Pre-feasibility research of Business Angels Network (BAN) Done by: Institute of Baltic Studies Ventspils High Technology Park

Transcription

1 Pre-feasibility research of Business Angels Network (BAN) Done by: Institute of Baltic Studies Ventspils High Technology Park Tartu, Ventspils 2011

2 Table of contents 1 EXECUTIVE SUMMARY OVERVIEW OF THE SOUTH ESTONIA AND MID-WEST LATVIA OVERVIEW OF SOUTH ESTONIAN REGION OVERVIEW OF MID-WEST LATVIA REGION SITUATION IN THE REGION IN THE AREA OF THE DEMAND AND SUPPLY OF PRE-START FINANCE SUPPLY SIDE OF PRE-START FINANCE DESK RESEARCH AND INTERVIEWS Overview of supply side of pre-start finance in South Estonian region Overview of supply side of pre-start finance in Mid-West Latvia region DEMAND SIDE OF PRE-START FINANCE DESK RESEARCH AND QUESTIONNAIRES Overview of demand side of pre-start finance in South-Estonian region Overview of demand side of pre-start finance in Mid-West Latvia region POSSIBILITIES TO ESTABLISH THE BANS FOUNDATION IN SOUTH ESTONIA AND MID-WEST LATVIA LESSONS LEARNT AND RECOMMENDATIONS REFERENCES

3 1 Executive Summary Very often start-ups and business idea authors face difficulties and challenges to implement the idea and ensure its sustainable growth due to the lack of various resources. Shortage of knowledge, practical skills and finances are the key factors that prevent the business idea from being turned into real business. To facilitate the process, attraction of business angels can help a lot. As different researches show, business angels tend to invest into business ideas that are to be realised near business angel s location. However, start-ups, business idea authors as well as business support organisations lack information about the readiness and interest of local business angels and risk-capitalists to invest into small businesses with high growth potential. This is also the case of South Estonia and Mid-West Latvia partly due to no strong and sustainable local business angels networks in those regions. The aim of the pre-feasibility research of business angels network is to study role of the local business angels as well as the need of start-ups for the support of business angels in south Estonia and Mid-West Latvia. The pre-feasibility study will also define lessons learned during the research and will give recommendations regarding foundation of business angel network. During the research the following methodology both in Estonia and Latvia was used: Desk research, content analysis; Interviews and poll (questionnaires circulated); Data analysis. Interviews were conducted with business angels who are active in supply side of early stage pre-finance activities. Questionnaires were distributed among start-ups and entrepreneurs-tobe. The key lesson or conclusion regarding business angel network during this study is that most business angels actually do not seek any publicity therefore creation of formal transnational network and attracting business angels to it could be very hard; it also could be the reason why current associations are not very successful. Business angels mostly prefer personal networks and find ideas through them. However some business angels believe that some kind of formal network or communication is crucial in order to exchange information, to get highly reliable information regarding business projects as well as share responsibilities, funding and risks. The key recommendation suggested by the researchers is as follows: two virtual networks in the project regions (Mid-West Latvia and Sothern Estonia) should be created. Both should be administrated by two most known intermediaries in the regions, namely Tartu Science Park and Ventspils High Technology Park (both have already started to form such networks). One of the main tasks of these networks would be also to raise awareness of business angel initiative in the regions. As both organisations have rather significant cooperation history already, no boundaries for the close cooperation in the future ensuring also transnational activities can be seen. 3

4 2 Overview of the South Estonia and Mid-West Latvia 2.1 Overview of South Estonian region In the framework of this project region of South Estonia includes following counties: Hiiu, Jõgeva, Lääne, Põlva, Pärnu, Saare, Tartu, Valga, Viljandi and Võru. In this region approximately 27% of economically active enterprises are located. Enterprises birth and death rates compared to Estonian average are presented on Figure 1. Death rates of South- Estonian enterprises have been smaller than Estonian average during last years. But this kind of trend is not observable in birth rates. Fortunately, still, birth rates exceed death rates, although in 2008 the difference was rather small. This could be caused by the severe global economic crises which influenced also Estonian economy. Figure 1. Enterprises death and birth rates in South-Estonian counties (Business demography 2011) The average number of employees in newly born enterprises is very small (see Figure 2). Number of employees ranges from 1.11 to 2.15 employees per newly born enterprise in South Estonian counties and in Estonia as average. 4

