX 3 VENTURE CAPITAL DEFINITIONS When reviewing comparative data and defining Private equity policy it is appropriate to ensure clarity when using the various terms private equity, venture capital, corporate venture capital, and business The term private equity is often used to refer angel funding. Not all “venture capital” is the same, to the specific later stage funding involving and not all is relevant to the early stage. Although the buyout capital, growth capital, replacement term “private equity” is used as a general catch all capital, rescue/turnaround and buyouts. “Private description for forms and stages of funding provided equity funds” are often focused on refinancing and to enterprises not quoted on a stock market (including restructuring of existing assets (rather than the venture capital, growth capital, replacement capital, creation of new assets). Governments very rarely rescue/turnaround and buyouts), the term is also, intervene directly to promote or engage in private confusingly, used to reference later stage investing equity. Private equity investing is largely focused (post venture capital). on management buy-outs, buy-ins, and other later stage development finance. The term is primarily used to make a specific comparison with venture capital activity. In the USA, the private equity industry is clearly separated from the venture capital industry. In Europe and elsewhere, venture capital and private equity terms are often used interchangeably, thereby often promoting confusion. Buyout capital, growth capital, replacement capital, rescue/turnaround, and buyouts represent some 91 percent of all European private equity. Just 9 percent is classified as venture capital. 89 Annex 3. Venture Capital Definitions Box 20. Investment stage definitions Funding provided before the investee company has started mass production /distribution with the aim to complete research, Seed product definition, or product design, also including market tests and creating prototypes. This funding will not be used to start mass Venture Capital Transaction production/distribution. Funding provided to companies, once the product or service is fully developed, to start mass production/distribution and to cover initial marketing. Companies may be in the process of being set Start-up up or may have been in business for a shorter time but have not sold their product commercially yet. The destination of the capital would be mostly to cover capital expenditures and initial working capital. Stage of investment Financing provided for an operating company, which may or may Later stage not be profitable. Late stage venture tends to be financing into venture companies already backed by VCs. Typically in C or D rounds. A type of private equity investment (often a minority investment) in Growth relatively mature companies that are looking for primary capital to Capital for mature companies capital expand and improve operations or enter new markets to accelerate the growth of the business. Financing made available to an existing business, which has Transactions Rescue / experienced financial distress, with a view to re-establishing Turnaround prosperity. Replacement Minority stake purchase from another private equity investment capital organization or from another shareholder or shareholders. Financing provided to acquire a company. It may use a significant Buyout amount of borrowed capital to meet the cost of acquisition. Typically by purchasing majority or controlling stakes. Source: Invest Europe. Venture capital Venture capital is a subset of private equity. Invest Europe (formally known as EVCA), reported Venture capital refers to equity investments made that private equity investing in Europe190 amounted for launch (seed), early development (start-up), to €71.7 billion in 2017. This was split between: or expansion (later stage venture) of business. The investment can include equity, quasi-equity, mezzanine, unsecured debt, and secured debt. 190 Europe includes: Austria, Baltic countries (Estonia, Latvia, Lithuania), Belgium, Bulgaria, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, Netherlands, Norway, other CEE (Bosnia Herzegovina, Croatia, FYR Macedonia, Moldova, Montenegro, Serbia, Slovenia, Slovakia), Poland, Portugal, Romania, Spain, Sweden, Switzerland, Ukraine, United Kingdom. Annex 3. Venture Capital Definitions 90 Table 14. European private equity investment by stage 2017 Value of % of total No of Average investment Stage of Investment Investment (€ Invested Companies Size (€million) billion) Buyout funding 51.2 71.4% 1,171 43.7 Growth capital 11.5 16% 2,107 5.5 Rescue/Turnaround 0.4 0.6% 68 5.9 Replacement capital 2.2 3.1% 94 23.4 Seed venture capital 0.6 0.8% 1,081 0.6 Start up venture capital 3.5 4.9% 2,193 1.6 Later stage venture capital 2.3 3.2% 671 3.4 Total 71.7 100% 7,385 Within venture capital investments, ICT was the Invest Europe analyses investment data according to largest sector, receiving 45 percent of the total the location of the portfolio company. At European venture capital investment amount. This was followed level, this relates to investments in European by biotech and healthcare (23 percent) and consumer companies regardless of the location of the private goods and services (8 percent). equity firm. This showed that for the entire CEE region, private equity investment was just €3.4 billion, with venture capital accounting for just €100m. Table 15. CEE region private equity investment by stage 2017 Value of % of total No of Average investment Stage of Investment Investment (€ Invested Companies Size (€million) billion) Buyout funding 2.7 79.4% 33 81.8 Growth capital 0.6 17.6% 50 12 Rescue/Turnaround 0 0% - Replacement capital 0 0% - Seed venture capital 119 Start up venture capital 0.1 2.9% 46 0.6 Later stage venture capital 9 Total 3.4 100% 257 91 Annex 3. Venture Capital Definitions Corporate venture capital A corporate venture fund is an investment fund formed and funded by a corporation. The purpose is to invest either in companies that the corporation may in the future acquire, or simply in businesses that they think might be interesting investments. Most large corporations, particularly in the tech sector, now have venture capital arms, including the classics such as Google, Microsoft, and similar companies. However other corporations in other industries also have their own venture capital arms, including for example Volvo trucks and Air France. Lockheed Martin recently doubled their corporate venture capital fund to $200 million191. It is estimated that corporate venture capital, which is growing rapidly, now accounts for around 20 percent of all venture capital globally. 191 http://www.defensedaily.com/lockheed-martin-doubles-venture-capital-fund-200-million/ Annex 3. Venture Capital Definitions 92 ANNEX 4 PROGRAM INSTRUMENTS: EARLY-STAGE GOVERNMENT SUPPORT CzechInvest As a subordinate organization of the MIT, Accelerator for Space Development (since CzechInvest has a business development arm Autumn 2016) focused on promoting startup development. •• This program is housed under the ESA Business Apart from a business development mandate, it is Incubation Centre Prague192. also an investment agency focused on attracting foreign direct investments and promoting the •• Type of support: Startups receive up to €50,000 country abroad. It has a total of 13 regional offices for product development, networking opportunity focused on enhancing business development in with the European Space Agency, and support for particular regions. Funding comes from the state or patent/trademark applications. from EU structural funds. Startups from the capital •• Achievement to-date: Supported/currently city are excluded from accessing the EU funds on supporting 10-12 startups. the grounds that other regions need to catch up to the frontier (Prague). Czech Starter193 (since 2010/2011) Since 2011, CzechInvest has created 6 programs dedicated to startups: •• Type of startup: Early stage startups that are registered and have a prototype. •• Type of support: 7 months of mentoring and consultancy services, and support to management, patent applications, finance, etc. The best startups are selected for a 2-week mission in Silicon Valley. 192 https://www.czechinvest.org/en/Our-services/Start-ups/ESA-BIC-Prague 193 https://www.czechinvest.org/en/Our-services/Start-ups/CzechStarter 93 Annex 4. Program Instruments: Early-stage Government Support Czech Accelerator194 (flagship program since CzechLink Start197 2010) •• Targets foreign and local investors to invest in •• Type of startup: Startups which are at least one startups and raise investment opportunities in year on the market. the Czech Republic. •• Type of support: 3-month program in •• Type of support for investors: pre-screening of collaboration with business incubators in Silicon startups/targets, provide information of potential Valley, Singapore, or other cities. Support includes startups based on investor criteria, provide access free use of space, networking opportunities, to database. workshops, and mentoring. Travel abroad provides startups with experience in foreign To address a lack of available and coordinated markets and aims for these startups to conduct i n f o r m at i o n , C z e c h I n v e s t a l s o c re at e d business globally (with no requirement to be CzechStartups.org198 with IBM Czech Republic, Czech-based after the program). Czech ICT Alliance, Association of Small and Medium •• Achievement to-date: 200 companies Enterprise and Crafts of the Czech Republic, and supported, of which 10 have received funding Rockaway Capital. The website seeks to become the from local investors. Success stories include STRV, one-stop of information related to startups: current a digital product agency which Czech Accelerator startup news, events and competitions, current supported into Silicon Valley. business support programs and projects, and free-to- •• Caveat: Startups from Prague are not eligible access databases for startups, investors, and business given EU funding requirements. It is also not incubators, accelerators, and co-working spaces. easy to transfer funds from the Prague/local government to CzechInvest. Because of this, CzechInvest plans to implement Prague Vouchers program for a total of 60 Prague-based startups. Technology Agency of the Czech Republic (TA CR) Czech Match195 •• Type of startup: Startups which are at least one The EU points to key challenges in strengthening year on the market. public-private linkages in the Czech Republic •• Type of support: Workshops to support (a major concern of the national innovation enterprises to be ‘ready’ to pitch to investors, system)199. These challenges include low levels of match-making events between startups and public research contracted by the private sector (about potential foreign investors. 3 percent), underutilization of IP rights instruments (in spite of availability of legislation), low applicability of public research, poor commercialization of Czech Demo196 research outputs, lack of knowledge transfer, weak •• Type of startup: Startups operating five years entrepreneurial culture, and weak interaction or less, has a prototype, employs 50 or less between domestic private sector and research entities workers, operates outside Prague, registered, to create new technologies. Poor commercialization with ambition to operate globally. is attributable to low incentives by public sector researchers, as researchers are evaluated primarily •• Type of support: Travel support to international on scientific publication outputs with little emphasis networking events, with opportunities to demo on commercialization. In general, constraints to product or service during these events, assistance academic entrepreneurship in the Czech Republic for presentation and related promotional are largely institutional: rigid academic labor market, preparations. outdated human resources practices in academia, complicated processes in starting university spin-offs, and lack of effectiveness of TTOs200. 194 https://www.czechinvest.org/en/Our-services/Start-ups/CzechAccelerator 195 https://www.czechinvest.org/en/Our-services/Start-ups/CzechMatch 196 https://www.czechinvest.org/en/Our-services/Start-ups/CzechDemo 197 https://www.czechinvest.org/en/Our-services/Start-ups/CzechLink-Start 198 https://www.czechinvest.org/en/Our-services/Start-ups/CzechStartups-org 199 EU (2018). “Research and Innovation Observatory country report 2017: CR”. 200 Machacek, V. and M. Srholec (2016). “Knowledge Transfer through Academic Entrepreneurship in the Czech Republic”. Annex 4. Program Instruments: Early-stage Government Support 94 Improving university-industry collaboration Ministry of Industry and Trade through contract research, R&D commercialization, and technology transfer is a key mandate for TA CR. It provides competitive funding for example to The MIT is the central ministry focused on support commercialization of research, development, addressing SME issues through support programs. and innovation projects (and increase the number For example, in collaboration with the EU, it outlined of spinoffs from universities). TA CR’s programs business support activities and objectives to increase supporting this agenda include the following201: SME and startup competitiveness208. Through entrepreneurial support activities from the ESIF, OP •• ALFA: Support applied research and experimental EIC 2014-2020 has an allocation of €4.3 billion, of development in the following sectors—advanced which €434 million (10 percent) are allocated for technologies, materials and systems, energy piloting financial instruments. resources and the protection and creation of the environment, and the sustainable development The MIT is preparing to roll out funds to support of transport202. innovative startups. The MIT and the EIF have •• GAMA: Support practical application and established a €50 million fund-of-funds for early commercialization of R&D203. stage capital. These funds will be rolled out to three financial intermediaries with experience in •• DELTA: Support joint projects between incubation/acceleration: two accelerators which can enterprises and TA CR-supported research provide up to €200,000 for entrepreneurs who are at organizations and foreign technological and the proof-of-concept stage, and one intermediary/ innovation agencies (which TACR has/will have venture capital which can provide up to €1 million established collaboration during the period of to series A startups active in the market. This fund public tender)204. intends to initially support spinoffs from university/ •• EPSILON: Support applied research and research organizations, with a primary aim of helping experimental development (especially those spinoffs get investors at the subsequent stages. The which have high application potential in new fund also intends to focus on biotechnology (as the products, processes, and services) in the following MIT identified gaps with early stage funding in this areas—competitive knowledge-based economy, sector). sustainability of energy and material resources, environment for quality of life205. In 2017, the MIT also joined a regional investment project of the EIF targeting later stage businesses •• ZETA: Support cooperation between academia and SMEs’ expansion (not startups) through the €80 and companies by connecting graduate students million Central Europe Fund-of-Funds project209. and young researchers conducting R&D activities with industry players206. The MIT likewise administers policies related to •• National Competence Centers: Support long- research, development, and innovation. Apart term cooperation between research and its from CzechInvest programs (specifically focused application and enhance the institutional basis on startups), another current program is TRIO. This of applied research207. 2016-2021 program provides financial aid with the goal of boosting applied research and experimental development in key enabling technologies, such as micro-/nano-electronics, nanotechnology, industrial biotechnology, advanced materials, photonics, and advanced manufacturing technology210. 201 Other TA CR support programs that are tangential to the university-industry collaboration agenda (not mentioned) can be found here: https://www. tacr.cz/index.php/en/ 202 https://www.tacr.cz/index.php/en/programmes/alfa-programme.html 203 https://www.tacr.cz/index.php/en/programmes/gama-programme.html 204 https://www.tacr.cz/index.php/en/programmes/delta-programme.html 205 https://www.tacr.cz/index.php/en/programmes/epsilon-programme.html 206 https://www.tacr.cz/index.php/en/programmes/zeta-programme.html 207 https://www.tacr.cz/index.php/en/programmes/national-centres-of-competence-1.html 208 MIT of the Czech Republic (April 2015). “Operational Programme Enterprise and Innovations for Competitiveness 2014-2020”. [Available at: https:// www.mpo.cz/assets/dokumenty/54704/62511/648398/priloha002.pdf]. 209 http://www.eif.org/what_we_do/equity/news/2018/80-million-central-europe-fund-of-funds-to-support-smes-and-small-mid-caps.htm 210 https://www.mpo.cz/en/business/support-for-research-and-development/the-new-program-trio--160149/ 95 Annex 4. Program Instruments: Early-stage Government Support Czech-Moravian Guarantee University incubators and and Development Bank accelerators (CMZRB) Established in 1992 to support SMEs, CMZRB xPORT at the University of Economics in provides SME access to financial capital through Prague213 the following instruments: preferential loans, bank guarantees, and subsidies. More recently, xPORT was created in 2015 as a university there are programs specifically targeted at innovative business accelerator to support students and SMEs (in support of the State’s economic goals to graduates’ entrepreneurial ambitions by offering boost knowledge-driven sectors). Of eight CMZRB a space to help them turn their business ideas SME support programs211, there is only one that (e.g., ideas from their thesis) into actual products relates to supporting innovative startups: and services. xPORT support activities are as follows: •• iPORT guides students and teams on the ideation stage by helping teams develop the idea towards INOSTART program fundraising. The program runs between one •• Type of startups: SMEs operating 3 years or less. month (trial period) and up to 12 months. Support includes idea validation, business plan creation, •• Funding: Swiss Government. prototype development, and access to mentors •• Type of instrument: Loan guarantee provided and investors. by Česká spořitelna (60 percent or less of the outstanding principal loan; up to 15 million CZK; •• aPORT helps teams accelerate their current business plans for success. Support provided is maturity up to five years from first instalment tailored to the team and includes incubation of of loan principal); The program also provides ideas, team formation, market research, support business advisory services for startups in strategy to finding an investor, product launch, and and business plan implementation212. connection to foreign accelerators. •• Objective: Support innovative projects through •• BusinessPort connects students with companies partial payment of consulting costs (projects with the end goal of students creating an need to fit criteria on innovation related to R&D innovative product or service for the partner spending or patents). company. Current projects are related to retail •• Impact to-date: Given the size of the program analytics, open data, and healthcare. (<€10 million per year), the program’s impact is likely to be marginal and is more about promoting •• ePORT spurs entrepreneurial education for students through lectures, training, and workshops innovative activities. by experienced entrepreneurs. CMZRB is also currently in discussion with the Prague City Hall to establish a fund for innovative SMEs. 211 A full list of SME support to-date can be downloaded from this link: https://www.cmzrb.cz/sme-assistance 212 OECD (2017) “Financing SMEs and Entrepreneurs: A Scorecard”. 