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Every start-up business needs its angel

29 September 2015 / 10:09:09  GRReporter
5483 reads

Ivan Petkov

Nikolay Mavromatis is a financial manager of a start-up company and has 8 years of experience in finance. Over the years, he has worked as a financial analyst in one of the biggest Bulgarian holding companies. He has experienced the successes and failures of having a private business. He knows what it means to start from scratch and how big the risk to fail is - lessons that he considers especially valuable. In 2008 for the first time he conceived the idea of ​​an organization to bring together business angels in Bulgaria. He decided to implement it alone but failed and returned to the world of corporate business to gain more experience. In early 2015, he returned to the establishment of a network of the Bulgarian business angels, but this time he had an established team behind him. They decided that it was the right time to re-start the idea and to implement it in a way they wanted things to happen and now they are standing behind the newly-established Bulgarian Association of Business Angels, with all the experience and zeal for success that they have gained over the years.

What exactly does the term "business angel" mean? What kind of people are business angels, what businesses do they come from?

The term "business angel" is not unknown for a certain circle of people in Bulgaria but the general public is unaware of its meaning and what hides behind this term. There is no single definition, so we use two definitions that are popular among international organizations and networks of business angels. According to them, these are people who have significant financial resources, professionals and entrepreneurs who invest personally their own assets and resources in new and emerging businesses. In the majority of cases, they provide not only their own capital but also their network of contacts, the managerial skills they have acquired and mentoring, which is extremely important for the development of a start-up business. In most cases, they bear the risk themselves. They invest in the company in return for a stake in it and bear the loss in the event of unfavourable development of this company. Accordingly, if it is successful, their profit is proportional to the share they hold in the company. The main difference between business angels and venture investment funds is that business angels invest personal funds without operating with the money of other people or financial institutions. Business angels have a more personal attitude, as I call it, to entrepreneurship than those funds. I am not saying that the funds do not have a personal attitude, but when you invest your own funds in an idea and a company, you are much more committed to its success. Generally, these are the definitions. Business angels do not invest only to make capital gains from their investment. Some do it to keep abreast with the relevant trends in entrepreneurship in various areas of interest to them and to share their investments with other business angels. Business angels may invest alone or together through the so-called syndicates. Thus, they can provide more capital on one hand and diversify the risk on the other, as they have the opportunity to put their capital into several companies, not just into one. In the syndicates, there are leading business angels who are usually people with a closer knowledge of the industry. In fact, in this society private investors can exchange experiences and ideas, learn to invest together because each of them is good in a different area. The benefit is for investors who discover new horizons for capital investment and entrepreneurs, because they raise capital, which is critical in the early development stages of their company, especially when the company is in the development stage of the idea that underpins it and has no revenues from products. At this stage, it is very important for someone to support you to move on. Both sides have an interest in this process.

Over the last year in Europe, the segment of early investments has included both business angels and venture investment funds. The share of investment is about 7.7 billion euro in investment, 5.5 billion euro of which is due to business angels. The statistics areprovided by the European Business Angels Network, the members of which are 150 organizations of business angels from 50 different countries. In Europe, there are about 250,000 business angels.

You mentioned the European Business Angels Network. Would you tell us more about it as well as about the organization headed by you? What are your goals and activities?

The European Business Angels Network was established at the initiative of the European Commission in 1999. It brings together the whole region, but has ambitions to do so outside Europe, for example in Africa where a large number of networks at the local or state level are its members. The Bulgarian Association of Business Angels became its full member this June and we organized the first official event of the organization on 2 September. The organization will express the voice of this society in Bulgaria. We are recruiting members at present and will then announce an event for entrepreneurs, which is scheduled for early December. We have set very high goals as an organization, the main ones being to bring the best practices that have occurred in Europe and overseas, as the US is the home to business angels where the development of this activity is the best. Europe is making very serious efforts to catch up. The activity of business angels coincides with the objectives of EU President Jean-Claude Juncker for large investments in innovative new companies in the next programming period. Our membership will allow us to use the practices that they have developed and tested over time, and to skip a stage in which time is lost to us, to apply this know-how by combining it with the specifics of the enterprise and the investment environment in Bulgaria. This will give a very significant boost to the economy because now the trend is towards new technology companies. Our association is not limited in this segment. In this connection, I will return to the event that we have planned for the end of the year. Our idea is to invite a delegation of foreign business angels from our partner network, who are willing to invest in specific business projects. Our desire is to give impetus at the local level and to show the Bulgarian business angels how one such process actually takes place, provide them with the opportunity to collaborate with business angels who have experience in Europe. For them, the entire process will be very useful because they will have the opportunity to observe in real terms how the processes develop in this type of investment. Our goal is to develop a community of Bulgarian business angels and we will enable our members to cooperate with all those who are in Europe. Our local entrepreneurial ecosystem will be able to apply for projects in Europe. Each member who is in our organization as a business angel has different preferences for different entrepreneurial projects, so we want to give them access to the entire European network, not only to the Bulgarian one, which means access to all projects available for investment. However, our focus is on helping the Bulgarian community and we will help both local business angels to make joint investments with their European counterparts and entrepreneurs to seek funding in more places.

If you were to compare the business climate in Bulgaria and Greece, what are the strengths and weaknesses of the two countries? Are there Greek business angels to invest in Bulgaria?

Bulgaria was the last to become a member of the European Business Angels Network. The network was presented in Macedonia, Kosovo, Albania, Montenegro, with the exception of Bulgaria. Our association believes that the business environment in Bulgaria has significant potential and we believe it can achieve successes. In terms of support from the government and various institutions, unfortunately, there are no developed initiatives for this kind of investment because of the lack of organization at the local level.