5 Figure 2. Average number of persons employed in newly born enterprises in South-Estonian counties (Business demography 2011) The main economic activities of newly born enterprises are presented in Figure 3. During the period under analysis three most popular economic activities were wholesale and retail trade, construction, and professional, scientific and technical activities. Number of newly born enterprises in wholesale and retail trade, and construction decreased sharply in Fortunately number of enterprises active in scientific and technical activities has increased constantly. Latter is also the activity from were high-growth technology based enterprises may spur. Figure 3. Main economic activities of newly born enterprises in South-Estonian counties (Business demography 2011) One of the main problems for entrepreneurs in pre-seed or seed phase and start-up companies is lack of available financial resources. These organisations are not usually able to create enough money because costs and investment needs are large and revenues are 5

6 small or nonexistent. One opportunity to decrease the existing weaknesses is existence of business angel network but there is no formal business angel network operating in Estonia and business angels act independently. According to experts there are approximately around 50 BA-s in Estonia, but the number of active business angels is smaller and there is no official information about their investments. Right now people with business ideas, and start-ups are able to get/apply money either from the independent BA-s, venture capital funds, or national or regional organizations/intermediaries. Getting money from BA or VC funds is rather hard for three reasons. First, majority of VC investments have been made into traditional industries. Second, young entrepreneurs do not know whom to approach. Third, start-up companies lack knowledge and experience how to pitch their idea. There are additional problems in getting money from private VC funds because several Estonian VC funds do not consider Estonia as their main market and funds tend to be invested into companies in their expansion phase and not into pre-seed, seed or start-up phase. Only two VC funds have invested in enterprises in their pre-seed and seed stage. These funds are Ambient Sound Investment (ASI) and Martinson Trigon Venture Partners (MTVP). Latter concentrates on ICT companies. As already mentioned above, starting entrepreneurs can apply for financial resources from national and regional organisations and intermediaries. The most important organizations in this respect are Enterprise Estonia (EE) and Estonian Development Fund (EDF). Now the short overview of four organisations - ASI, MTVP, EE and EDF - is given. Although these organisations are not focused on South Estonia specifically, they do influence that specific area. There are no VC funds or other organisations focused only on providing financial resources for South Estonian entrepreneurs in pre-seed or seed phase. Ambient Sound Investments (ASI) was established in This organization is not typical VC fund because partners are investing their own money. ASI is not limiting its investments to particular activity or industry. Portfolio of ASI includes companies with the following characteristics: investees are based on R&D or their own intellectual property for their core technology, firms are in their seed or early development phase, have people who want to be global leaders in their field, have already a customer active in technology or technology-based services, firms are based in Eastern Europe, Russia or Asia. MTVP was established in 2004 when partnership contract was signed between venture capitalist Allan Martinson and Baltic investment Bank Trigon Capital. This fund is focused on ICT enterprises located in Baltic States, Central Eastern Europe, and Russia. This fund is mainly focused on enterprises in their growing stage but they have also invested into preseed and seed phase. 6