213 https://xport.vse.cz/english/ 214 http://pointone.czu.cz/homepage-en Annex 4. Program Instruments: Early-stage Government Support 96 Point One at the Czech University of Life Sciences in Prague214 Founded in 2014, Point One is a business incubator for students and graduates of the Czech University of Life Sciences. The primary aim of the incubator is to help teams decide whether a business idea is viable or not during the course of incubation period (16 months on average). Members of the incubator gain access to the co-working space, individual mentorship, customized trainings, and pitching events to help teams communicate their business ideas. During the course of the incubation period, specific support activities include: •• Self-education (1-4 months): With the goal of generating business insights- members attend four expert workshops (at least), two member meetings, and four mentor consultations. •• Prototype development (5-8 months): With the aim of creating a prototype and marketing strategy- members attend four professional workshops or individual consultations, two member meetings, and four mentor consultations. •• Market entry (9-16 months): To help members validate their business ideas and become independent- members attend four expert workshops or individual consultations, four member meetings, and eight mentor consultations. 97 Annex 4. Program Instruments: Early-stage Government Support ANNEX 5 OPERATION OF COFUNDS There is growing use of CoFunds by governments The timing of the introduction of a CoFund and to stimulate business angel and other early the nature of its design depends on the stage stage investing. The EBAN 2016 compendium of of local angel market development. The OECD CoFunds215 lists details of funds in 22 European highlighted that for an angel CoFund to succeed countries. there needs to be at least a minimal level of existing angel activity217 for the fund to engage with. “Once For the purpose of this report, CoFunds are a functioning angel market has been established, defined as commercially-oriented funds backed CoFunds can help in leveraging and encouraging by public funding dedicated to the provision of more private investment”. (usually) equity finance to SMEs in partnership with investors from the private sector. CoFunds A study of the impact of policy incentives for angel have been described as providing ‘stretch funding’ investors in Portugal218 found that the Portuguese to enable more rapid access to larger amounts of CoFund was most valued by more experienced funding in an equity gap. Although the specifics angels, while less experienced angels gave more will depend upon local circumstance and policy importance to the provision of investment training objective, they tend to operate by matching funds and networking facilities. The initial hurdle to doing a in deal sizes ranging from €56,000 up to €2.3 million. first investment is likely to be accesses to deal flow and the knowledge and confidence of how to do a deal CoFunds are being used to stimulate behavioral rather than the availability of CoFunds. This supports changes in current and potential investors. the view that CoFund introduction should follow a CoFunds are seen as a potential tool to encourage period on initial marked stimulation, education an more individuals to become angel investors, and organisation designed to develop potential CoFund for existing investors to invest more as they lower investment partners. risk by allowing more investments to be made and providing portfolio diversification. A paper produced for the EC described CoFunds for business angels as representing an added value for public authorities in comparison to grants because their leverage effect is higher216. 215 http://www.eban.org/wp-content/uploads/2017/06/Co-Investment-Funds-2016_EBAN-website.pdf 216 Fostering business angel activities in support of SME growth, How to support SME Policy from Structural Funds, European Commission Guidebook Series, 2015. 217 Financing High-Growth Firms, The Role Of Angel Investors, OECD, 2011. 218 Angel investing in an austerity economy – the take-up of government policies in Portugal, José Bilau, Colin Mason, Tiago Botelho & Soumodip Sarkar, 2017. Annex 5. Operation of CoFunds 98 Box 21. Swedish co-investment funds The 12 Swedish funds always invest jointly with private players and on equal terms (pari passu) with them. At least half the amount must come from private venture capital while the remainder is shared equally between funds from the ERDF and regional public co-financing. The Swedish Government targets the funds to be market-complementary and revolving. The former means that it must not crowd out existing private investments and the latter that the capital base must not shrink in the long term. Investments are normally between €116,000– €1.16 million. Case studies are provided on the different CoFund the heading of co-investment. The EC identified a designs found in each of the countries making key success factor for CoFunds as participation at up the UK, England, Scotland, Northern Ireland, the deal level, not the fund level223. Co-financing and Wales. The differing designs reflect the different schemes where private investors can participate stages of development of the angel markets in each only at the level of the fund had been found to be of the host countries, and the differing objectives less attractive for private investors who wished to be of the governments who introduced them. These actively involved with the companies. different design elements have been considered necessary to promote angel development regionally CoFunds would not normally be constructed to even though the UK countries share common legal, achieve purely commercial returns. Most CoFunds regulatory tax and currency. This highlights the seek to develop the investment market in some way, need to carefully analyze local circumstances and addressing perceived market failures. The design and objectives before concluding a fund design. The operation of a CoFund will depend upon its primary Swedish Government operate no less than twelve objective, and the extent to which it addresses supply regional co-investment funds (see Box 21), with a side or demand side constraints. combined value of €279 million219. The risk of having a single co-investment fund is that it will have an uneven impact across regions, favoring the most entrepreneurial regions220. This Co-Fund objectives has been the experience of the UK Government’s angel co-fund (see Case Study 5) with the investments The primary objective of CoFunds depends concentrated in London, the Thames Valley, and on the level of development of markets. In an Cambridge, all areas with high levels of existing undeveloped market, the primary objective is likely entrepreneurial activity221. to be to seek to create an angel investment market where previously there was none224. An example of CoFunds normally match private sector investment the focus on supply side support would be the New at deal level. The fund and the private sector invest Zealand Seed Investment Fund (see Case Study 6), in the same company at the same time. A private a fund with significant supply side development sector investment into a fund that was otherwise objectives. In a more developed market the primary financed by the public sector (for example the EIF) objective would be to encourage more investments would not normally be considered a CoFund222. to be made and support the sustainability of investee Normal syndication of an investment, for example companies, particular where venture capital follow between two or more venture capital funds and / or on funding is limited. An example of such a fund is angel investors, would also not be considered under the Scottish CoFund (see Case Study 3). 219 Business Angel, Co-investment Funds and Policy Portfolios, Swedish Agency for Growth Policy Analysis, 2013. 220 Final Report for Tillväxtanalys (Growth Analysis) on the Recommended Methodologies for an interim Evaluation of the Swedish Regional Co- investment Funds, Professors Gordon Murray, Marc Cowling, Colin Mason and Markku Maula, 2016. 221 The role of government co-investment funds in the supply of entrepreneurial finance: An assessment of the early operation of the UK Angel Co- investment Fund, Robyn Owen, Colin Mason, 2016. 222 It is common for EIF and other public sector financed funds to require an element of private sector match funding. This match funding at a fund level would not normally be referred to as a CoFund. 223 Fostering business angel activities in support of SME growth, How to support SME Policy from Structural Funds, European Commission Guidebook Series, 2015. 224 If the primary objective were to provide funding to startups it is likely that a simple standard (non CoFund) structure would be used. 99 Annex 5. Operation of CoFunds Within these high level objectives, the specific •• Companies can secure funding faster as the design of a CoFund can achieve a number of other CoFunds availability means they need to spend objectives: less time finding individual investor willing to syndicate together. •• Encourage “professionalization” of angel activity by requiring, for example minimum standards for •• The involvement of the CoFund accelerated the due diligence. speed at which follow on funding was available. •• Improve efficiency of the market by introducing standard legal documentation. •• Encourage best practice, for example through increasing levels of syndication between investors Methods of operation by requiring a minimum number of angel co- investors (primary objective of the Welsh Angel In the most developed markets, where there is CoFund – see Case Study 2). an existing track record of well-established angel networks with a history of successful exits, it is •• Assist sustainability of angel networks and groups possible to adopt a delegated decision making by providing a deal fee (typically 2.5 percent of model. This means the CoFund does not itself the public sector funds invested) to the private source and negotiate investment deals but rather sector investors on deal completion. has a contractual partnerships with the private •• Act as a demonstrator that angel investing in sector investors who are responsible for this a particular location is viable, and potentially work. Provided the proposed investment falls within profitable. the characteristics specified in the fund mandate •• Encourage investment in particular geographies the Co-Fund is essentially automatically matched to or industry sectors by only supporting investments private sector investment. The fund conducts initial in those locations / industries. due diligence on the competence of the investor partners, if this is satisfactory the fund undertakes no individual deal due diligence nor does it become involved in the deal negotiations. Such a structure is very efficient in terms of fund operating cost. This Indirect benefits is the model adopted by the Scottish CoFunds, the New Zealand Seed Investment Fund, and the EIF’s The impact of a CoFund can be greater than European Angels Fund226. the financial contribution it makes. One fund assessment reported that225: In emerging angel markets, it is unlikely that a CoFund will have access to sufficient numbers •• Founders thought funding through the CoFund of private investors who can demonstrate a strengthened their position and credibility with successful track record (taking a number of other investors. companies from initial investment to successful •• Founders reported that receiving the CoFund exit) with whom to partner on a fully delegated funding had put them in a much stronger position basis. In such circumstances a professional fund to secure follow on funding when required. manager may be appointed to source and negotiate deals which are then introduced to potential private •• For angels, having an investor the size of the sector investors (some of whom may subsequently CoFund already in the deal on the same terms as become involved as company mentors or advisors). them created a more equal playing field in which This was the model adopted for the initial phase of to negotiate with follow on venture capital funds. the Northern Ireland CoFund. •• The involvement of the CoFund can lend legitimacy to the concept of syndication among private investors. 225 Review of Co Investment Funds Implementation, Structure and Lessons Learned, A Report for Scottish Investment Bank, Nelson Gray, January 2015 226 For more information, see: http://www.eif.org/what_we_do/equity/eaf/index.htm Annex 5. Operation of CoFunds 100 The UK Government’s angel CoFund takes a Investment structures middle ground, reflecting an angel market in England developed and structured to a point somewhere between that in Northern Ireland The majority of funds invest on a pari passu and Scotland. In this model, business angels bring basis. Sharing of return on an equal footing is seen potential deals to the CoFund which, rather than as appropriate in order to maintain an alignment of accepting them automatically as in Scottish CoFund, interest between the funds and the private sector. carries out a though review of the due diligence done One notable exception is the Portuguese fund (which by the angel investors and the returns of the deal to is in turn modelled on a Dutch structure). ensure that sufficient work has been done to verify Preferential treatment for the private investors the deal, and that the terms are reasonable. Although may be justified. Preferential treatment attracts the English market is well established, 85 percent private investors by increasing their chances of a of applications to the fund by angel investors are positive investment return where for example it is rejected. This highlights the difficulty of establishing not considered appropriate or practical to do so a credible investor base even in well-developed via the tax system. Preferential returns to the private countries. Few angel investors have undergone any sector must be carefully justified as they will restrict training in due diligence (or indeed other aspects of the returns available to the fund and therefore its angel investing). The majority of angel investors in the capacity to become sustainable. UK have been active for 5 years or less227, meaning few have taken a company from initial investment to successful exit (a process that typically takes up to 8 or more years). The fund therefore acts as a source of guidance as to what due diligence is appropriate for each case, how to structure and value the deal, and how to best assist the company post investment. Box 22. Example of asymmetric profit shares in a CoFund The Portuguese COMPETE business angel CoFund, launched in 2009, provides a preferential return to the business angels. Until the total investment of the angel has been returned, the payback is distributed in their favor (angel 80 percent / CoFund: 20 percent). Once the angel has had their full investment returned, distribution is symmetric until the CoFund investment is returned in full (angel 50 percent / CoFund: 50 percent). After the angel and the CoFund have each received back their investments, the balance of any exit proceeds is again distributed asymmetrically proportionate (BA: 80 percent / CoFund: 20 percent). This model subsidizes the risk of the angels with the intention of encouraging more individuals to invest in high risk companies. It does introduce a greater cost to the government, and it is unlikely that such a structure will be sustainable without continuous state support. 227 https://british-business-bank.co.uk/wp-content/uploads/2017/12/Business-Angels-2017-Research-Findings-compressed-FINAL.pdf 101 Annex 5. Operation of CoFunds Alternatives to a fund structure It may not be possible to operate a co-investment benefits of a CoFund (supply and demand side facility in a formal fund structure. Possible reasons market development) without the complexity of a include: formal fund. The financing may be available from transfers from exiting grant programs not benefiting •• The funds available are too limited to establish an from private sector leverage. An example of a co- equity-based co-investment fund (CoFunds tend investment grant program introduced to support to have a minimum size of around €10 million to the development of angel investing is the World be viable). Bank’s $1.6 million Caribbean Investment Facilitation •• The time available is limited, such as if a support Project228 (CIFP). This provides grant funding to program must be ended by a specific date (for enterprises that are able to secure investment from example before the end of an ERDF funding business angels and other approved investors. The period). The life-cycle of an early stage investment purpose of these grants is to incentivize angels to is long, typically expanding to eight years or more. invest in promising enterprises that they may not otherwise by reducing their investment risk. The intended benefit of the grants is to stimulate angel An alternative is to provide a co-investment grant. (and other relevant) investment into the enterprises. The founder and the angel investors would jointly The grant contribution is up to 50 percent of the apply for a co-investment grant, providing largely the investor’s contribution, up to a maximum of $100,000 same documentation and evidence of appropriate per enterprise, and is made once the entrepreneur due diligence, valuation, and structuring as would has secured the investment. Similar to how CoFunds be the case for a standard equity co-investment. operate in other countries, CIFP co-investment In this case however a non-repayable grant would grants rely on angels and private investors to be provided, matching the private sector up to a carry out the bulk of the commercial/business due predetermined maximum amount (30 percent diligence on the enterprise. The CIFP is managed - 50 percent). While the ‘fund” would not benefit by the Caribbean Export Development Agency, a from any future profits from the successful exit of regional nongovernmental organization that has the the investment, should one occur, the state would institutional ability and experience of assessing SME’s have the opportunity to gain from all the other for grant purposes. 228 http://projects.worldbank.org/P157484?lang=en Annex 5. Operation of CoFunds 102 ANNEX 6 INVESTOR READINESS In many investment markets, including the Czech Investor ready shortcomings range from a simple Republic, “investment readiness” programs inability on the part of the business to present are offered by incubators and accelerators that their case effectively, to those that are judged typically cover topics such as business planning, likely to never be suitable for investment. Those technical development, market analysis and which are judged to be not investable may be due financial forecasting, and have an emphasis on to weaknesses in the skills and composition of the “pitching”. Accelerator programs typically end with management team, the route to market, the status a “demo day”, seen as a graduation process, where of their IP, the level of product development, or their the companies who have completed the program engagement with potential customers is considered pitch their newly developed ideas to an audience inadequate. However, the biggest challenge is that including investors. Despite this, many investors, many simply do not have the capacity to generate including those interviewed for this project, complain the required rate of return to match the investor’s that they continually receive proposals that they portfolio risk229. recognize as having potential but which require significant additional work to get them to the point Due to the stage of development of the where they could be invested in. local market, few accelerator managers or entrepreneurs have been through the fundraising A key constraint on the level of successful process. As such, most programs fail to address investment transactions completed is the the more fundamental and much harder issue of perception by investors that many of the fundamental investability or prepare entrepreneurs businesses seeking funding are simply not for the capital raising process. “investor ready” (as opposed to investment ready). The applicants for funding have little understanding of the investment process. 