FINNISH BUSINESS ANGEL INVESTMENTS – A VIEW TO PROFITABILITY

This is Part-Time Genius Blog on how to grow your business in a profitable and sustainable way.

WHAT – GREAT PROFITABILITY YET 54% OF THE INVESTMENTS FAIL

This is a spin-off from my previous blog post “Why interim management can help micro and small businesses grow”.

FiBAN, Finnish Business Angels Network has published a great study “The profitability of business angel investment” (FiBAN and Moring, 2017). This study is by far the most complete in Nordics, concluding analysis of 126 business angel exits.

Business angel is a private person investing time, money and connections into unlisted high-potential startup companies. In exit business angel makes most of the profits by selling ownership of the company.

​According to the study, a return multiple 3,75 X (ROI) was reported among the respondents who were mainly active full-time business angels. Internal Rate of Return for all investments since 1987 was 25%. 

FiBAN investment profitability comparison.

​Finnish figures are aligned with a ”rule of thumb” that of ten investments, one is profitable, five loss-making and four break-even.

SO WHAT: IMPACT WITH LESS CAPITAL AND RISK

Return on Investment multiple 3,75 X sounds great when considering that it includes all exits, also the 37% that went bankrupt.

Survey reported that Finnish business angels have longer holding period, but it was compensated with higher return multiples. Is it so?

The above table reports for Finnish investments 3,75 multiple in 66 months compared to USA with 2,6 multiple in 42 months.

Anticipating the time value of money, should the expected return reflect the extended time period? In this example, holding time for Finnish investments is 57% longer than in USA – should the multiple for Finnish be then 1,57 times 2,6 = 4,09, at least?

Another view - what if Finnish investment period would be 3,5 years instead of 5,5 years?

​As capital would rotate faster, the same impact could be achieved with a smaller total invested capital. Alternatively, with the current investment level a greater number of startups could be financed.

Could faster rotation of capital, even more prudent selection and high-intense management lower the number of failure cases?

​The two-percentage difference in failure rate doesn’t sound much but over long-term, the effect of compound interest can be significant.
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Is there a way to improve the equation?

NOW WHAT: THE RIGHT EXPERTISE JUST ON TIME

It is fair to assume that a person who invests his own money into a startup wants to make sure money is spent with care and according to plan – not just spent.

As stated in my previous blog post, the biggest challenge for micro businesses is to have access to required competencies and expertise exactly when needed – the same applies to startups.

​Traditional answer has been recruitment.

Personnel comes with fixed costs and this can be poisonous to a startup who is tight with money and time. In short-term, personnel costs are locked and hard to get rid of if needed.

​The long lead-time of recruitment causes delayed time-to-impact which is a cost as well.

Would it be optimal for a startup to maintain high flexibility on people resources? To have the required expertise available exactly when needed without commitments beyond the scope?

I believe so. Part-time professionals can be the flexible, scalable and cost-efficient tool for an investor to drive higher return on capital invested with less risk.

PS - big thanks to Ruben Moring for fact checking and sparring on the topic.
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Sources
 
FiBAN & Moring, R. 2017. THE PROFITABILITY OF BUSINESS ANGEL INVESTMENT.