7 The Estonian Development Fund was founded in 2007 by the Riigikogu (Estonian Parliament). EDF is active in two rather different areas. It invests into starting and growthorientated technological companies in cooperation with private sector on equal terms and carries out socio-economic and technology foresight. Currently no investments have been made into seed phase. Enterprise Estonia was founded in 2000 and provides finances, training and advice to, and creates partnership opportunities for Estonian enterprises, research and development institutions, the public and third sector. The tasks of Enterprise Estonia are: to increase the sustainability and accelerate the growth of new enterprises, to increase export and product development capabilities of Estonian enterprises, to bring foreign direct investments into the Estonian economy, to increase the export of tourism and develop internal tourism, to promote regional development and civic society. Enterprise Estonia is one of the institutions responsible for the distribution of EU structural funds. During the period Enterprise Estonia is responsible for managing 0,83 billion EUR coming from structural funds. Main product focused on providing financial resources to starting companies is start-up and development grant. Under this innovation support measure start-ups can apply for start-up grant amounting 6400 EUR and created for enterprises less than 12 month old or for development grant amounting EUR and created for enterprises less than 24 month old in their growth stage. In conclusion, there are not formal BAN operating in Estonia, but for increasing the knowledge about business angels and promoting investments into pre-seed, seed and starup phase this kind on organisation is needed. Currently early stages of entrepreneurship are supported through public sector measures or entrepreneurs themselves. Although there are some organisations (introduced above) investing or supporting start-ups they are mainly not interested in investments into pre-seed and seed phase although some of them have done it in the past occasionally. 2.2 Overview of Mid-West Latvia region According to former administrative division the Mid-West region of Latvia includes the following districts: Liepāja, Kuldīga, Saldus, Ventspils and Talsi (Kurzeme Planning Region) as well as Tukums, Rīga, Ogre and Limbaži (Riga Planning Region). In this region 72% of all active enterprises of Latvia are located (54% of all active enterprises of Latvia are located in Riga district, 18% - in other districts). Birth rate Death rate Birth rate Death rate Birth rate 7 Death rate Birth rate Death rate Birth rate Death rate Kuldīga Liepāja Saldus Talsi

8 Ventspils Tukums Rīga Ogre Limbaži Latvia Table 1. Enterprises death and birth rates in Mid-West Latvia Overall as the table shows birth rates exceed death rates reflecting positive tendency for the region. Exception is the year of 2005 which can be explained by the following. In January 1 st, 2001 a commercial law came into force and it stated that all limited liability companies as well as joint stock companies should reregister. Business of the companies that did not reregister in time was stopped thus liquidating and excluding the companies from the register. Because of that starting from 2002 the death rate of the enterprises increased. In 2005 the speed of reregistering process dropped and there were funds allocated to liquidate the companies that had not reregistered yet and that were not in debt. Because of that in 2005 the death rate of the companies increased significantly again. There are no official statistics regarding type (by industry, innovativeness etc.) of the newborn companies available in Latvia. It is estimated (Avotins, 2011) that the target group (deal flow) of business angels and other investors companies with innovative products could amount to 2,5-4% of all the registered companies, including, new-born companies. That would give figure of new-born companies with innovative products in the Mid-West Latvia in 2009 being the potential investees of business angels and other types of investors. Due to concentration of economy and research capacity these companies presumably are basically established in Riga. The number of employees in newly born companies in the Mid-West Latvia is rather small, namely 2,19 employees in a company that is not older than 2 years from the moment of registration of the company. 8

9 Figure 4. Average number of persons employed in newly born enterprises in Mid-West Latvia (data from business incubators) The main economic activities of newly born enterprises (of business incubators in the region) are presented in Figure 5. Figure 5. Main economic activities of newly born enterprises (clients of business incubators) in Mid-West Latvia. As the Figure 5 shows, there are three main fields in which newly born companies act in the region of Mid-West Latvia, namely, manufacturing, information and communication as well as 9