229 Typically expressed as the ability to grow the value of the investor’s ownership stake by 10x over 5 years. 103 Annex 6. Investor Readiness Entrepreneurs are left facing various challenges, A government policy initiative to support the including: development of BANs can significantly improve the chances of a company receiving funding: •• Inability to identify an appropriate source of capital. •• BAN’s that have the resources to provide investment readiness training to applicants put •• Lack of understanding of common investment forward a lower proportion of applicant businesses instruments. to their investors, but a higher proportion of these •• Misalignment of priorities between the investor applicants end up successfully raising finance230. and entrepreneur. •• The BAN’s not only have the experience to explain •• Limited knowledge on due diligence exactly what investors will be looking for, they requirements. can tailor this to the specific needs of their own •• No focus on the exit event for investors. members. •• The networks are able to focus the applicants to address the issues that are of key importance to the investors. This adds value to the process for both the demand and supply side. Applicants gain a better understanding of what really matters to investors and make better presentations as a result. Investors see what they consider to be a higher quality of deal flow and are likely to invest more. 230 Annual Report On The Business Angel Market In The United Kingdom: 2008/09 Colin M Mason, Richard T Harrison, 2010. Annex 6. Investor Readiness 104 ANNEX 7 BUSINESS ANGEL TRAINING Table 16 provides an indication of the type of responses. They all emphasized the need to adapt issues that may need to be addressed for each training materials to local circumstances (localization) stage of business angel development. and specifically to seek to use local data in relation to deal size, pre-money valuations, and likely exit routes Angels move through differing stages on their and valuations. “Standard” training modules, based journey to full engagement as investors. Angels typically on US data, were consistently criticized. It will be found at these different stages in varying was generally seen as essential that training, be it proportions in each market segment. Even in online or in person, be delivered by experienced emerging markets there will be individuals who have angel investors. Training approaches that were been conducting “angel type” investing but may deemed to be effective include: not have thought of themselves as angel investors and operate as part of the “invisible” market. The •• General Awareness Training, as a “recruitment” tool. training program should be designed to be flexible in its engagements and training so as to effectively •• “Learning by doing” as a member of an existing encourage individuals to become an angel investor, group. to continue the journey to become a skilled and experienced investor, and ultimately to take on the •• More advanced training within the angel organization as the individual becomes more key role of “lead angel investor”, organizing and familiar with the process. managing the investment process (particularly the due diligence process) for a syndicate. Table 16 sets •• Training delivered by experienced angels (i.e. out the typical stages angels go through and the have seen a number of deals from initial screening general nature of their training needs at each stage. to exit). Interviews with the wider angel practitioner •• Training supported by (not led by) service providers (lawyers, accountants etc.) with a track community globally suggest that while these record of working with angels. individuals operate in different environments at differing stages of development, there are fairly consistent themes running through all their 105 Annex 7. Business Angel Training Table 16. Issues and potential solutions in business angel development stages Emerging Under consolidation Structured •• Little or no visible •• Evidence of angel •• High level of angel angel activity. activity, completed deals, activity, deals •• May have nascent regular opportunities completed & positive Issue BAN or association for companies to exits. but few members / pitch, established •• BANs, syndicates, and completed deals. and functioning BAN/ associations visible. associations. •• International outreach. •• Finding and •• Increasing number of •• Keeping existing angels convincing people to active angels and their active. be angel investors. skills. •• Financial sustainability •• Building trust and •• Portfolio management, of BANs. understanding in the especially securing follow •• Sidecar funds and market. on funding. integration with venture Solution •• Establishing BANs and •• Increasing syndication. capital. finding / training BAN •• Integration with •• Exit strategies. managers. crowdfunding. •• Internationalization of •• Finding initial deal •• Developing complexity of companies. flow. investment instruments. •• Increasing positive •• Post investment image in media. mentoring. The training topics seen to be most popular for active •• Those looking to learn more, possibly with a view angels were judged to be: to becoming a lead investor, want to master the most relevant items for their immediate needs. •• Preparing for and executing an exit. They therefore prefer short workshops and/or •• Founder relations / management team issues. mentoring from experienced practitioners as •• Follow on funding, syndication, co investment, opposed to longer courses from academics, and realities of working with venture capitalists. agencies, or others (i.e., they wish to lean about due diligence when they have a proposition upon •• Valuation. which they need to do due diligence). •• Managing underperforming investments – •• Many people stressed the importance of having minimizing financial and reputational loss. experienced angel investors provide the training. This reflects a desire to learn by example, to hear real life “war stories” as opposed to theory. The following recommendations and observations were received from practitioners: •• To facilitate interaction between the experienced angel instructor and the class (whether at a •• The most in demand ‘volume’ training is likely physical meeting or webinar), it has been found to be an introduction to angel investing, giving that seminars tend to work best when they are a general overview. Key is to provide inspiration limited to about 20-30 people. to commit to becoming an angel. Needs to be relatively short, so as to encourage attendance by busy people. Annex 7. Business Angel Training 106 Table 17. Angel training needs Angel Level Engagements Training Needs Potential but with •• Awareness raising Objective: Capacity information. •• Inspiration to persuade high net worth (High net worth with •• Motivational information, e.g. individuals to consider this new asset little knowledge/ videos on famous persons class. understanding) who are business angels. •• Motivate them to join or create local angel •• Likely to react best to short groups. video sessions. •• Highlight the benefits of working with others in syndicated deals. Wants to become •• General “Introduction to Elementary Topics an Angel Angel Investing” information. •• Basic summary introduction to angel (Have heard of •• Typically covers the key investing. angel investing, elements of angel investing •• Light touch on all topics, to highlight what wish to try it, but at a high introductory level. a successful angel investor should know. unsure how) •• Intended to encourage those •• Steps in the investment process from deal who wish to be angels to sourcing to exit. continue to the more detailed training sessions. Nascent Angels •• More detailed technical Typical Introductory Topics (Wish to invest, trainings, often divided into •• Being an investor, not an executive. but have not yet individual sessions for each •• Deal structuring. done so, little/ topic, building to an overall •• Opportunity evaluation (screening). no due diligence appreciation of the basic •• Due diligence. experience) skill sets needed by an active •• Valuation. angel investor. •• Deal structuring. •• The emphasis is typically on •• Exit strategy. “how to get a deal done”. •• Highlighting need for portfolio approach. Active Angels •• More detailed technical Intermediate topics: (Have made one or training, often divided into •• Portfolio strategy, managing performing two investments, individual sessions for each and underperforming investments. limited experience topic. •• Post investment mentoring. of the process, no •• The emphasis is typically on •• Changing management teams. exits) post investment activities. •• Post investment monitoring. •• Acting as a non-executive director. •• Planning / structuring follow on funding. •• Working with other investors, particularly venture capital. •• Planning and structuring for exit. Experienced •• Technical training to equip Advanced topics: Angels an experienced angel •• How to be a deal lead. (Have made several investor to become a “lead •• Acting for others, not just self. investments, angel”, one who will lead the •• Managing the deal process. preferably has deal making process. •• How to organize and manage due had a profitable •• Advanced training to diligence teams. exit, active in the assist in more complex •• Sharing due diligence with others. process) deal structures, typically •• Inter BAN syndication. with other angel networks, •• Effective engagement with venture capital venture capital, or / corporate partners. international investors. •• Structuring cross border syndication. 107 Annex 7. Business Angel Training ANNEX 8 BUSINESS ANGELS: MYTHS AND REALITY “Despite the growing interest in angel investment The reality of angel investing is that it operates on over the past decades, definitions are neither a spectrum, occupied at one end by the solo investor uniform nor consistently applied.” who makes his or her own investment decision to — OECD 2011231. invest directly, and at the other end by investors who are part of angel networks who simply say ‘yes’ or ‘no’ Whilst the majority of definitions of business to the investment opportunities that they are offered angel exclude investment by “friends and family”, and play no hands-on role in the investee company. there remain substantial inconsistencies between The hands-off investor who invests in a pooled fund the different definitions. In some ways it is easier to and delegates the decision on which investments define what a business angel is not, rather than what to make would not be considered to be a business a business angel is. For example: angel on the basis on the academic definition above. •• A business angel is “not an institutional investor”, While angels are often associated with “equity” defining an institutional investor as a corporate the form of investment used is varied. Investment financial institution or other organization that uses means can include equity, convertible debt, debt, money raised from another party to invest. revenue share, and guarantees. Typical deal structures •• A business angel is not a “friend or family” vary geographically. Within the USA convertible debt investor, using their own money to provide capital is used in 45 percent of investment in the North to a business owned and operated by a family West, but in only 22 percent of Mid-Atlantic deals233. member, work colleague, friend, or neighbor. Convertible debt is effectively unknown in UK angel deals. A classical academic definition of a business angel Angels invest at all stages of a company’s would be: development. These stages range from pre-seed “High net worth individuals who invest their to pre-IPO financing. Angels may invest in a range own money, along with their time and expertise, of stages to mitigate risks in a portfolio. directly in unquoted companies in which they have no family connection, in the hope of financial gain”232 231 Financing High-Growth Firms: The Role of Angel Investors, OECD 2011. 232 The Real Venture Capitalists: A Review of Research on Business Angels, Colin M Mason, 2008. 233 Angel Resource Institute, HALO Annual Report on Angel Investments 2017. Annex 8. Business Angels: Myths and Reality 108 The size of an angel investment can range from as Motivation for becoming a little as €5,000 or less to several million. Investment size is both at the level of the individual angel’s business angel contribution and the total round size contributed by an angel network or syndicate of angel networks. Scott Shane reports that while making money is a motivation for most angels, it is not the only Although angel investing is characterized as being motivation, or even the defining motivation for many. “hands on” with the provision of mentorship and He suggests that two thirds of angel investors report business advice in addition to funding, passive that making money isn’t their primary motivation237. investing is common among members of angel networks. In a situation where say 10 angels It is important to understand the motivations of contribute to a single investment, it is not practical or business angels in order that appropriate policy advisable to have all 10 active in that individual deal. can be designed to incentivize more individuals to become business angels and existing business Angels still tend to be male and older. In the USA angels to invest more. It is also important to 22.1 percent are female and 77.9 percent male234. In understand why people become business angels in the UK just 14 percent were found to be female235. order for entrepreneurs to understand how best to Angels tend to be older, in the 45-65 year age group. attract this form of investment into their company. This reflects the length of time required to build significant personal disposable investment funds. The motivations of individual business angels The average is falling however as more cashed out will include: technology entrepreneurs turn to angel investing. •• To make money. Many observers would argue The availability of networks and groups within that there needs to be a primary requirement which angels can become involved in syndicate for angel investors to make a return on their deals has also enabled younger, and typically still investments, i.e. with the anticipation of receiving in employment, individuals to become active angel a return on investment. Otherwise the provision investors, by reducing the size of investment they of funding would appear to be a donation, or need to make. “charity”/philanthropy. This requirement however leaves open the extent to which the expected 54.8 percent of US angel investors were previously return may be defined as “commercial”, which the founder or CEO of their own startups236. This in turn is likely to depend upon individual and suggests that prior experience as an entrepreneur personal perceptions of risk. fuels an understanding of startup issues and a network in the entrepreneurial community, resulting •• To get involved with private companies: Some in an interest in angel investing. This however means angels are motivated because they enjoy being that a significant 45 percent of angel investors were involved with startup companies for example, not a founder or CEO of their own startups, but rather but don’t wish to start their own company. They have a professional or corporate background. simply enjoy the “buzz” of working with potential high growth companies. •• To learn new things: be it the investment process or new technologies. •• As a hobby: to have fun, meet interesting people, and keep up to date with technologies. •• To help the community: “giving something back”. Helping a class of population, for example young people, or providing funding to cure a particular disease. 234 http://www.theamericanangel.org/ 235 A Nation of Angels, Assessing the impact of angel investing across the UK, ERC, 2015. 236 http://www.theamericanangel.org/ 237 “Fools Gold?”, The Truth behind Angel Investing in America, Scott Shane, 2009. 109 Annex 8. Business Angels: Myths and Reality Box 23. Example of angel motivations The complexity and relationship between differing motivations is illustrated by the “four pillars” upon which the Scottish angel group Archangel was founded in 1992, the principles which still guide their approach to investment and the character of the group as a whole. The group sets four technical criteria that potential investee companies must meet to be considered for investment: •• must be based in Scotland; •• must have high growth and international sales potential; •• should have defensible technology, with clear IP; •• should be in a sector which qualifies under the Enterprise Investment (tax incentive) Scheme At a more philosophical level, the group’s business ethos is underpinned by four fundamental pillars, which are: •• To put something back into Scotland by investing in young people and companies, particularly those in science and emerging technologies. •• To look for investments where they could add value by passing on their own business experience. •• To have fun. •• To make some money. While financial return is ranked number four, it in effect forms the foundation upon which the other motivations are built. Barriers to entry New skills There are considerable disincentives and barriers Capable active business angels tend to have a to entry that are likely to restrict the number of background in business. They have accumulated new investors. Business angel investing requires the wealth available for investment either through investor to learn new skills, is potentially extremely working at a high level within corporate industry time-consuming, and is very risky. Angel investing is or being themselves a successful entrepreneur. an entirely voluntary activity and some considerable Neither of these backgrounds however prepares effort may be required to persuade those capable of an individual particularly well with the knowledge getting involved to do so. required to invest in someone else’s business. There is a steep learning curve required to understand how to source investable businesses, carry out screening and due diligence, and learn the intricacies of valuation and deal structuring. All of this must then be combined with the skills necessary to support a business post-investment with mentoring and advice over the likely 5 to 10 years it will take to achieve a successful exit. Potential angels may be put off continuing to invest once they realize the amount of new knowledge required to be successful, and the few sources from which they can obtain this knowledge. All too often early mistakes lead to the first investments made failing fairly quickly, resulting in the angel withdrawing from the market. Annex 8. Business Angels: Myths and Reality 110 Figure 11. Steps in the Investment Process Finding Deal Valuation Flow Initial Screening Detailed Screening Term Sheet Legal’s Post Investment Due Monitoring & Diligence Mentoring Exit Time consuming This time is largely given at no, or minimum, cost to the company. The angel is, after all looking after their own personal investment, and many will believe A significant amount of time can be spent that taking a fee would merely be paying themselves sourcing appropriate investments to consider, with their own, invested, money. Angels are often interviewing entrepreneurs, conducting due in a position to provide significantly more time to diligence238, negotiating valuations, and agreeing a particular company than would be possible for legal terms. This is multiplied considerably by the a professional fund manager whose resources are proportion of deals that may be initially considered, restricted by the size of their fund management fee. but which for whatever reason do not complete. Angels typically report that they only invest in around 3 percent of the deals initially considered. Given the recommendation that an angel should invest in a minimum of 12 to 15 deals239 would mean having to High risk initially consider some 500 in order to spread risk, it is clear that many who have the financial capacity to make such investment will be put off by the significant Angel investors make decisions to invest under time commitment needed to do so. conditions of extreme uncertainty. Angel investors face cases in which uncertainty is so extreme that it Even more time will be committed by the qualifies as unknowable: they decide on investments business angel to supporting the company post- in ideas for markets that often do not yet exist, and investment. A study of angel investors in Germany they propose new products and services without showed that angels typically spent 6.2 days per knowing whether they will work. For experienced month on their investments, averaging 1.34 days angel investors, rather than being undesirable, per month on each investment, with the most time unknowable risks are deliberately sought, on being spent on their most recent investees240. More the basis that it is by investing in companies with active investments might involve a day per week. unknowable risks that they can find the most attractive and profitable investments. 