In Greece, the following problems are observed: when the first organizations of business angels were created, it turned out that the Greek investors would like to invest alone, without being united in syndicates, in order to make the most of the investments. But it is very risky from the standpoint that when you put all your eggs in one basket, there is a significant risk of breaking them all. This initial process continued for about two years there. Currently the situation has changed. They have understood that the principle of unity between business angels and separation of investment is a much better option that allocates the risk in this type of activity.

Everyone has a different way of development. We hope to avoid some mistakes by learning from foreign experience, from the countries in the region. There is a lot to be desired in terms of tax and investment incentives. In this regard, we have an initiative by which to try to consolidate those Bulgarians who are living outside Bulgaria, to give them access to information about what is happening in Bulgaria at the business level and about the investment and entrepreneurship opportunities. We will try to bring back not only the money that Bulgarians return to help friends and relatives, but also investments that have a much greater effect on the economy. Perhaps this will be the first area in which we will try to seek partnership with the government, to secure incentives for this type of investment from outside. This would accelerate the process, as many successful and skilled Bulgarians are living and working outside Bulgaria and, on the other hand, Bulgaria has many interesting projects in which our compatriots from abroad could invest. Our idea is to cover every point in the world.

As far as I know, without pretending to be comprehensively informed, there are no Greek business angels to invest in Bulgaria. Surely, there are some individual attempts. The aim of an association such as ours is to unite all these people and to provide them with a platform where there is clear information on the part of those seeking to make investments and those seeking investment, and where they can exchange news, information, experience. I think a good environment will form that entrepreneurs and investors in the region can use. We will certainly invite business angels from Greece too, as we are invited to events in Greece. This process with the neighbouring countries will surely be active.

What are the most interesting sectors that attract most investment and that make the greatest profits?

The European statistics show that about 40% of investments are made in information technology, 10% in biotechnology and medicine, another 10% in the field of renewable and clean energy, and the remaining percentage is distributed between other sectors. We will not limit ourselves to a particular segment so as not to limit investors. Business angels themselves will shape their investment preferences and assess the ideas of local entrepreneurs that they like the most. I believe that we will not significantly differ from the statistical picture in Europe. If there are any differences, they will be small in range and the picture in Bulgaria will be very similar to that in Europe.

Each economic cycle has one or leading industry or another. Currently, and in the years to come, information technology will remain a leading industry because huge profits are made in it and so will medicine and energy, which are very large industries as well. But I repeat, we will not restrict investors as I am sure that there are good ideas in all the other traditional areas for Bulgaria in which economic benefits can be derived, and the specific industries can change for the better. Even the entire business model can change.

What is the scale of the companies that are interested in investment according to the markets targeted, namely the Bulgarian market, the Balkans, Europe or the world?

When an investor goes to an entrepreneur, he considers several things. Firstly, the product or service offered. At the management level, whether the company has previous experience, if it has the potential to handle a sharp growth rate. It is one thing to manage 2 people, another to manage 10 and quite different to manage 50 people or more. Next is whether you can deal with all the challenges outside the country in which you are operating. All these indicators have different weights for different investors. There is no limit if a business idea is targeted only to Bulgaria, because if an entrepreneurial idea or company can change an industry locally and if this is applicable in Bulgaria for some time, if it succeeds and shows that it works, then the idea can certainly be replicated not only in the Balkans but also in Europe and outside Europe. Bulgaria is a small market but that does not mean that it cannot be profitable and that investments cannot be targeted specifically at the local market. There are examples of large international companies that are developing an entirely local business aimed at the local market. But it all depends on what the investor imagines and on his knowledge of the particular market. Bulgarian companies acquired by international companies have shown that they can have a strong presence in the global business.

What happens if the investment fails? What is the percentage of successful start-ups?

On average, 1 in 10 companies is successful. This is a very low percentage. Usually investors rely on the fact that in the event of success, the profit from the successful company will cover the failed investments. Of course, if you ask me if one company will be successful when you invest in 10 companies, the answer is "No". Here is the catch of statistics. The right approach to this type of risk investment is the management of a portfolio of companies, where there is cooperation with other business angels and the risk is distributed.

Again on average, it becomes clear within 5-7 years whether an investment is successful and whether the investor is holding the investment i.e. he is not leaving the company. If the investment is successful, the investor sells his share and makes capital gains. This period is different in different industries. Information technology development is very fast and the period can be 2 years. In some successful cases, it may even be 1 year.

These risk investments are called "smart capital". The investor knows how long he will hold his investment in a company. This capital is not liquid, the investor cannot decide to leave the company tomorrow because the business is developing. The European Business Angels Network has come up with some ideas to overcome the disadvantages of this type of investment, namely to create a single capital market, a stock market but not for public companies, which will trade shares of companies and will increase the liquidity of this type of investment. If an investor has to rapidly leave an industry, he will be able to sell his investment. This is already laid out, all members of the European network are fighting to implement the idea. In Turkey, it is a fact, but the aim is to establish such a common market in Europe.

You are certified business valuator. Could you tell us more about that activity?

I have the knowledge and competence to go and evaluate a company, to say how much it costs if its owner wants to sell it, list it on the stock exchange, liquidate it or to offer it as security to a financial institution. The evaluation is based on strict financial methodologies. The certificate I have is for companies that have some history. Unfortunately, so far no one has found a methodology to evaluate a business idea in advance, based on objective and measurable criteria. The risk to be borne can be measured to some extent, but only to some extent. No one can say in advance whether an idea would be successful and how easily it could be to realize it.

 

Tags: Business angelVenture capitalEntrepreneurAssociationProjectsEuropean Business Angels Network
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