10 professional, scientific and technical activities. However, this data reflects information about young companies in the business incubators only; the overall situation is different as the business incubators focus on innovation and progressive industries. Unfortunately there is no data on overall situation in Latvia available. The total number of enterprises per 1000 inhabitants in Latvia is close to the average figure of European Union countries (SIA Biznesa augstskola Turība, 2006), being in range of enterprises per 1000 inhabitants. Although entrepreneurial activity in Latvia is similar to the EU average, Avotins (2011) suggests that there is considerably smaller share of enterprises with innovative products in Latvia compared to the EU average that in turn generates lower added value of the economy and lower quality of deal flow for investors. The financing system of Latvia is bank-oriented since enterprises mostly attract funding using different instruments provided by banks (collateral loans, leasing, soft loans, etc.). The market-oriented financing system where most of the finances are attracted through stock exchange or venture financing would be an alternative, but such funding measures are poorly developed and exercised in Latvia. The most frequent sources of capital attraction for business development in Latvia are banks (56%), leasing companies (25%) and private investors-individuals (21%), while venture capital companies account only for 1,1% (European Commission, Eurobarometer: 2006). In comparison, use of venture capital funding in EU 15 countries in 2005 was 6% (European Commission, Eurobarometer, 2005). Moreover, in order to get the information or advice on availability of funding the majority of companies in Latvia (32.5%) would first address bank, while 15.5% - an external consultant, and the rest would choose among legal experts, accountants, professional associations, relatives and friends, as well as other professional contacts. (Seed Capital Industry in Latvia and Related Training Needs, Development Projects Institute Ltd. Riga, 2006) Venture capital as well as business angel market in Latvia was rather undeveloped and inactive until 2007 as there were almost no tools that facilitated start-ups, entrepreneurial spirit and innovations leading to very low level of demand for seed and early stage financing. Starting form 2007 the new programming period provided several tools for start-ups (e.g. Business incubators, Altum, Idea Cup) which eventually should lead to rise of demand for seed and early stage financing. However, people still lack knowledge on possibilities to attract seed capital and/or seed funding. As demand is rising and VC and BA market is developing, there probably is a need for an active network which would operate and have members also in regions (e.g., Seed Forum), deal with training, cooperate with business incubators, etc. 10

11 3 Situation in the region in the area of the demand and supply of pre-start finance 3.1 Supply side of pre-start finance desk research and interviews In order to analyse supply of pre-start finance in Mid-West Latvia and South-Estonia the plan of interview in order to find out opinions of business angels was developed. It was developed by representatives of Ventspils High Technology Park and sent to partners in Tartu Science Park for comments. After finalising the interview plan it was circulated to business angels both in Latvia and Estonia. 5 interviews were done in Estonia and 4 interviews in Latvia Overview of supply side of pre-start finance in South Estonian region During April interviews were conducted in Estonia with people active in supply side of pre-start financing. Three of the interviewees are active business angels, one is a member of the management board at EstVCA and head of investment division in EDF, and one is partner in private equity and VC firm. Latter is focused on investments in early stage companies. Therefore interviewees are familiar with the area under investigation. The first business angels in Estonia started their activity few years ago. According to one of the interviewee BA activity In Estonia can be dated back to At the same time the knowledge about each other and each others activities is high. It may be caused by the fact that Estonia is relatively small and there are no many BAs. Therefore the awareness about each other s investments is high. Mainly equity capital and different loans are provided to starting enterprises. Preferred sector is IT, but other sectors are not excluded. Investment decisions are mainly based upon the quality of the idea rather than sector of the business activity. There are no limits for annual investments, but investments per company are limited ( EUR per company). The average investment horizon is 5 years. When the area and time horizon of the investments were discussed during the interviews the main answer was that BAs prefer to invest into their own region which in Estonian case means their own country. Some BAs could also consider investing outside the country, but in that case the idea has to be very good and there should be someone inside the team BA knows and trusts. This result may be explained based on the short time horizon of BA activity. The parallels may be drawn with exporting firms where at first position in domestic market has to be established and experience gained then some type of export could be considered. BAs do not have common formal channels through which the ideas can be submitted to them. Only channel connecting Estonian BAs is LinkedIn group and via EstVCA. Therefore new investment opportunities are found either through personal networks, other BAs or investor networks. Some of the ideas are found through BAs homepage or Ajujaht. But it can be stated that finding of the ideas is mainly occasional and regular search is not implemented. Most important aspect for BAs before making the decision of investment is the team itself (including managerial competencies), but also growth potential of the idea, target market and 11