238 The NESTA report “Siding with the Angels” suggests angels need to do a minimum of 20 hours just on due diligence on a potential investment before completion. 239 In any one investment, an angel investor is more likely than not to lose their money, i.e. to earn less than a 1X return. However, once investors had a portfolio of at least six investments, their median return exceeded 1X. A portfolio of 48 investments is 95% likely to deliver 2.5X over-all return. Data from Professor R Wiltbank, www.willamette.edu/~Wiltbank/ 240 Malte Brettel, 2003, Business Angels in Germany: a research note, Venture Capital, July 2003, Vol. 5. No. 3 111 Annex 8. Business Angels: Myths and Reality Angels use due diligence to try and assess risk “winners” are equally distributed within the deals and investment strategy to manage risk. The an angel selects. In practice it would be perfectly level of risk associated with any one proposition is possible for an angel to select 10, or indeed more, not absolute, but a personal perception based on losers from a set of 245 possibles. A previous study previous experience and industry knowledge. of angel returns in the UK found a similar skewed return pattern, with 97 exits out of 1080 producing The 2016 Angel Resource Institute study on angel 80 percent of all returns242. investing returns in North America241 suggests that 70 percent of investments made by angels To address this extreme risk, experienced angels in the US failed to return capital to investors (they do not seek to maximize each decision but instead were losses). Just 10 percent of all exits generate 85 seek a high return at the portfolio level, building percent of all cash returned. Angel investing is a “big a large portfolio to spread risk. Monte Carlo win” (or “homerun”) game where many investments simulation of the Wiltbank data243 suggests that if result in losses, but the occurrence of large outlier an angel has a portfolio of 6 investments they have a exits are the key drivers of the return rate. The returns 50 percent probability of obtaining their investment distribution is highly skewed, with the median capital back (1x) (and therefore a 50 percent chance investment return being a loss, while the mean, in of just losing money also). If they increase their this study, being a 2.5x multiple return (for every $1 number of investments to 12 however they have a 75 invested $2.5 were received back). For the study, percent chance of hitting a 2.6x return (for every $1 the gross internal rate of return (IRR) was 22 percent. invested they get $2.6 back). It is possibly concerning The study was based on 245 exits (liquidity events that a UKBAA study showed that 64 percent of UK or closures, no estimated carried value). Thus out of angels surveyed had 10 or fewer investments in 245 potential investments 171 resulted in loss, while their portfolios, 42 percent with 5 or fewer244. Angels just 24 provided 85 percent of the cash returned. This operating within structured groups or syndicates suggests a 1 in 10 success rate, where if an investor tend to have larger portfolios. It is thus desirable to has a portfolio of 10 investments they will have one implement policy that encourages syndication. “good win”, but that would be to assume that the Box 24. Using syndication to build investment portfolios Successful angel investing appears to be based on using syndication to build large investment portfolios. Archangel245, the Scottish investment group established in 1992, has completed investments in 80 companies of which 22 are still in the portfolio, 39 have failed, and 20 have resulted in positive returns, resulting in an IRR of 20.9 percent246. Tech Coast Angels247, formed in 1997, has invested in 351 companies of which 190 are still in the portfolio. 91 have been completely written off (zero return). 50 have managed to return capital (zero profit / zero loss), 20 have returned between 5X and 263x, resulting in a 3.2x portfolio return, an IRR of 26 percent248. 241 The study was funded by Ewing Marion Kauffman Foundation and the NASDAQ OMX Education Foundation and was based on exit data primarily from the period 2010 – 2016. https://angelresourceinstitute.org/research/report.php?report=101&name=2016%20Angel%20Returns%20Study 242 Siding with the Angels, Business angel investing – promising outcomes and effective strategies, Robert E. Wiltbank, NESTA, 2009. 243 http://archangelsonline.com/ http://www.angelcapitalassociation.org/data/Webinars/2015%20Slide%20Presentations/ PortfolioStrategyWebinarPPTFINAL.pdf 244 Business Angel Spotlight, Research by IFF Research and RAND for BBB together with UK Business Angels Association, 2017. https://british-business- bank.co.uk/wp-content/uploads/2017/12/Business-Angels-2017-Research-Findings-compressed-FINAL.pdf 245 http://archangelsonline.com/ 246 Archangels: Impact evaluation of activities, 1992-2015, University of Strathclyde. http://online.fliphtml5.com/fgcw/xkov/#p=1 247 https://www.techcoastangels.com/ 248 https://www.techcoastangels.com/performance/ Annex 8. Business Angels: Myths and Reality 112 Few individuals have either the time or financial angel groups to discover investment opportunities is resources to build angel investment portfolios of particularly prominent among angels who have less the required size for risk mitigation by themselves. than two years of investing experience. This is best achieved by being part of a BAN or organized group or syndicate. Recognizing that Angel networks have emerged because individual observing others reap successful financial returns angels find advantages in working together, in from being an angel investor is likely to attract new terms of better deal flow, superior evaluation and individuals to become angels themselves (as seeing due diligence of investment opportunities, and the individuals lose money will likely put new entrants off) ability to make more and bigger investments, as well and that increasing the pool of capital available to as social attractions. Groups typically range from 25 drive the economic development benefits derived to 75 members. They take various forms but, in most from startup stimulation, many government agencies cases, a manager or a core group of members will have adopted policies to support the establishment screen the deal flow and select the companies which and operation of BANs. are invited to pitch to members. Members then vote whether to pursue an interest in the business. If the vote is in favor a sub-group will be appointed to undertake the due diligence and report back to the full membership. If the recommendation is positive, Need for government individual members make their own decisions on whether or not to invest and the group will combine intervention all investing members into a single investment. It has become generally recognized that public The emergence of angel groups is significant sector intervention is necessary to encourage for the development of an entrepreneurial individuals to become angels and provide the ecosystem: essential financial and business support needed by high growth potential startups. This is because •• They reduce inefficiency in the angel market by making angels more visible and easier for of the effort required by potential new angels to learn entrepreneurs to approach. the necessary skills, the significant time involved in finding and making investments, the commitment •• They stimulate the supply-side of the market. needed to support a company for many years before an investment return is likely249, and the high •• They enable risk reduction diversification. probability of the investment failing to produce any •• They offer the opportunity to learn from more return at all. experienced investors. •• They enable larger investments and more follow on. •• They can provide a broader and deeper level of Organizing angels mentoring and support by calling upon the skills of multiple investors rather than just one. The angel market place is evolving from a largely invisible, atomistic market dominated by individual and small ad hoc groups of investors who strive to keep a low profile to a more Business angel networks, organized and professional market place in which groups, syndicates, federations, angel syndicates (sometimes termed ‘structured angel groups’) are becoming increasingly and associations significant. In developed markets new angels are now most likely to get involved through angel groups These terms are often used interchangeably and are rather than via the influence of informal relationships, applied with different meaning in different countries. individual endeavor, or emerging online vehicles. 89 It is appropriate to provide definitions to ensure percent of US angel investors identify prospective clarity of understanding and the place each has in a investments through angel groups250. The reliance on developing market. 249 Time to exit in the UK has been reported to be extending out to 9 to 10 years – The Risk Capital Market in Scotland, 2009- 2010, Scottish Enterprise, 2012, page 5. 250 http://www.theamericanangel.org/access-full-report 113 Annex 8. Business Angels: Myths and Reality Angel associations to make their own individual investment decision, and the BAN does not decide which investors Angel associations or federations are trade will invest in a deal. BANs also often provide a bodies established to support the development number of added value services to both angels of the angel capital market and to provide a and entrepreneurs, such as investor/investment collective voice for angel investors to policy readiness. While the majority of BANs are set up as makers and others. They may represent countries not for profit organizations, some such as Keiretsu (e.g., LINC, UKBAA, France Angels, ACA), regions Forum251 are commercial organizations, seeking to (e.g., BAE, EBAN, African Business Angel Network), make profit from the investment process. or be global (e.g., Global Business Angels Network). These organizations play an important role in raising awareness about the industry, sharing best practices, Angel groups developing local angel groups/networks, providing networking opportunities, and collecting data. The Angel groups are “clubs” of angels who invest role of angel associations is to provide support to together repeatedly. They are often “closed” groups, the angel industry as a trade body, which means they with membership only open to those who are known themselves usually do not invest nor play a match to or recommended by existing members. A group making role. tends to be relatively formal, often structured as a not for profit company, but with investments being made directly by the individual members (not in the Business angel networks name of the group). Groups may be “member led”, with the work of deal sourcing and deal completion BANs are formed as a way to facilitate match being done by individual members, or “manager making between potential angel investors and lead” with much of the work (but not the investment entrepreneurs. The BAN itself does not make any decision) being made by a manager appointed by investments or investment decisions. BANs tend to the members. The Angel Group structure is the most remain neutral and generally refrain from formally common angel organization structure in the US, evaluating business plans or angels. Angels continue Canada, New Zealand, and Scotland. Box 25. Examples of BANs Examples of BANs include: •• Angels Santé /Angels for Health (France): was founded in 2008. It has 90+ members. Most members are based in France but is expanding to Europe and welcomes investors from other countries interested in healthcare. Angels Santé is exclusively investing in high-growth companies focused on healthcare (Biotech, Medtech companies, Diagnostics, e-Health.) •• BAN Vlaanderen (Belgium): is the Flemish business angel network, founded in 1999 with currently 225 members/business angels. Its goal is to stimulate economic growth in Belgium by developing, guiding, and promoting entrepreneurship through bringing together capital-seeking entrepreneurs and private investors (business angels). •• AG (Italy): was founded in 2007 and currently brings together 120+ investors. It is the main angel I group in Italy and constantly ranks as one of the most active early stage investors in the country. Its members have invested in excess of €12 million in deals in Italy, Europe, the US, and Israel. The group is strongly committed to promoting entrepreneurship as an engine for growth in Italy as well as in Europe. 251 http://www.keiretsuforum.com/ Annex 8. Business Angels: Myths and Reality 114 Angel syndicate An angel syndicate is a gathering of two or more Syndication may also refer to the circumstances angels into an informal consortium for the purpose of where two or more angel groups come together to creating a critical mass of funds for investment into a invest in a company. Angel groups often enter into company. Syndicates are often created to fund a one memorandum of understanding in advance of such off transaction. They may be formed from investor arrangements, setting out rules for the sharing of members with a network or may be brought together due diligence, the establishment of a “lead” angel in other ways, including by the investee company. group, and other matters relating to the processing The formation of informal syndicates by members and administration of a “shared” deal. The Angel of a BAN to do deals is increasingly common. For Resource Institute, in its 2017 Annual HALO report example, the Estonian BAN (EstBan) reports that for on angel investing in the US253, notes that while the 2017, 87 percent of their deals were by syndicates median value of funding provided by an individual of its members252. angel group in the US was $200,000, the median value of funding rounds was higher, at $270,000. This means it is now normal for it to take multiple angel groups to fund a deal. Box 26. Examples of Angel Groups Examples of Angel Groups include: •• Archangel Informal Investment: a Scotland-based business angel group. Originally formed in 1992, the syndicate now comprises around 100 investor members and is investing c.a. £10 million per year in early stage Scottish companies, including leverage from partners, the largest being the Scottish Enterprise CoFund. •• Bloom Equity: an Irish group of experienced entrepreneurs who have successfully built technology led companies in software, online services, e-commerce, and telecoms. As many of the members are industry veterans that have successfully set up and sold technology companies previously, they have a unique set of skills, experience, and contacts. They generally invest €150,000 – €250,000 in return for a significant minority shareholding generally in the region of 15-25 percent. http://www.estban.ee/about/2017 252 The HALO Report is a collaborative effort of the Angel Resource Institute, Florida Atlantic University, and Pitchbook intended to raise awareness of 253 early stage investment activities and trends. https://angelresourceinstitute.org/research/report.php?report=111&name=2017%20Annual%20ARI%20 HALO%20Report 115 Annex 8. Business Angels: Myths and Reality ANNEX 9 KNOWLEDGE-INTENSIVE FIRMS In 2017 the UK Government initiated the Patient half of high-growth technology firms use external Capital Review (PCR)254 intended to explore ways equity finance258. These innovative firms have a to improve the flow of long term risk capital’255 for disproportionate impact on productivity through knowledge-intensive firms looking to scale up. the new ideas that they commercialize and bring to market. It is patient capital that supports such firms. External equity finance is used by only around 1 percent of UK small business256. Use of equity The UK Government identified knowledge- finance by UK firms that fit into the standard policy intensive firms, those with high growth potential definition of ‘high-growth’ has been estimated to be but which are R&D and capital intensive, as between 4 percent and 14 percent257. having the most difficulty obtaining the capital they need to scale up. As a result, the Finance Equity finance is however critical for firms Budget 2017 introduced increased tax incentives for focusing on the commercialization of technology, investment into such firms and a further consultation firms where revenues typically lag investment is underway on the possibility of introducing specific significantly, or firms without existing revenues tax advantaged investment funds259. looking to commercialize R&D. As a result, nearly 254 https://www.gov.uk/government/consultations/financing-growth-in-innovative-firms 255 The consultation defined patient capital as “long-term investment in innovative firms led by ambitious entrepreneurs who want to build large-scale businesses”. It noted that only some firms need patient capital to grow to scale. 256 BDRC continental, “SME Finance Monitor Q4 2017”, March 2018, found that 1% of SMEs had ‘applied’ for external equity investment in the last 12 months (available at: http://www.bva-bdrc.com/wp-content/uploads/2018/03/RES_BDRC_SME_Finance_Monitor_Q4_2017.pdf) 257 ‘BERR economics paper No.3: High growth firms in the UK: lessons from an analysis of comparative UK performance’, November 2008 (available at: http://webarchive.nationalarchives.gov.uk/+/http:/www.bis.gov.uk/files/file49042.pdf)|‘Myth-busting and entrepreneurship policy: the case of high growth firms’, Ross Brown, Suzanne Mawson & Colin Mason, Entrepreneurship & Regional Development, 2017, Volume 29 , Issue 5-6 (available at: http://www.tandfonline.com/doi/abs/10.1080/08985626.2017.1291762?journalCode=tepn20) 258 For more information, please see: http://www.fasttrack.co.uk/league-tables/tech-track-100 259 https://www.gov.uk/government/consultations/financing-growth-in-innovative-firms-enterprise-investment-scheme-knowledge-intensive-fund- consultation Annex 9. Knowledge-intensive Firms 116 Box 27. UK definition of knowledge-intensive firm The UK Government has determined that to qualify as “knowledge-intensive”, a firm must meet one or both of two operating cost conditions: •• Must have spent at least 15 percent of operating costs on R&D or innovation in one of the three years preceding investment. •• Must have spent at least 10 percent of operating costs on R&D or innovation in each of the preceding three years. A company must also meet either the innovation condition or the skilled employees’ condition. To meet the innovation condition the company must be creating or have recently created IP, which will be used in future for its main business activities. This can be proven by: •• Producing patents or licenses, or •• Having an independent expert (e.g. a university professor in a relevant field) verify it is producing IP To meet the skilled employees’ condition at the time of investment and for the following three years, at least 20 percent of the company’s full-time equivalent employees must be skilled employees with a relevant Master’s (or higher) degree carrying out R&D or innovation activities. 