Facilitating Business Angel Investments in Estonia
A comparative study on business angel investment incentives in selected countries was conducted by think-tank THETA in accordance with instructions given by Estonian Development Fund in December 2012 and January 2013.
The purpose of the study was to find the use and effectiveness of the following measures of facilitating business angel investments:
- providing support directly to national angel associations as well as networks and groups;
- training of angel investors;
- increasing of investment readiness of entrepreneurs;
As a result of the analysis of the theoretical literature, best practices available and exchanged information
with several experts in the business angel community, THETA team reached to the following main conclusions
supplemented by expert opinions and recommendations.
Driver for market growth
In many countries business angels constitute the largest source of external funding, after family and
friends, in newly established ventures. Companies backed by business angel investors have been important
contributors to economic growth and of creating new jobs. This non‐institutional equity finance of business
angels, which is still relatively untapped in Europe compared to the USA, where the angel market is five
times larger, could become an essential driver to build more high‐growth SMEs.
A healthy and well‐functioning entrepreneurial ecosystem is critical for successful business angel
investing and the market to grow. The role for policy makers is to put the appropriate legal and financial
framework conditions into place and address market failures. It is also crucial to shape the educational
system and national culture in favour of an entrepreneurial risk‐taking, sales mentality and innovation prone
attitude. This includes at least the following market players such as incubators, accelerators, business HUBs
and entrepreneurial skills training, workshops, competitions, know‐how sharing, networks, etc. However,
the main actors in building the business angel market must be business angel investors themselves. The
entrepreneurial ecosystem should encourage and motivate experienced entrepreneurs to take that high
risk and become active business angels.
For policy makers to intervene in a market, there usually needs to be evidence of a “market failure”.
While it does not qualify as a market failure, in the survival rate of the start‐ups and SMEs, there is a clear
financing gap in the seed and early‐stage period and this causes a lot of potential to be strained and
wasted. There are many ways how to tap into that potential and make it an asset. One way is encouraging
private high‐net worth individuals business angels with business knowledge to divert their assets into these
start‐ups. What is the strongest motivating factor to direct assets of high‐net worth individuals into
business angel investments is, however, investment‐friendly tax and regulatory environment, including
immigration regulation and efficient insolvency regulation to attract foreign talent and investors. A forceful
argument for policy action to this end relates to the potential positive spillover effects of business angel
The creation of liquid markets regarding exit possibilities such as listing on the stock exchange and
alternative investment markets (SMEs’ listing, “First North”) is very important and should be made
attractive to the business angels and venture investors. This enables more exit strategies and increases the
need for the follow‐up investments in the respective country. If the business angels’ only alternative is to
use trade sale for exit from the local market, it is not sustainable and attractive for the follow‐up venture
investments due to the limited exit strategies. It should also be stressed out that even though the
emergence of new sources of funding such as crowdsourcing that employ social media are still at an embryonic stage, the potential risks of such funding and the fragmented European regulatory environment
along national lines for cross‐border platforms are among the emerging challenges which pose issues for
entrepreneurs, platform providers and investors alike.
Co‐investment and co‐investment funds are now more popular than ever, due in part to the perceived success of such a program in Scotland. Typically co‐investment programs work by matching public funds with those of private investors on the principle of pari passu (on the same terms). This set‐up enables to direct money to this sector without losing the comfort zone of distance if so wished for and also enables to create synergy between business angels, share information and create a certain formal know‐how and deal flow in that informal financial sector. However, it takes significant amount of time for planning, setting‐up and securing all the necessary approvals before the fund can be were launched. This opens up, however, the question how much regulation and rules should be applied (or created) to these co‐investment funds. The key aspect is not to tilt the interest towards protecting the public funds and investors representing public money. However, the study shows, that other neighbouring countries besides Estonia are launching or considering launching co‐investment programs. Business angel syndicates or groups need to already exist or be created so that the co‐investment fund can work with an entity of some form, with one lead investor serving as the contact point, rather than dealing with a set of individual investors themselves.
Business angel networks are generally considered as effective even if they cover only a small part of the
total number of business angels (no more than 15%) in the respective country. Public support can play an
important role in launching and covering operational cost of associations and networks but it should be
structured in a way that sets clear benchmarks or provides incentives for these organisations to move to a
self‐sustaining model over time. If public support is given to business angel networks, it is important to
make sure the business angel networks are generating an appropriate level of angel investment activity.
The business angel networks should not be confined to one particular country of region, but to encourage
the creation and sustainable development of multi‐country and cross‐border business angel networks. The
business angel network should strive for professionalisation and transfer of best practices in the business
angel investing. Our study shows that government has supported national angel associations, networks or
groups in all selected countries. In our opinion, the new business angel networks should be secured
sustainable financing as many business angel networks struggle to finance their core activities at least first
2‐3 years as of its foundation.
Source: THETA, 2013. This study was financed by Estonian Development Fund with the support from Central Baltic Interreg IV A 2007-2013 program.