12 the development stage of the idea are considered. Therefore it is crucial for entrepreneurs to find the best team available. This is important event in case the BA investment is not needed. After the investment is made BAs usually contact their companies at least once per month, but the routines of meetings across BAs differ. Some BAs prefer to meet face-to-face weekly, some call weekly but meet once per month, some meet daily etc. The number of contacts also depends on the period in the business development, and moment of the investment and/or exit. During the investment period BAs help their companies in every way they can, they are like mentors for starting entrepreneurs. They consult, help with recruitment, introduce the company to clients and potential investors, BAs also participate in R&D business development. Therefore, companies receiving angel s money also receive valuable non-monetary help to increase the potential of survival of the idea Overview of supply side of pre-start finance in Mid-West Latvia region During the spring 2011 four interviews were carried out with Latvian business angels. They all are active, moreover two of them represent two business angels and venture capitalists associations in Latvia, namely Latvian Private Investors Association and Latvian Private Equity and Venture Capital Association. Two respondents stated that their activities as business angels can be dated back to 2000, other two respondents are business angels for approximately 5-8 years. If speaking about the BAs awareness of each other it can be evaluated as rather high in Latvia. Two respondents mentioned that they personally know approximately 10 other BAs, while one mentioned 31 other business angels he knows. Also in Latvia, mainly equity capital and different loans are provided to starting enterprises. Business angels mostly do not have special preferred sector, they rather focus on sectors that they know better as well as on quality, sustainability, profitability and export ability of the business idea and company. There is no concrete investment sum that business angels are investing in companies per year; decision and investment amount is strictly related to above mentioned characteristics of the business idea and the company. However, the following numbers were named: EUR per company. Respondents were asked to give their opinion on readiness to invest outside the home region/ country. The answers differ; two of them said that they would be ready to work with business ideas outside Latvia and two of them mentioned that they choose ideas also based on principle of closeness, namely for them it is important to keep an eye on the development of the idea as well as idea holder. This is important also because business angels are more or less involved in the company (depends on the idea, idea holder and willingness of the business angel) and regular contact and meetings monthly is a common praxis. Although there are 2-3 formal BA networks in Latvia, their success and efficiency cannot be considered as good. What is evaluated as very efficient in finding ideas and in mutual communication is personal relationships and networks. All respondents said that they only trust known and trustworthy channels and people. Among trustworthy channels the following were mentioned: business partners, personal networks and recommendations, known consultants, accountants, business idea competitions and business incubators. No 12

13 respondents mentioned formal networks as the way to find business ideas. The reason behind that could be mentality of people (to be solo angels) and perception of inefficiency of public structures in work with private sector. Although being a Solo Angel means more timeconsuming screening of business ideas (Nelson Gray, 2010), still in Latvia confidentiality and privacy outweigh the potential benefits from BANs. If analysing given answers by respondents regarding criteria that is important when choosing the idea, the following was named: trust in business idea and its holder and/or team, return of investment, liquidity ratio, availability of current assets, risks, availability of time and other resources of the business angel, synergy with other business activities of the business angel. Interviewed business angels were asked to name ways how they help companies and business idea holders. In addition to investing in equity capital as well as to loans, business angels are ready to help every way they can, for example they provide consultancy, mentoring and advice, help to develop strategy and action plan, help with planning and control, help with first clients, etc. Thus nascent companies and business idea holders receive both financial and non-financial support. All respondents agreed that knowledge of business angels initiative is insufficient. They also agreed that people lack full understanding who business angels are and basing on what principles they invest. They also agree that the idea of business angels co-investment fund (financed by ERDF) should be rehabilitated. Also cooperation between business angels and business incubators should be facilitated. 3.2 Demand side of pre-start finance desk research and questionnaires During March 2011, the questionnaire with the objective to get overview of the demand side of pre-finance and business angels services was compiled. Questionnaire was compiled by Dorel Tamm (IBS) in cooperation with Sven Illing (Tartu Science Park) and it was sent to partners from Tartu Science Park and Ventspils High Technology Park for commenting. After finalization of the questionnaire it was published to potential target groups via internet. Three target groups were approached with the request to fill in the questionnaire. The three target groups were young entrepreneurs, network of young entrepreneurs, master students of Entrepreneurship and Technology Management program. From South-Estonia 24 answers were received, from Mid-West Latvia 20 answers were received Overview of demand side of pre-start finance in South-Estonian region The following overview of demand side of pre-start finance in South-Estonia is based on the results of conducted questionnaire. As already mentioned above, 24 enterprises or start-ups replayed to the questionnaire. 50% of the companies replaying to the questionnaire is not yet registered and the oldest enterprise is 6 years old. Therefore the enterprises replaying to the questionnaire were all suitable for analyzing the demand side of the pre-start financing. 37% of the respondents are active in areas with high growth potential i.e. ICT; robotics, electronic and optical products; and energy technology. At the same time it is not possible to say that enterprises active in other areas e.g. agriculture and food processing have not high growth potential and are definitely low-tech enterprises. Lately the borders of dividing enterprises 13