117 Annex 9. Knowledge-intensive Firms ANNEX 10 TAX INCENTIVES TO PROMOTE ANGEL INVESTING The EC recently published a report looking It is suggested that the provision of income tax at best practices in tax incentive programs for relief on dividends received from investments investors in 36 countries260 from within Europe made is not appropriate in stimulating early and the OECD. The tax structure is being used by stage investment. This is because young startup many countries to encourage the desired change in companies are usually not in a position to pay behavior for individuals to take on extra investment dividends. Such a tax policy would therefore likely risks. This report includes case studies on a tax encourage investment in later stage businesses, incentive structure operated by the State of Delaware possibly further reducing the capital available for (see Case Study 7) and a grant structure operated in startups. Germany that provides the same stimulus to Angel investors as a tax incentive, but without involving Capital gains tax exemption can be effective. legislative change to the tax code (see Case Study 8). However, given the high number of companies that fail to return capital (and therefore do not produce Tax credits can be given in a number of ways: a capital gain upon which tax would be payable) and the extended time it takes to achieve an exit •• Income tax relief on dividends received. (typically eight years or more for knowledge intensive •• Exemption from capital gains tax on exit. companies), provision of capital gains tax relief is less •• Loss offset against other taxable income. effective than providing an immediate tax benefit at the time of investment. However, it should be noted •• Tax credits at the time of initial investment. that it is common for schemes to use multiple forms of incentive (the UK Seed Investment Scheme utilizes tax relief at time of investment, loss relief, and capital gains tax relief). 260 Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Israel, Italy, Japan, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, South Korea, Spain, Sweden, Switzerland, Turkey, United Kingdom, and United States. Annex 10. Tax Incentives to Promote Angel Investing 118 Tax credits at the time of initial investment are Effective targeting likely to be the most effective at addressing investor risk aversion. The amount and timing of the tax credit are more certain for the investor. The objective of a tax incentive is to encourage Tax credits at the time of investment may take the a behavioral change in a target set of investors form of a deduction of the investment amount (or to invest in a target set of companies that are a percentage thereof) from income tax that would perceived to offer economic benefit to the state. otherwise be paid. An alternative is to provide a tax It is therefore necessary to design the scheme in a relief on capital gains from the disposal of other way that it achieves its objective of creating increased assets (property, bonds, etc.) on amounts that are risk taking in relation to the target set of companies. invested in qualifying startups. For example, if the Schemes typically have a set of criteria that the sale of a property made a gain of €10,000 no tax company and the investor must meet in order to would be paid on that gain if the investor made a qualify. This may include: €10,000 investment into a qualifying startup. The UK •• The company can be targeted in terms of age, Seed Enterprise Investment Scheme (SEIS) includes size, sector, and location. such a measure, effectively providing a write off of 50 percent of capital gains tax that would otherwise •• The investor can be targeted in terms of status (for example targeting experience investors who be paid261. Such a scheme may encourage the gains may give added value to the company through from the sale of relatively safe investments to be mentoring etc.) and connection with the recipient invested in riskier startups. of investment (e.g. to exclude founder family For tax incentives to be effective, however, there members, existing employees, or directors). needs to be a culture of risk-taking and investment. •• T he investment can be targeted in terms of size or In the Czech Republic, interviews suggest that rich investment structure (equity is often preferred as it private individuals who are willing to invest their is seen as full risk bearing and long term support capital (whether in the early or latter stages) tend for the company). Typically, only new issues of to be risk-averse, impatient (seeking short terms shares by the company qualify, not shares bought investments and quick returns), and lacking in deal from the founders or previous investors (to ensure flow experience. It is therefore appropriate for the the funding goes into the company to promote introduction of a tax incentive scheme to be preceded growth). by a period of preparation including the general promotion of angel investment and the facilitation •• The minimum length of time qualifying investments must be held in order to attract tax of education of potential new investors to enable relief (to encourage long term company support). them to make informed investment decisions. It is appropriate to try and ensure that those encouraged by the tax incentive to make investments have some knowledge and understanding of the process. The danger is that a tax incentive will encourage “dumb money” to enter the market, resulting in inappropriate investments being made and potentially significantly distorting the market. The result could be a significant level of financial loss by investors, resulting in angel investing in general receiving a bad reputation, setting back efforts to increase its economic impact. The United Kingdom’s SEIS was the highest ranked tax incentive by the EC report Effectiveness of Tax Incentives for Venture Capital and Business 261 Angels to Foster the Investment of SMES and Start-Ups, 2017. 119 Annex 10. Tax Incentives to Promote Angel Investing Potential tax avoidance issues Potential impact and cost issues As with all tax regulations, individuals will look for advantages that may be out of the spirit of the For tax programs, the direct cost of the schemes legislation’s intention. It is therefore appropriate is the level of tax foregone. This may not be easy to when designing a new scheme to consider lessons calculate in advance as, depending upon the nature learnt from previous programs. A number of lessons of the scheme, it may include forgone tax on as yet can be drawn from the long history of the UK unknown capital gains or loses. The overall tax “loss” Government’s EIS scheme, initiated in 1994. The UK will depend upon the level of credit granted and the Government has, for example, particularly tackled amounts of investment permitted. Some US states potential abuse through “capital preservation” limit the potential loss by setting a maximum annual investments. These are investments which are in budget that can be claimed by investors, after which practice inherently lower risk, and often asset backed, no additional applications will be accepted for that that can generate stable returns without aiming for year. significant growth or incurring the requisite level of risk to justify a tax incentive. Examples of such The UK Treasury estimate that the cost of their investments in the UK include a company set up to principal angel tax credit scheme, the EIS, costs provide preschool nursery education. Typically, the between £0.57 and £0.73 per £1 of investment investment was used to purchase a building in which made264. One interpretation is that the state saved the nursery operated for the minimum required between £0.43 and £ 0.27 by encouraging this time under the tax legislation. The company was funding to be provided by the private sector rather then liquidated and the property assets sold. With than by the state. These costs should be considered a 30 percent income tax deduction, an investment against the overall economic benefits unlocked by could even be sold at a loss, say at 90 percent of additional investment, for example the benefits the original investment value, and still return a created through growth, innovation, and increasing profit to the investor, tax free, of 20 percent over national income. The UK Government has been the three year minimum period. To combat such operating EIS since 1994. In an assessment of EIS abuse a specific ‘capital preservation purpose test’ published by HM Treasury in 2016265 it was found has been introduced to ensure that adequate risk is that 60 percent of companies receiving investment being taken within any individual investment. The supported by the EIS scheme believed investment principles-based “risk to capital” test is designed would either definitely or probably not have taken to ensure that the propositions only invest in those place without the scheme. 79 percent of investors businesses which are deemed to be “knowledge stated that the income tax relief was either very intensive“262, have the capacity to grow quickly, and important or essential for the investment proceeding. are not simply low-risk tax shelters263. A study of Irish angels found that almost half of those surveyed reported that they would stop making While adding a degree of complication, the adoption business angel investments if all tax incentives were of appropriate definitions and rules will ensure removed, and a third reported that they would scale that the increase in available investment from the back their investing266. introduction of a tax incentive scheme is targeted at the companies and regions considered to be of key Significant claims have been made for the impact priority to the Government. There is now sufficient of tax incentives. The Arizona Angel Investment Tax experience in the operation of such schemes, Credit initiated in 2005 provided a tax credit of 30 particularly in the UK, to provide guidance as to the percent made into qualifying businesses, a rate that most appropriate structures to adopt. increased to 35 percent for investments in bioscience or rural companies. The tax credit had a total budget limit of €20 million but has been credited with creating an estimated combined economic impact to Arizona since the program’s inception of $1.3 billion267. 262 See Annex 9. Knowledge-intensive firms for the definition of knowledge intensive. 263 https://www.gov.uk/government/publications/income-tax-venture-capital-schemes-risk-to-capital-condition/income-tax-venture-capital-schemes- risk-to-capital-condition 264 Financing growth in innovative firms: consultation, HM Treasury, 2017, page 49. 265 The use and impact of venture capital schemes, HMRC Research Report, 2016, 355 https://assets.publishing.service.gov.uk/government/uploads/ system/uploads/attachment_data/file/497288/Venture_Capital_Schemes_report_v11_PUBLICATION.pdf 266 Funding For Growth: The Business Angels Market On The Island Of Ireland, InterTradeIreland, 2016 267 https://azcapitoltimes.com/news/2017/03/28/angel-investment-tax-credit-too-much-of-a-good-thing-isnt-nearly-enough/ Annex 10. Tax Incentives to Promote Angel Investing 120 Need for preparatory work prior to implantation of tax incentives To maximize the impact of a tax credit in broadening the overall base of investors, it is important that the benefits are widely communicated to potential new investors and companies. It is not sufficient to reward only existing investors with the incentive. One study suggests that take up of a tax credit offered by the state of Vermont was low because it was not sufficiently championed and widely publicized268, concluding: “so even though a state can construct a properly targeted angel investment credit program, the best practice that the state can put forth is one where building relationships and communication among entrepreneurs and angels can thrive”. An article in the UK’s What Investment suggested that despite the scheme running since 1994 many investors were simply unaware of it269. Policies such as tax incentivization can only be fully effective within a functioning ecosystem built upon a free flow of information. It is not appropriate to launch a tax incentive program until the foundations of such an ecosystem have been put in place. 268 Tax credits and government incentives for angel investing in various states. Angel Capital Education Foundation. Williams, J., 2008, www. angelcapitalassociation.org/data/Documents/Public%20Policy/State/Tax%20Credits%20-%20Jeffrey%20Williams.pdf 269 http://www.whatinvestment.co.uk/eis-why-isnt-it-more-popular-2554597/ 121 Annex 10. Tax Incentives to Promote Angel Investing ANNEX 11 CZECH ENTREPRENEURIAL LANDSCAPE During the preparation of this report, the team Supply side collected data on the actors operating within the early stage environment in the Czech Republic. This is not intended to represent a complete mapping, and it may be that some disagree with Credo Ventures Inc. our descriptions and allocations of functions. In •• Company: Credo was founded in 2009 in Prague the context of this report, the lack of a comprehensive where it currently resides. It has a team of 11 source of information on industry actors accessible by people. Its advisory board comprises of five company founders or investors was highlighted. This foreign entrepreneurs/investors. informed the recommendations regarding the need for comprehensive and continuous data collection •• Investment focus: Credo supports investments in and dissemination. It is likely that individual actors Central Europe in the field of AI, machine learning, will come and go continuously, and that the roles IT, cognitive security, business automation. and offerings of those listed will change and develop •• Investment portfolio: Credo focuses on seed, over time. For example, new sources of funding venture, and series A investments between will emerge, while others will close. The intention €50,000 and €6 million, and convertible notes (it in presenting the data generated is to illustrate has made one so far at the amount of €50,000 in the complexity of the existing landscape and the online security). Its total assets under management potential difficulties actors may have in connecting to are €71 million (50 percent seed investments, 30 the most appropriate organizations and individuals percent series A investments, 20 percent series to meet their needs. B investments). It has invested in 42 startups/ ventures, and is a leading investor in about 50 percent of them. Annex 11. Czech Entrepreneurial Landscape 122 SUPPLY SIDE Private equity funds Venture capital Later stage funding Angel network The stock exchange Public organizations Crowdfunding (equity, debt, sales) 123 Annex 11. Czech Entrepreneurial Landscape Rockaway Capital J&T Ventures •• Company: Rockaway resides in Prague. It has a •• Company: The J&T team consists of three people team of 32 people. as a management team, three people as an investment committee (IC), and an advisory board •• Investment focus: Rockaway’s focus is on building that consists of three foreign investors. the internet economy in emerging markets. It invests in e-commerce/e-shops and surrounding •• Investment focus: J&T has made investments services, IT and cloud-based technology, 3D in the Czech Republic, the UK, Slovakia, Finland, technology, digital business, gaming, and lending and Germany. Hardware (machine to machine platforms. (M2M) infrastructure) and software technology in sound, air quality, and healthcare. Also, SaaS •• Investment portfolio: Rockaway focuses on and IT (connecting platforms, crowdsourcing seed, venture, and series A investments between platforms, customer experience software, gaming €200,000 and €5 million, and convertible notes apps, and data-driven marketing). (it has made one so far in a software-as-a-service (SaaS) platform development at the amount of •• Investment portfolio: J&T focuses on seed and $400,000). It has invested in 22 startups/ventures, venture round investments. It has made nine and is a leading investor in about four of them. investments, two of them as a leading investor, of a value about $2 million. Miton Consilium Private Investment •• Company: Miton was established in 2000 and currently resides in Prague. It has a team of 11 •• Company: Consilium is a family office (private people of which seven are investment partners. wealth management firm) with a vision to become an active equity partner and an entrepreneurial •• Investment focus: Miton’s focus is on SaaS and investor. Its management team consists of four AI. people. •• Investment portfolio: Miton focuses on seed •• Investment focus: Consilium invests in and venture investments in the field of SaaS, AI, companies in the EU and CEE as well as North and fintech. It has made six investments, and in America. It invests in traditional sectors such two of the six investments it is a leading investor. as manufacturing (components of machines for agriculture, industry, and construction), and YSoft Ventures the design and manufacturing of sports goods and equipment. It also invests in early-stage •• Company: YSoft Ventures was established in businesses with global potential in applied 2014 and it resides in Brno. YSoft Ventures is biotech, new materials, energy storage, and the investment arm of YSoft, a successful global additive manufacturing. software and hardware startup using access to local engineering and IT talent. It provides startups •• Investment portfolio: Its preferred equity value with support in marketing, financial management, range is €20-50 million. management, R&D, global presence, and sales support. YSoft Ventures’ management team is Symfonie Capital four people. •• Investment focus: YSoft focuses on the CEE •• Company: Symfonie was established in 2014 in the UK. It has a management team of 4 partners. region. Because YSoft also produces its own It offers startups and companies its expertise in hardware and software, they choose to invest finance and investment management. in companies with the same focus and passion. It focuses on building intelligent enterprise •• Investment focus: It invests in SMEs in the UK, office solutions that build smart business (waste Czech Republic, and Poland. Its portfolio consists management solutions, network security, of: (a) angel venture fund (focus on innovative performance monitoring, hardware in projection high-growth companies in IT, IoT, financial and and video-mapping, digitization of movement business services, mobile, efficient energy, and in Industry 4.0, storage, and video compression healthcare), (b) high income debt investments solutions). (high-yield instruments), (c) tailored investments (hand-picked quality investments). •• Investment portfolio: It focuses on seed and venture round investments. It has made eight •• Investment portfolio: Symfonie focuses on seed investments of value around $4 million, four of and early stage investments between €50,000 them as a leading investor. and €250,000. Annex 11. Czech Entrepreneurial Landscape 124 JAM Ventures two will offer shares on the market on 2nd October 2018. No new companies offered shares on the •• Company: A newly established venture capital START day in June 2018. fund in Prague. •• Investment focus: Its focus is on post-acceleration •• Focus: It focuses on companies who have completed proof of concept. Typically, it has seed investments. It screens for €300,000 – €1 private banking clients, and it requires minimum million seed investments that have the potential capital of €14,000 in order to filter out micro retail to growth 10 times in the next five years. The investors (those who invest about €500). investment structure they use is quasi equity. It also perceives itself as a bridge between startups in Prague and investors in Berlin. •• Investment portfolio: It aims at the investment of €35-50 million under management. Support side Keiretsu Forum Opero •• Organization: It has about 25 members, four or •• Organization: Opero is a membership-based five of whom are active investors in projects in the and commercial rental co-working space. It offers Czech Republic and abroad. It has established a its members closed offices, fixed desks, flexible mentoring project called Angel Academy where it memberships, and club membership. provides investors with seminars and coaching on risk and early stage investing. It provides investors •• Focus: Within the B2C space, Opero focuses with administrative help post-investment. Works on more mature companies. It also offers B2B with an annual membership fee. mentoring in collaboration with the British Chamber of Commerce. Fundlift TACR (Technological Agency of the Czech •• Company: Investment-crowdfunding platform in Republic) Prague that links investors to projects. Currently has 8,000 registered members, 2,500 of them •• Organization & focus: TACR is a Government- are active. backed agency that supports applied research and experimental development in the field of •• Investment focus: Fundlift focuses on passive advanced technologies, materials, systems, investors who invest online in bonds, convertible energy, and the environment. Its goal is technology debt, and equity, mainly in the food & gastro transfers from universities to the private sector. industry. The model is ‘1-firm, 1-year, €1-million’. Unico.ai Prague Stock Exchange •• Organization: The Prague Stock Exchange was •• Start-up: Unico focuses on technology transfers. It helps universities and research organizations established right after the fall of the communist to commercialize their research and ideas. It regime in the Czech Republic in 1990. A very also helps the private sector to find expertise recent innovation is the START program, which and technology for their innovation, and it helps is an IPO market for SMEs. It is branded as a investors to find early-stage promising projects for “market for smaller businesses” with a valuation of investment. It uses AI and data processing skills. between €1 million to €80 million270. The market Its unique market offering is its ability to tap into allows a minimum investment of about €19,000. non-public databases. Trading on the START market is not continuous as on other markets of the Prague Stock Exchange, •• Focus: It has facilitated projects in marine but it is an auction that takes place for 20 minutes techniques, biomedical engineering/life four times a year, on predetermined days, called sciences, nanotechnology, chemistry, electronic START Days. The first two companies were placed microscopy, efficient energy and housing, into the market on 15 May 2018 and an additional infrastructure, and virtual reality. 270 For more information, see: https://www.pse.cz/en/trading/markets/start-market/ 125 Annex 11. Czech Entrepreneurial Landscape SUPPORT SIDE Incubators Fund-backed accelerators Foreign government Public sector facilitators Private sector facilitators facilitators Annex 11. Czech Entrepreneurial Landscape 126 Confederation of Industries •• Investment focus: Loans and guarantees to SMEs with the goal to finance more risky projects by •• Organization: It is a business lobbying providing collateral and interest rates relief. organization. It acts as an umbrella for 33 associations together with 141 direct members. The overall number of its members reaches CzechInvest (Czech Accelerator) 11,000. •• Organization: Investment and business •• Focus: It focuses on cohesion policy, digitalization development agency backed by the Government of the economy, energy, environment, EU affairs, (reporting to MIT). It provides starting companies export, human resources, Industry 4.0, labor with mentoring, funded acceleration, and market, R&D, labor and tax legislation, and networking. It has mentored almost 200 transportation infrastructure. companies since 2010, and 10 of those have received funding from local investors. C-Corpfin •• Focus: It focuses on projects only outside Prague. Its sectoral focus is on aerospace •• Company: C-Corpfin is a financial advisory (space program supported by the European company. It offers M&A advisory services Space Agency), automotive, business services, around raising debt and equity capital, company electrical engineering and electronics, advanced valuations, and on value creation. engineering, ICT and data centers (90 percent of •• Focus: Mid-market transactions. Its clients span companies in the Czech Republic are in ICT), life from government enterprises (railway state sciences, and nanotechnology. company) to pharmaceuticals, energy, TV and entertainment, manufacturing, and the banking sector. StartUp Yard •• Organization: Fund-backed accelerator, deal- flow generator for the investment community in Depo Ventures the Czech Republic. Every eight months it takes •• Company: Depo was established in 2016 in a batch of three startups on board for a three Prague. It is an investment platform, which month acceleration program. Currently it has connects investors and startups (‘venture by nine startups on board. Out of an average of 150 service’ model). It aims to move into private equity applications, it takes in 10 startups that have at (fee-based business model). It offers corporate least two founders. It offers a pool of 157 pro- finance and business law consulting. It also makes bono mentors. some investments. Currently it has six staffs of which one is a partner. •• Focus: It focuses on tech startups with global ambition. It offers €30,000 for the acceleration in •• Investment portfolio: Depo has mobilized €2.5 exchange for 5 percent equity. million within three projects. UP21 Busyman •• Organization: UP21 is a Prague-based incubator •• Company: Peer to peer (P2P) crowdfunding backed by a seed fund. It has incubated 17 platform, established in 2010 in Prague. startups in the past two years, four of which have •• Investment focus: Pre-seed, early stage projects raised venture capital funding. Startups in UP21 of $100,000-$200,000. are provided with key performance indicators (KPIs) – only if they reach their KPI goals, can they access more seed funds. The membership fee is CMZRB 5,000 CZK (about $220). Typically, it offers €20- 50,000 per startup and asks for 15 percent of •• Bank: is the development bank of the Czech equity if a series A investment happens. Republic. It supports, in accordance with the economic policy intentions of the Government •• Focus: It focuses on B2B startups that are not of the Czech Republic and the regions, the necessarily in the tech industry. It also focuses development of SMEs, infrastructure, and other on early-stage startups, typically at the ideation sectors of the economy requiring public support. or minimal value proposition stage. 127 Annex 11. Czech Entrepreneurial Landscape ANNEX 12 INTERVIEWED STAKEHOLDERS The team met with the following stakeholders: •• David Dostal, Fetview •• Alejandra Mendoza, ImpromptMe Business Angels/Business Angel Network •• Michael Fehn, E.ON •• Karel Obluk •• Lukas Sedlacek, ELAI & Poetizer •• Keiretsu Forum •• Jakub Elias, Shipvio Venture capital/Crowdfunding platforms •• Bruce Pales, 360cities •• Symfonie Capital •• David Vitek, NWT •• Equus Ventures Incubator/Accelerator/Co-working Space •• Miton Ventures •• OPERO •• Depo Ventures •• CzechInvest (government) •• Ysoft Ventures •• Startup Yard •• J&T Ventures •• Busyman •• Credo Ventures •• UP21 •• Fundlift Government Agencies M&A/Private offices/Others •• Ministry of Finance (client) •• C-Corpfin •• MIT •• Consilium •• MPO •• Medesa •• CzechInvest Entrepreneurs •• Technological Agency •• Vojta Nosek, Unico.ai •• Confederation of Industry •• Jan Rehak,NETIOproducts •• CMZRB •• Pavel Jurus, Big Terra •• Prague Stock Exchange Annex 12. Interviewed Stakeholders 128 CASE STUDY 1 HBAN BUSINESS ANGEL NETWORK IRELAND The HBAN was established by Enterprise Ireland •• to ensure international best practice is and InterTradeIreland in 2009271 and managed on implemented; their behalf by a competitively tendered private sector service provider on a three year rolling •• to standardize legal documents for business angels and syndicates; contract. The primary strategic aim of HBAN is to facilitate •• to work in co-operation with all angels on the island. investment by business angel investor syndicate groups in early stage companies on the island of Ireland. This is achieved through the establishment, The service provider operating HBAN on behalf of support, development, and promotion of business Enterprise Ireland is expected to be independent of angel investment, and specifically investment existing and new angel networks and funds. As such by syndicates of angels, and by facilitating and they are not permitted to operate another BAN or encouraging referrals of investment opportunities syndicate group or provide business angel services to angel investors. whilst delivering the HBAN program. The main objectives of the program are specifically: HBAN has an advisory group made up of representatives of business angel syndicates and •• to develop business angel syndicates i.e. groups high profile entrepreneurs. The role of the advisory of more than one business angel who work as a group is to provide further direction and advice to the partnership to fund businesses; HBAN initiative and to enable HBAN to get feedback •• to act as the lead representative body for business and support from both representative groups. angel investing on the island; HBAN’s key deliverables are: •• to lobby Government on behalf of BANs on the (a) Securing the participation of high-net-worth island; investors to build syndicates through the HBAN •• to provide training for investors on business angel Network, i.e. individuals with investable assets; investing; 271 http://www.hban.org/ 129 Case Study 1. HBAN Business Angel Network Ireland (b) Establishing a network of contacts to facilitate Outcomes company referrals to syndicates from national and regional economic development agencies, primarily Enterprise Ireland, Invest Visible angel investment in Ireland has increased NI and InterTradeIreland, and also from other from €4.6 million into 28 investments in 2009 to BANs, corporate finance houses, legal and €12.8 million into 45 investments in 2017. HBAN is accountancy practices, incubators, accelerators, forecasting angel investing will reach €25 million per commercialization, and offices. year by 2020. (c) Facilitating introductions between individual From there being no visible angel networks in business angels in syndicated deals and 2009, there is now a network of HBAN-supported syndicate/investor groups to companies seeking syndicates across the Republic of Ireland. These investment; include technology syndicates in Dublin (Bloom Equity) and Cork (Boole Investment Syndicate), all- (d) Establishing, supporting, and developing a island Medtech and Food syndicates, the Ireland- minimum of seven new syndicate groups over wide Irrus Investments Syndicate (investing in a the 3 year period of the contract; broad range of life science, medical technology, and (e) Position itself as the lead angel representative other IP based companies), and regionally based body to Government, stakeholders, business, syndicates such as the West by North West Syndicate and the media for business angel investing on and South East Business Angel Network. HBAN also the island of Ireland. This will include a lobbying supports networks of individual business angels. role where appropriate; (f) Providing advice and training to business angels on business angel investing and syndicate development. HBAN has responsibility for introducing standardized legal documents/ agreements for business angel investment deals to help reduce the administrative and cost burden to both angels and companies; (g) Coordinating and managing public relations events and activity – HBAN is required to implement a comprehensive marketing and promotional plan for the program, to raise the profile of the HBAN brand. Activities are expected to include HBAN involvement in conferences and events associated with raising finance aimed at early stage companies and investors, a monthly HBAN newsletter, press releases on Angel investments, and regular social networking postings; (h) Developing and managing the HBAN website including publishing all deal opportunities on its website; (i) S eeking to introduce standards and international best practice into the angel market on the island; (j) Facilitating the introduction of international business angels to the network including the establishment of linkages with international angel groups; (k) Hosting and management of an annual business angel conference. Case Study 1. HBAN Business Angel Network Ireland 130 CASE STUDY 2 WELSH DEVELOPMENT BANK ANGEL COFUND The Welsh Angel CoFund is a £8m fund which aims •• The lead investor and company will complete to boost angel activity in Wales. Launched by the a simple application form (and relevant search Development Bank of Wales (DBW) in May 2018, it is documentation) for submission. available to syndicates of investors (a minimum of 3 individual angels) looking to co-invest in Wales based •• The syndicate carry out all due diligence on the company/project before presenting it to the fund SMEs. Each syndicate must be led by an experienced for final approval. angel investor investing their own money in the deal. Lead investors are pre-approved by Angels Invest Wales, the NAA for Wales established by the DBW, based upon the individual’s experience and track record of angel investing. The lead investor and the Investment criteria other syndicate members may be not based in Wales, but all companies invested in need to be Welsh. •• Equity and loans from £25,000 - £250,000. •• Maximum exposure to any individual syndicate is £700,000. •• Syndicate members must not have existing Fund operation investments in the company/project. •• Syndicate member family or friends who are •• Lead investors apply directly to the DBW for involved in companies/projects will be deemed approval. There are currently two intakes per year a conflict of interest. for lead investor applications. •• The Fund will contribute up to a maximum of 50 •• Upon successful application, the lead investor percent of the total deal. forms a syndicate with a minimum of two other experienced investors. Once a syndicate has been formed they can apply for co-investment. 131 Case Study 2. Welsh Development Bank Angel CoFund CASE STUDY 3 SCOTTISH COFUND (TO MAY 2015) The Scottish CoFund (SCF) was established in Fund objectives 2003 and has been capitalized twice, initially £60m and then a further £67m. The operation of the fund (though not its legal status) was changed in Its original business plan set out a number of 2015 to reflect continuing market development and objectives: maturity in Scotland. This case study describes the •• Increasing the amount of “equity gap” venture operational structure up to 2015. capital available to SMEs in a way that did not displace existing investment activity; It is managed by the Scottish Investment Bank (SIB), part of Scottish Enterprise. The co-investment model •• Demonstrating to potential investors that returns was designed to increase capacity within the Scottish could be made by investing in the “equity gap” investment market. The fund directly encouraged thereby stimulating the growth of the venture more investors into the Scottish market and increased capital industry; the incentives for investors and angels to operate •• Increasing the number of fund managers within syndicates. The design of SIB’s CoFund operating in the “equity gap”; and allowed experienced investors to lead more and larger deals and attracted investors from outside •• Attracting new investors who had not previously invested in this sector of the venture capital Scotland, providing valuable expertise and greater market. scale capital. The model provided for efficient and effective delivery of investment capital into high growth businesses. The fund was to overcome these market imperfections by acting as a catalyst in encouraging additional players to enter the market, both by attracting investors from outside Scotland and by encouraging the growth of new angel syndicates. In its turn this would increase both capacity and capability in the market. Case Study 3. Scottish CoFund (to May 2015) 132 Investment size Eligibility of investee The SCF provided equity financing (very occasionally The investee company had to conform to the EU convertible loans) of between £100,000 and £1 definition of a SME, be centered in Scotland, and million into company financing deals of up to £2 not be within one of the following restricted sectors: million. The total amount could be allocated in multiple tranches. •• Real estate/property development; •• Social and personal services; •• Pubs, clubs and restaurants; •• Local services; Fund operation •• Banking and insurance; •• Motor vehicles; •• The SCF did not find and negotiate investment deals on its own. Instead it formed contractual •• Nuclear decommissioning; partnerships with active venture capital fund •• Professional services; managers, business angels, and business angel groups (the SCF partners). •• Retail. •• Applicants to be partners were subject to due diligence by SIB to ensure they had the experience and credibility to make investments in early stage businesses and that the source of their funds was Investment process legitimate. This assessment also considered the capacity of the partner, in terms of the staff they All deals were sourced by SCF co-investment employed, to scrutinize investment propositions, partners. Companies seeking investment were undertake due diligence, support the company signposted to a list of SCF partners on the Scottish post investment, and provide the necessary Enterprise web site. These partners were tasked with reporting to the Scottish Enterprise. finding investment opportunities and negotiating the •• Once the SCF partner went through a formal terms of the deal. application process they led all investments and were paid a flat arrangement fee per investment at completion of 2.5 percent of the SCF funds invested. What SIB expects from its co- •• The partner investors were also permitted to charge the company receiving investment investors “reasonable” legal and due diligence fees. SIB specific expectations of their partner investors •• The SCF partner found the investment opportunity, include: negotiated the terms of the deal, and offered to invest its own equity cash. If the opportunity •• SIB expects its co-investors to act in a professional needed more money than the partner could manner and in good faith towards Scottish provide, it could then approach the SCF to co- Enterprise/SIB at all times, and