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Tuesday, June 24, 2008

Date with a Investor

More and more matching services for investors and entrepreneurs are springing up. The 2007 launch of SA Investors Network Angels Den was followed last month by the opening of Venture Giant: and on the international stage, last year’s launch of pan-European network Easy followed in the footsteps of AngelSoft, which was founded in 2004 by legendary New York investor David Rose. According to Angel Investor magazine, there are estimated to be upwards of a dozen matching services in the UK alone.

The matching of investors and couples bears many similarities – both sides often struggle to seek each other out, they each find a neutral venue like a website a less intimidating environment to flaunt their “wares”, and in both instances a certain amount of “filtering” is required before the actual, ahem, transaction can be completed. Angels Den even holds popular speed dating events. But it’s fair to say that investor matching services, like dating websites, have so far enjoyed a somewhat patchy reputation.

When asked his opinion on matching services, Nick Halstead, founder of blog aggregator and g2i company Favorit, is none too complimentary about angel networks: “My experience with angel networks has been ‘avoid unless you have to’. When I first raised money, I ignored all of them. In fact, at a lot of the networking events I went to, I started to see them as sharks.”

He does concede that there are good and bad matching services, but categorises one of the larger networks as “big but terrible. I used them in a previous company and they just spam out your plan and take your money.”

The good, the bad and the ugly

The raison d’etre of these sites is that they take the legwork out of contacting multiple angels to piece together a funding round. The latest set of figures from the National Endowment for Science, Technology and the Arts (Nesta) shows the level of investment from both the early-stage VC market and angel investors to be erratic, although in both cases there’s been a general trend towards a larger number of smaller deals, and an increased level of co-investment, whether that be with public funds, or, increasingly, other angel investors.

According to Nesta’s September report, “Shifting Sands: The changing nature of the early stage venture capital market in the UK”, investments below £2 million accounted for between 70% and 80% of all venture capital investments between 2001 and 2007. However, the average investment shrank sharply between 2002 and 2006, from £700,000 to £393,000, although it recovered in 2007 to £705,000. What this skewing means is that entrepreneurs are increasingly having to piece together deals from a number of different sources.

That trend is only likely to continue as sources of finance dry up in the credit crunch. Rishi Anand, founder of Venture Giant and a successful entrepreneur himself, says: “It’s a difficult process. When I first started, I remember how much running around I had to do. The site is just a way to develop leads and contacts, to create a dialogue and keep in contact. If you don’t use it, then you’re restricted to friends and family and your own network of contacts.”

So why the poor reputation among entrepreneurs? In some cases, complaints about the performance of matching services stem from the fact that people expect too much from them – Anand himself points out that Venture Giant is no replacement for old-fashioned networking, but rather complements it. That said, criticism of the matching services come from three main areas: first, that the networks usually take an upfront fee, regardless of their success; second, that they often apply only limited sophistication to the matching service; and third, that there’s a lack of transparency, which makes it difficult to know where you’re going wrong with your proposition.

To many, the upfront fee feels rather like the fee you would pay for taking out a classified ad in a local newspaper. It’s got a low price tag compared to, say, a page of display advertising, but you don’t really know who’s going to see it or what impact it might have. That said, there are some differences between the services on offer. Angels Den, for example, charges a one-off fee of £99, while Venture Giant charges the same figure, but only when you’ve been contacted by an investor. "We’ve changed the business model to pay on performance,” says Anand. “In today’s economic climate, I would not take money upfront for any service.&rdquo.

Database Filtering

Anand also believes it’s the filtering of entrepreneurs and investors that lies at the heart of the proposition. Investors who sign up to Venture Giant fill in a self-certification form which indicates the minimum and maximum amount they are looking to invest, and which industry and region they’re interested in. Entrepreneurs’ regions, industry types, investment range and expectations are then matched to investors and an introduction effected.
Halstead agrees this is an important component of the service: “The good networks put more work into the filtering process on both sides so that the final meet is more focused on the right matching. Too many angel networks require you to pay up front.”

Anand insists that because Venture Giant only takes a fee once an entrepreneur has been contacted, it’s more reliant on the quality of its database. He points out that high net worth individuals are difficult to define and even harder to find – he hired consultants to extrapolate data on millionaires or individuals with strong shareholdings and invite them to join. Only two weeks in, he already has 127 registrations from entrepreneurs with limited marketing – and other networks report similarly high levels of interest.

Ultimately, any investor grouping is only as good as the quality of investors in the network. They should be judged by the investments that have been made as a result of their match making, so it’s always worth checking out their track record. Unlike dating, there’s little pleasure in the dalliance between an investor and entrepreneur – so you do want to use a service that stands a good chance of getting the whole thing sorted out quickly.

For South African Business Invetment Opportunities and Capital check out SA Investors Network