use such skill invest on equal terms. and care as would generally be expected of an investor engaging in risk investments; •• The SCF partner determined how much the SCF could invest in any new deal. The SCF was •• SIB expects certain standards of fair dealing, therefore genuine “gap funding”. No private transparency, and alignment of interests with its sector funding was displaced. accredited partners and co-investors e.g. while SIB accepts that an investor has the right to charge •• Companies approached partners directly fees to an investee company, it expects these fees meaning that SCF had no influence on the deal to be reasonable in the circumstances and in line selection of the private sector. This ensured that with the current market rate; deals were undertaken on a fully commercial basis. •• SIB expects an investor to be free of conflicting interests with a company. If an investor does have any conflicts, actual or potential, these should be 133 Case Study 3. Scottish CoFund (to May 2015) disclosed to SIB and the company and managed Post 2015 operation appropriately. This includes conflicts where an individual within a partner organization is also acting in a consultancy or other role; SCF is partially funded under the ERDF Program, which operates on a five year cycle. At the end of •• Accredited partners (in SCF investments) are the cycle completed in 2015 SIB carried out an expected to undertake appropriate levels of assessment of operations and delivery in response diligence on the investment opportunities to changing market needs. This resulted in changes presented to SIB; in operation including lowering the minimum and •• The co-investor or accredited partner’s legal increasing the maximum amounts that can be representatives are responsible for preparing invested by the fund, and increasing the overall deal the legal documentation, which should include size. The minimum fund investment was reduced from SIB’s legal requirements, to execute a transaction; £100,000 to £10,000 and the maximum cumulative investments into any one company led by accredited •• SIB expects that investee companies will be partners increased from £1 million to up to £1.5 managed in accordance with good corporate million on a cumulative basis. The maximum deal governance and its accredited partners and/or size for SCF investments has risen from £2 million to co-investors to support this; £10 million. This reflects an increasing focus on ‘scale •• Each investee company will be allocated a portfolio up’ companies rather than startups, and a wish to manager (a Scottish Enterprise employee) to address the relative lack of formal follow on venture manage the SIB investment. SIB expects its co- capital funding available in Scotland. investor to engage with the portfolio manager as appropriate and share information and views on the company and investment; •• SIB expects to be kept up to date with any changes in personnel of its accredited partners and co- investors. Case Study 3. Scottish CoFund (to May 2015) 134 CASE STUDY 4 INVEST NI COFUND A Northern Ireland (NI) Co-Fund was launched Unlike other CoFunds models, the NI fund does not in June 2011 with initial capital of £7.2 million have any specific objectives around the development (increased to £12.5 million in 2014) by Invest of the supply side of the investment market. Invest NI Northern Ireland funded through the ERDF. It is however separately fund the HBAN angel network managed (following tendering) by independent which is tasked with angel market development. professional fund manager Clarendon Fund Managers Ltd (CFM) through a management services agreement. CFM is responsible for facilitating investments and identifying potential companies and investors. Fund terms The fund invests in rounds of between £250,000 and £450,000, at a ratio of up to 45 percent of the investment round on pari passu investment terms. Aim of the fund The Fund will only consider ‘new investments’ from The May 2010 economic appraisal, which made the the private investors where they can demonstrate case for roll out of the CoFund in 2011 for six years272, that they have carried out their own due diligence identified the following objectives: and independent assessment of the investment •• To strengthen the capability of NI to develop and opportunity. commercialize new technologies and break into growing sectors and markets; •• To address imminent gaps in the availability of venture capital in NI by providing a continuum of funds and a deal flow chain across seed, early stage and development capital. Following a review of the Funds operations completed in 2016 Invest Northern Ireland provided £17.7 million to a second fund, Co-Fund NI II. This is 272 managed by the same fund managers. 135 Case Study 4. Invest NI CoFund Fund operation Development of angel investment skills & networks The fund was established with the intention of deals being private investor led with relatively passive An interim evaluation of Invest Northern Irelands involvement from the managers. It was anticipated Fund of Funds in 2014273 identified that work to form that initially the NI CoFund would assess private angel syndicates (they specifically refer to the work investor syndicates and specific investments on done by Scottish Enterprise) is something that would a deal by deal basis but over time expected to have been of value in Northern Ireland prior to the move to a position where the fund has a number launch of the NI CoFund. of “pre-qualified” partner syndicates. The fund documentation specifically states that the desire The interim evaluation of the Co-Investment fund is to move towards the Scottish co-investment in 2016274 concluded that the relative immaturity model. Initially the fund would “provide assistance of the Northern Ireland equity market, both from a and support, where required, to help facilitate the company and from an investor perspective, has had investment process, without leading deals and a significant impact on the expected operation of the making investment recommendations”. Even in fund. The intention had been to have a delivery model the relatively passive role the fund managers were based on the principle of passive involvement and expected to have to: the provision of a facilitator role in the completion •• Assist the private investors with setting out term of investments. Given the immaturity of the market sheets, discussing valuation principles, and and the varying levels of sophistication among providing guidance on due diligence and the investors, the fund is unable to remain as passive in investment process (the fund does not do its own the investment process as the model would ideally due diligence, but expects all due diligence done wish. Indeed, without a proactive approach and by the angels to be shared and will comment on additional effort, the number of completed deals it and guide suggested additional work). would be much reduced. •• Work with investee companies and investors Fund managers are having to take a more hands-on post investment to plan for follow on investment and involved approach to facilitating the investment rounds. being completed. This includes more involvement than planned in sourcing matched funding, providing Angel activity in Northern Ireland is however at a additional support around the due diligence and very early stage of development, with few angels and legal aspects, and post completion of the investment very few potential lead angels. This has resulted in in the monitoring and mentoring of the company. the fund managers having to take a more active role than anticipated. Operational performance of the Co-Fund At the time of its last formal evaluation in June 2015, £8 million had been invested into 28 companies via 53 investment transactions. 273 Interim evaluation of Invest NI Fund of Funds, Urbis Regeneration, 2014 https://secure.investni.com/static/library/invest-ni/documents/fund-of-funds- interim-evaluation.pdf 274 Co-Investment Fund Interim Evaluation – Final Report, Capaxo Ltd, Nelson Gray, December 2016. https://secure.investni.com/static/library/invest-ni/ documents/co-investment-fund-interim-evaluation-report.pdf Case Study 4. Invest NI CoFund 136 CASE STUDY 5 UK BUSINESS ANGELS COFUND The fund was launched in November 2011, return (although no specific IRR target has been set) financed by a loan from the UK Government in order to demonstrate to potential new private Regional Growth Fund (15 year term non- sector investors that it is possible to achieve attractive subordinated loan). It was set up with the financial returns acting as a business angel. It is Government’s arm’s length development agency, believed that this will encourage more individuals to the British Business Bank (BBB) acting as the fund become angels, thus increasing the supply of private manager. Initially capitalized at £50m, this was sector funding. increased to £100m in 2014. In order to be eligible for the endowment from government, the fund was constituted as a company limited by guarantee and classified as a private sector company. The Board comprises members independent of the Investment size and stage Government and Government are not involved in investment decisions. The fund is managed within the The fund invests amounts between £100,000 and BBB by four staff with the assistance of an external £1 million in SMEs alongside syndicates of business law firm for legal document review275. angels, on an up to 50:50 ratio. The fund may not hold more than 30 percent of a company’s equity. Fund objectives Follow on reserve The CoFund has a specific headline objective to seek to increase the quality and quantity of business The fund reserves 100 percent of the fund value for angel investing in the UK. A focus of the fund is to follow on investments in its own portfolio. ensure it achieves a commercial rate of financial 275 In 2018 the fund management structure was changed so that it is now managed by a newly created fund management company Akero Capital Partners. The personnel previously operating the fund within BBB have transferred to carry out the same functions within this new entity. The operation of the fund remains the same. 137 Case Study 5. UK Business Angels CoFund Operation •• data sheet; •• commercial due diligence; Businesses cannot approach the fund directly. This •• references for management and key personnel; has to take place through an angel syndicate. All subsequent interaction is with the angel syndicate, •• financial due diligence; not the company. This reflects the fund’s motivation •• legal due diligence; to increase the number of business angel syndicates in the UK and to promote best investment practice •• technical due diligence; in the angel community. •• planning reports and patent documents. The lack of established and experienced angel groups in England was a reflection of the emphasis The BBB provide feedback to syndicates on any on angel networks276 as the primary form of angel papers that are rejected (4 out of 5 are). Rejection, organization in the country. This means that the or a suggestion to withdraw, is communicated as Scottish approach delegating investment decision early as possible. making to the investing angels, with the fund doing no due diligence or deal structuring was not Investment decisions are made by an independent appropriate. This results in the significant difference IC on the basis of satisfactory due diligence and a between the model used for the Angel Co-Fund and compelling commercial investment case. Proposals that used in Scotland for SCF. The BBB have to be are not put forward where the BBB are doubtful active investors with full discretion over investment of seeing a proposal being approved. The IC is decisions. Investment decisions are made on a deal independent of the Fund Board and the BBB and is by deal basis (as opposed to allocating funds to angel made up of 15 experienced investors, all of whom groups for them to make the investment decisions). have either entrepreneurial or institutional investment The lead angel investor is also approved on a deal backgrounds (or both). Half are business angels by deal basis, even where they have successfully co- and half fund managers (i.e. from an institutional invested with the fund previously. investment background). The BBB will carry out an initial review of the proposal The IC considers all propositions on a fully commercial to ensure that it appears to qualify and is likely to be basis, “from the perspective of an angel investor”. a suitable investment candidate, as well as giving They are tasked with looking at deals on an individual advice and guidance on the qualification process for and stand loan basis, not, as would be the case in the syndicate and lead angels and other requirements a formal venture capital fund, on a portfolio basis. of the fund. They are not, for example, tasked with balancing portfolio risk. For businesses that pass an initial review, the angel syndicate (not the company) will be asked to submit Questioning tends to focus on whether there is an investment paper template provided by BBB evidence that: which provides an overview of the business. It should •• An appropriate level of due diligence has been cover the following: carried out by the lead angel. •• management team and key personnel; •• The lead angel has a detailed understanding of •• market, market opportunity; the business. •• business model; •• The lead angel can convincingly explain why it represents a good investment. •• financials; •• investment structure; The IC is primarily assessing the lead angel’s •• post-investment funding need; competence, as an investor and as a partner to the fund. •• exit strategy; 276 Angel networks work in similar fashion to dating agencies. They provide channels of communication (web site, presentations) which enable angel investors to examine investment opportunities from entrepreneurs seeking finance. They do not play any role in the investment process beyond this facilitation function. Most English networks relied on public sector financial support and have ceased operation since the closure of the Regional Development Agencies. Case Study 5. UK Business Angels CoFund 138 They are required to address three specific questions Lead angel investor for each investment (both for initial and follow on investments): Within the syndicate there must be an identified •• Does the investment opportunity appear to ‘lead angel’, and that lead angel must be separately offer a commercial return, relative to the risk, approved by the fund. In approving lead angels that a wealthy private investor (reasonable and the fund will consider if they have the willingness, experienced) might consider reasonable; knowledge, and time to fill the role. It is the •• Has an appropriate level of due diligence, based responsibility of the lead angel to: on the evidence provided, been carried out for •• Identify high potential SMEs who are looking for the specific investment proposed; and investment; •• Are the terms and structure of the investment •• Negotiate terms / perform due diligence / drive proposed appropriate and does the CoFund have the transaction; and alignment of interest with the angel. •• Be able to monitor and support the investees post investment. Fees and costs The criteria used in selecting lead angels include: •• Evidence of a significant (relative to the individual The fund charges no fees to the company on the wealth) new investment into the company; public element of the money. The fund pays the •• Is contributing a minimum of £35,000 to £45,000 angel syndicate a 2.5 percent fee for the upfront work (rule of thumb); they undertake forming the deal. •• Evidence of due diligence ability; •• Evidence of robust investment appraisal ability (ideally using sector expertise); Angel partner eligibility •• Evidence of available time to undertake the role; •• Has interests aligned with the fund; Angel syndicates become partners of the fund by •• Has some follow on capacity. having a deal approved. They are not “pre-approved” or pre-qualified as is the case with the Scottish SCF. Angel Syndicates must be: •• Groups of three or more active investors, investing at their own discretion; •• Independent of the businesses and investing in it for the first time; and •• Putting a meaningful, to them, amount of cash into the business. •• Submitting a proposal to the fund where it has made the decision to invest but is unable to raise sufficient equity to meet the requirement of the investee business. •• Syndicates do not need to be formally constituted and currently tend to form around a single transaction where the members have agreed to invest. Syndicate members are expected to be actively engaged with each other during the investment and work together in terms of sharing due diligence and negotiating terms. 139 Case Study 5. UK Business Angels CoFund CASE STUDY 6 NEW ZEALAND SEED COFUND The Seed Co-investment Fund (SCIF) was •• Increase the scale and enhance developed established in May 2005 by the New Zealand networks for early stage investment; Cabinet Economic Development Committee to assist in the development of the market for •• Catalyze investment that would not have occurred without the program, and; angel equity finance. The program commenced operations in July 2005 and the first co-investment •• Minimize fiscal risk and cover costs (the fund does partnerships and first investment were announced in not have a specific financial return (e.g. IRR) target. January 2007. It is a 40 million New Zealand dollars ($NZ) (€20 million) fund operated by New Zealand The core focus and aim of the fund is the development Venture Investment Fund (NZVIF), a government of investors and their capabilities in the New Zealand entity. market. The cash investment in the companies is a by-product of this. The fund believes that the competencies of angel investors can be developed: Fund objectives •• through the competency of angel investment networks (i.e., in terms of better investment The overall objective of the fund is to support the selection strategies, mentoring practices, development of New Zealand’s market for angel investment management, and investment equity finance. This is set out in the policy documents execution); underpinning the fund: •• Develop greater professional capacity in the •• through the competency of individual angel investors within a network (i.e., through their market for intermediating funds between exposure to network practices); investors and newer technology-based firms; •• Increase the depth in the specialist skills needed •• through the competencies of individual angel investors outside a network (i.e., by adopting best to assess and manage early-stage technology- practice in the marketplace). based investment; Case Study 6. New Zealand Seed CoFund 140 Fund structure Investment committee The overall objective of the fund is to help develop The SCIF is set up to follow the investment decisions New Zealand’s angel investment market and, in of its pre-selected partners. The IC does not therefore doing so, catalyze investment by angel investors that consider the quality of the underlying investment, would not occur otherwise. As a result there are two or the qualification of the partner brining it forward program mechanisms: (unlike for example the UK Co Fund IC). •• an annual budget of $NZ 100,000 for market The key points being looked at by the NZVIF IC are development initiatives; as follows: •• up to $NZ 8 million per annum for passive •• Stage: The company is at the seed or startup investment in seed and startup investments stage; alongside pre-qualified angel investment partners. •• Conflicts: That there are no conflicts of interest; and/or that any potential conflicts of interest have been fully disclosed and appropriately dealt with. Examples of conflicts of interest include: Operation {{ F ees/other payments to shareholders or advisers; The structure and operation (though not the definition {{ Any other investment terms that do not apply of objectives) was significantly based on the Scottish to all investors; Co-Fund model. {{ Existing shareholdings or other interests in the company, including current debt outstanding The fund can invest up to $NZ 250,000 (€145,000) to any source; into a new investment proposed by an investment partner, on an up to 1:1 match funding basis. SCIF has {{ The proposed investor representative for the the ability to participate in “follow on” investments in deal is not sufficiently qualified and/or aligned the same investee company for a further $NZ 250,000 with SCIF’s interests as an investor; –up to a total investment limit of $NZ 750,000 per {{ The proposed investment is into a company company. Only 4 companies have received more that is an associate or related company to one than $NZ 500,000. that SCIF has already invested into; The SCIF does not conduct deals with individual •• New Zealand nexus: The investment has a New investors. Instead investment partners, who may be Zealand nexus because the company has the angel networks, angel funds, etc., are “pre-qualified” majority of its employees (by number) and assets by NZVIF. The fund then relies on the partner’s (by value) in New Zealand at the time of initial investment skills and judgement for individual investment; investments. •• Eligible industry: The investment is in an eligible industry. While the fund is passive in the process it requires that partners use standard documents. This is credited with significantly lowering the legal costs to $NZ 5-10,000 (€2,500 - €5,000) per deal. 141 Case Study 6. New Zealand Seed CoFund Co-investment partners The fund has 12 active angel partnerships (out of 15 approved from 37 applications). The size of SCIF partnerships ranges from 12 to over 110 individuals. Co-investment partners are pre-qualified on the basis of: •• investment and commercialization skills, including experience in identifying investment opportunities and contributing to their commercialization; •• a credible strategy for identifying and selecting early-stage investment opportunities; •• the availability of at least €4 million of private sector capital over the course of the three to four year investment period; •• a credible syndicate or investor network and investment structure. Potential partners submit a 10–20 page application which articulates: •• legal framework & governance; •• commercial sustainability; •• processes and systems for {{ sourcing deals {{ due diligence {{ negotiating of terms {{ managing investments; •• explanation of the investment decision making process; •• key personnel, IC. Case Study 6. New Zealand Seed CoFund 142 CASE STUDY 7 TARGETED TAX INCENTIVES IN DELAWARE In May 2018, the Delaware state government •• Fewer than 25 employees; introduced a new tax incentive277 to encourage investment in a specific kind of Delaware tech •• A tech company with a proprietary product in a qualified high-technology field (including startup that is committed to innovating in agriculture, manufacturing, wildlife preservation, the state. The Angel Investor Job Creation and environmental science, financial technology and Innovation Act for Small Technology Companies transportation); gives angel investors a tax credit of up to 25 percent of their investment, provided they make a minimum •• Employees’ annual wages must be at least 175 investment of $10,000. The maximum tax credit percent of the federal poverty guideline for a available for each individual is €125,000. family of 4 and intern wages must be at least 175 percent of the federal minimum wage; Businesses have to get certified by the state as a qualified business before the investment is made, •• The business has not been in business longer than 10 years, unless it’s a medical/pharmaceutical meeting the following conditions: company where FDA approval is required; •• Must be based in Delaware; •• Not previously received private equity investments •• Must be engaged in innovation: of more than $4,000,000; {{ Using proprietary technology to add value to •• Has not issued securities that are traded on a a product, process, or service in a qualified public exchange. high-technology field; {{ Researching or developing a proprietary This tax credit is aimed at promoting local high product, process, or service in a qualified high- quality job creation in early stage companies from technology field; fairly serious angel investors (the $10,000 minimum {{ Researching, developing, or producing a threshold pushes this beyond the investment capacity proprietary technology, product, process, of the typical crowdfunding investor). It must be a or service in the fields of agriculture, company involved in innovation in specific sectors. manufacturing, wildlife preservation, Retail, property development, and similar would environmental science, financial technology, not qualify. It must be supporting tax paying jobs (a or transportation; high percentage of the tax credit to investors is likely recovered from additional payroll tax). •• At least 51 percent of employees are in Delaware; 277 http://legis.delaware.gov/BillDetail?legislationId=25737 143 Case Study 7. Targeted Tax Incentives in Delaware CASE STUDY 8 INVEST – GRANT FOR BUSINESS ANGEL CAPITAL278 Launched by the German Government in 2013, Companies who wish to offer this investment benefit the INVEST grant for business angel capital to potential investors must apply and be approved is designed to stimulate more angel investing for eligibility by the supervising authority, the Federal in Germany. It comprises a grant at the time of Office of Economics and Export Control. To qualify investment and a grant at time of equity to eliminate the company must: the cost of capital gains tax. •• Not be older than 7 years; •• Be an SME by the EU definition: less than 50 employees, maximum revenue or gross assets of €10 million; Initial grant (acquisition grant) •• Not be listed on the stock exchange; Angel investors receive a non-repayable, tax •• Have a head office within the European Economic Area (EEA), with at least one branch in Germany; free grant of 20 percent of their investment on investments of a minimum of €10,000 and up •• Carry on an innovative trade as defined by a list €500,00. The maximum grant per individual per of the Federal Office of Statistics or prove to be year is €100,000. The investment must be held for innovative - through a patent of central importance a minimum of three years before exiting (otherwise to the business (max. 15 years old), the receipt of it is repayable). public funding for research and innovation up to two years prior, or by an independent assessment; In addition, there is an exit grant consisting of a non-repayable, tax free grant of 25 percent of the •• Not be dominated by another company. profit earned on an exit. Having received approval, the companies can Individual companies can raise a maximum of €3 place the eligibility logo on their website and use million of investment using this grant. it for presentations. This indicates their eligibility to potential investors and increases their chances of obtaining financing. 278 https://www.existenzgruender.de/SharedDocs/Downloads/EN/Broschueren/Flyer-INVEST-Venture-capital-grant.pdf?__blob=publicationFile2016. Case Study 8. INVEST – Grant for Business Angel Capital 144 In addition to qualify the investor must: •• Be a natural person with permanent residence in the EEA, or a GmbH (company with limited liability), or UG (entrepreneurial company) with up to six shareholders. •• The investment must be made on a personal basis (not on behalf of another). •• The investment must not be funded by way of a loan, but out of the investors own capital. •• The investor cannot be an existing shareholder of the investee company. •• The investor cannot be associated with the company, for example as an employee or director. Payment of the grant is made after the government agency has confirmed the investment into the company. The investment must be made by way of an equity instrument. Where a convertible note is used the grant is available from the time of conversion to equity. Exit grant In case of profitable disposal of the shares the exit grant is a lump sum compensation for a tax on capital gains and equivalent to an exemption from the capital gains tax. 145 Case Study 8. INVEST – Grant for Business Angel Capital REFERENCES Acs, Zoltan J. and David B Audretsh. “Innovation in Large and Small Firms: An Empirical Analysis.” American Economic Review 78 (1988):678-690. BDRC Continental. “SME Finance Monitor Q4 2016.” (March 2017).http://bdrccontinental.com/ BDRCContinental_SME_Finance_Monitor_Q4_2016_Final.pdf. Bonini, Stefano, Vincenzo Capizzi, Mario Valletta, and Paola Zocchi. “Angel Network Affiliation and Business Angels’ Investment Practices.” Journal of Corporate Finance 50 (June 2018): 592-608. Boyns, Nic , Mark Cox, Rod Spires and Alan Hughes, “Research into the Enterprise Investment Scheme and Venture Capital Trusts,” PACEC (April 2003). CBInsights. “Coming of Age: European Tech Exits in Q1 2014.” Research Briefs (May 2014). http://www. cbinsights.com/blog/european-tech-exits-q1-2014. Colahan, Matt, et al. “The use and impact of venture capital schemes.” Ipsos Mori (February 2016).https://assets. publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/497288/ Venture_Capital_Schemes_report_v11_PUBLICATION.pdf. Cornell University, INSEAD, and WIPO. “The Global Innovation Index 2017: Innovation Feeding the World” Ithaca, Fontainebleau, and Geneva (2017). Criscuolo, C, P. Gal, C. Menon. “The Dynamics of Employment Growth: New Evidence from 18 Countries.” OECD STI Policy Papers No. 14 (2014). Cusolito, Ana, Ernest Dautovic, and David McKenzie. “Can Government Intervention Make Firms More Investment-Ready? A Randomized Experiment in the Western Balkans.” World Bank Policy Research Working Paper 8541 (August 2018). Czech Ministry of Trade and Industry and Deloitte Advisory s.r.o. Ex Ante Assessment of Financial Instruments of the Operational Programme Enterprise and Innovation for Competitiveness 2014-2020, 2015. https://www.mpo.cz/assets/dokumenty/54704/62511/648398/priloha002.pdf. Deloitte. “CVCA Private Equity Report: Summary of deal activity in 2015-2016.” (June 2017). https://www2. deloitte.com/content/dam/Deloitte/cz/Documents/survey/cvca-private-equity-report-2015-2016.pdf. EBAN. “Compendium of Co-investment Funds with Business Angels 2016.” (2017). http://www.eban.org/ wp-content/uploads/2017/06/Co-Investment-Funds-2016_EBAN-website.pdf. EBAN. “EBAN Statistics Compendium: European Early Stage Market Statistics.” (2016). http://www.eban.org/ wp-content/uploads/2017/11/Statistics-Compendium-2016-Final-Version.pdf. “ESIL-Angel Investing, is it for you?” YouTube. Video File. Feb. 14 2018. www.youtube.com/ watch?v=p5oP7jwFGkE. EstBAN. “EstBan 5 Years & 2017 Review!.” http://www.estban.ee/about/annual-reviews/2017. European Commission, “European Innovation Scoreboard,” (2018), http://ec.europa.eu/growth/industry/ innovation/facts-figures/scoreboards_en. References 146 European Commission. “1 in 10 enterprises in the EU recognised as high-growth companies.” http:// ec.europa.eu/eurostat/web/products-eurostat-news/product/-/asset_publisher/c2r9i0eawvMY/ content/DDN-20171019-1/pop_up?_101_INST%E2%80%A6. European Commission. “Best practices of public support for early-stage equity finance.” Directorate-General for Enterprise and Industry (September 2005). European Commission. “Business angels.” https://ec.europa.eu/growth/access-to-finance/funding-policies/ business-angels_en. European Commission. “Country Report Czech Republic 2017.” (2017). https://ec.europa.eu/info/sites/info/ files/2017-european-semester-country-report-czech-en_1.pdf. European Commission. “Czech Republic 2017 SBA Fact Sheet.” (2017). European Commission. “CZECH REPUBLIC: STRONG GROWTH AND TIGHTENING LABOUR MARKET.” (2018). https://ec.europa.eu/info/sites/info/files/economy-finance/ecfin_forecast_winter_0718_cz_en.pdf. European Commission. “SME access to finance conditions 2017 SAFE results—Czech Republic.” (2017). European Crowdfunding Network. “Review of Crowdfunding Regulation 2017.” (2017). https://eurocrowd. org/wp-content/blogs.dir/sites/85/2017/10/ECN_Review_of_Crowdfunding_Regulation_2017.pdf. European Investment Fund. “ESIF Fund-of-Funds Czech Republic.” (2017). http://www.eif.org/what_we_do/ resources/esif-fund-of-funds-czech-republic/index.htm. European Union. “Fostering business angel activities in support of SME growth.” Guidebook Series: How to support SME Policy from Structural Funds (2015). http://www.eban.org/wp-content/uploads/pdf/ Guidebook-FosteringBusinessAngelActivities.pdf. Eurostat. “High growth enterprises (growth by 10% or more) and related employment by NACE Rev. 2.” http://appsso.eurostat.ec.europa.eu/nui/submitViewTableAction.do. GEM. “Entrepreneurial Behavior and Attitudes.” (May 2013). http://www.gemconsortium.org/country- profile/55. Government of the Czech Republic Department for Analysis and Coordination of Science, Research and Innovation. “National Research and Innovation Strategy for Smart Specialisation of the Czech Republic (National RIS3 Strategy).” (2016). Haltiwanger, John, Ron S. Jarmin, and Javier Miranda. “Who Creates Jobs? Small vs. Large vs. Young.” Review of Economics and Statistics 95, no.2 (2013): 347–61. HM Treasury. “Financing growth in innovative firms: consultation.” HM Treasury (August 2017). https://assets. publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/642456/ financing_growth_in_innovative_firms_consultation_web.pdf. IFF Research, RAND for British Business Bank (BBB), UK Business Angels Association. “Business Angel Spotlight.” (2017). https://www.british-business-bank.co.uk/wp-content/uploads/2017/12/Business- Angels-2017-Research-Findings-compressed-FINAL.pdf. KfW Bankengruppe. “Beteiligungsmark t nach der Krise: Optimistischer Ausblick Aber Angebotslücke beim Wachstums capital wird grosser.” (2010). Lerner, Josh, Antoinette Schoar, Stanislav Sokolinski, and Karen Wilson. “The Globalization of Angel Investments: Evidence across Countries.” NBER Working Paper No. 21808 (March 2016). http://www. nber.org/papers/w21808.pdf. Lunden, Ingrid. “CB Insights: 3,358 tech exits in 2016, ‘unicorn births’ down 68%.” TechCrunch (Jan. 31, 2017). https://techcrunch.com/2017/01/31/cb-insights-3358-tech-exits-in-2016-unicorn-births-down- 68/?guccounter=1. 147 References Machacek, V. and M. Srholec. “Knowledge Transfer through Academic Entrepreneurship in the Czech Republic.” (2016). MacKenzie, N. and M. Coughtrie. “Archangels Impact Evaluation of Activities, 1992-2015.” Hunter Centre for Entrepreneurship, University of Strathclyde. https://pure.strath.ac.uk/portal/en/publications/ archangels-impact-evaluation-of-activities-19922015(428ad4b1-100d-450d-85e2-7fbc240f212d). html. Madill, J. J., G. H. Haines Jr., and A. L. Riding. “The Role of Angels in Technology SMEs: A Link to Venture Capital.” Venture Capital 7 (2005): 107–29. Malcolm Watson Consulting. “LINC Scotland Angel Capital Programme Interim Evaluation, July 2015 to December for 2017.” (2018). Mason, Colin M. “The Real Venture Capitalists: A Review Of Research On Business Angels.” (2008). Mazars, “Study on the impact on the State Fiscal Revenue of tax incentive of 30% granted to Business Angels’ investments,” FNBA (November 2011), http://www.eban.org/wp-content/uploads/2013/09/ Study_Mazars_Tax_Break_30-_2011_English_Final.pdf. Mergermarket. “M&A Spotlight: CEE.” Wolf Theiss Corporate Monitor (2017). https://www.wolftheiss.com/ fileadmin/content/6_news/Guides/2018/MnA_Spotlight_CEE_WolfTheiss_Corporate_Monitor.PDF. Ministry of Economic Development. Baseline Review of Angel Investment in New Zealand (Undertaken as Part of the Formation of the Seed Co-Investment Fund). New Zealand: Research, Evaluation and Monitoring Team, Industry and Regional Development Branch, November 2007. https://www.mbie.govt.nz/ publications-research/publications/evaluation-of-government-programmes/Archive/report.pdf. NESTA. “Vital Growth: the importance of high growth businesses to the recovery.” NESTA (2011). https:// media.nesta.org.uk/documents/vital_growth.pdf. OECD. “Czech Republic.” OECD Economic Outlook (2018). http://www.oecd.org/eco/outlook/economic- forecast-summary-czech-republic-oecd-economic-outlook.pdf. OECD. “Financing High-Growth Firms: The Role Of Angel Investors.” OECD Publishing, 2011. http://dx.doi. org/10.1787/9789264118782-en. Pasek, Roman. “The Greatest Science Story in the Czech Republic.” CzechInvest (2017). http://www.czech- research.com/greatest-science-story-czech-republic/. PricewaterhouseCoopers LLP (PwC), “Effectiveness of tax incentives for venture capital and business angels to foster the investment of SMEs and start-ups,” Institute for Advanced Studies (2017). PwC. “PwC MoneyTree.” www.pwcmoneytree.com/MTPublic/ns/nav.jsp?page=historical. Rahim, Hajra. “How to find and pitch to an angel investor.” The Telegraph (June 6 2018). https://www.telegraph. co.uk/connect/small-business/finance-and-funding/how-to-find-pitch-to-an-angel-investor/. Reid, Alasdair and Paul Nightingale. “The Role of Different Funding Models in Stimulating the Creation of Innovative New Companies. What is the most appropriate model for Europe?” (October 2011). https://www.researchgate.net/publication/277257785_The_Role_of_Different_Funding_Models_in_ Stimulating_the_Creation_of_Innovative_New_Companies_What_is_the_most_appropriate_model_ for_Europe. Schwab, Klaus, ed. “Global Competitiveness Index 2017-2018.” WEF (2017). http://www3.weforum.org/ docs/GCR2017-2018/05FullReport/TheGlobalCompetitivenessReport2017%E2%80%932018.pdf. Shrolec, Martin and M. Sanchez-Martinez. “Research and Innovation Observatory country report 2017: Czech Republic.” European Union (2018). https://rio.jrc.ec.europa.eu/en/library/rio-country-report-czech- republic-2017. References 148 Sohl, Jeffrey. “The Angel Market in 2017: Angels Remain Bullish for Seed and Start-Up Investing.” Center for Venture Research (May 17, 2018). https://paulcollege.unh.edu/sites/default/files/resource/files/2017- analysis-report.pdf. Staszkiewicz, Maria and Daniela Havlíková. “Czech Startups Report 2016.” Aspen Institute Prague (2016). Swedish Agency for Growth Policy Analysis. “Business Angel, Co-investment Funds and Policy Portfolios.” (2013). https://www.tillvaxtanalys.se/download/18.700b9665156832afbae1de28/1471261058898/ Report_2013_08.pdf. Tach, Dave. “Kingdom Come: Deliverance funded after two uncertain years.” Polygon (Feb. 21 2014). https:// www.polygon.com/2014/2/21/5433100/kingdom-come-deliverance-kickstarter-funded. The Conference Board. “Total Economy Database: Growth Accounting and Total Factor Productivity, 1950- 2016”. (November 2017). UK Business Angels Association. “Welcome to The Effective Angel Investor: How to get the most out of angel investing.” https://www.ukbaa.org.uk/effectiveangelinvestor/. Williams, Jeffrey. “Tax credits and government incentives for angel investing in various states.” Angel Capital Education Foundation (July 2008). www.angelcapitalassociation.org/data/Documents/Public%20 Policy/State/Tax%20Credits%20-%20Jeffrey%20Williams.pdf. Wiltbank, Robert E. and Wade T. Brooks, “Tracking Angel Returns,” Angel Resource Institute (2016), https:// angelresourceinstitute.org/reports/angel-returns-full-version-2016.pdf. World Bank. “Capital Market Assessment /Market Development Options Czech Republic.” The World Bank (September 2017). Yan, Li. “New policies to help small firms.” Ecncs.com (2018). http://www.ecns.cn/business/2018/05-04/301404. shtml. Young Company Finance. “The Risk Capital Market in Scotland: Annual Report 2016.” (March 2017). http:// www.evaluationsonline.org.uk/evaluations/Documents.do?action=download&id=835&ui=basic. 149 References 151 References