14 into high and low-tech companies are not explicit anymore and areas traditionally looked at as low-tech are using more and more high-tech solutions for being and increasing its competitiveness. The main obstacle for enterprises during the pre-seed and/or seed phase is still the lack of the financial resources (mentioned by 22 respondents) followed by lack of people with necessary skills, and complicated market access. Many respondents also mentioned that they do not have a written business plan (written business plan is missing in 67% of enterprises replaying to the questionnaire) and they experience the uncertainty of next steps. When the results of supply side research are taken into account then the lack of people with necessary skills may cause severe problems in getting investment from BA. Also, to attract business angels, written business plan is crucial. 54% of respondents have found support in dealing with those obstacles. Main supporters have been family, friends and/or work acquaintances, but also support has been received from private experts (lawyers, accountants, consultants), science and technology parks, and incubation centres. This result may be influenced by the fact that almost all the respondents are linked to the Tartu Science Park in one way or another and therefore may be biased. At the same time it is important to remember that 46% of respondents have not found any support at all for dealing with obstacles experienced during the seed and/or pre-seed phase. It does not mean that there are no suitable support services in (South) Estonia. For example Tartu Science Park could help enterprises with writing a business plan and figuring out the next steps of the development. Also some help could be found to deal with complicated market access e.g. Enterprise Estonia have some services established in this area. Therefore more attention should be paid to dissemination of the information about available support services and decreasing the barriers between intermediaries and entrepreneurs. Still it must be kept in mind that the main obstacle for starting enterprises is the lack of financial resources and ways to address these issues has to be searched for. The activities needing additional financing the most are very different according to the respondents. Two most often mentioned activities are linked to either product development or investments into infrastructure but still one can say that no explicit pattern is emerging while analysing the activities needing additional financing the most. Following table shows the investment need of respondents across different phases of enterprises development. Table 2. Investment need of respondents Count % Investments until prototype 0-50 thousand EUR 18 75,0% thousand EUR 4 16,7% thousand EUR 1 4,2% thousand EUR 1 4,2% more than 500 thousand EUR 0,0% Investments until market entry 0-50 thousand EUR 17 70,8% thousand EUR 6 25,0% thousand EUR 0,0% thousand EUR 0,0% 14

15 more than 500 thousand EUR 1 4,2% Investments during next thousand EUR 14 58,3% years thousand EUR 6 25,0% thousand EUR 1 4,2% thousand EUR 1 4,2% more than 500 thousand EUR 2 8,3% Source: Composed by the authors based on the data from questionnaires Majority of respondents do not need huge investments i.e. the investment need to either develop a prototype and/or enter the market is 0-50 thousand EUR. This kind of investments can be made by business angels. Main investors for enterprises so far have been the creators of the enterprises (mentioned by 87% of respondents) followed by friends and family, and public sector institutions (both mentioned by 17% of respondents). Entrepreneurs do not have enough information about business angels and seed funds, and this may be the reason why the main investors for enterprises are entrepreneurs themselves. At the same time to attract investors, entrepreneurs should at least have written business plan, but unfortunately majority of enterprises do not have it. Therefore, to conclude, the main investors for South Estonian entrepreneurs right now are entrepreneurs themselves, but this is not enough to develop the enterprise and reach high growth. This is the reason why the main obstacle for enterprises is still the scarcity of financial resource. So, it is necessary to find ways how to decrease seriousness of the existing situation. One way to do that is to increase efficiency of dissemination of the information about different support services and funding possibilities. The other way is to create business angles network to make them more noticeable and approachable by young entrepreneurs. At the same time also competencies of entrepreneurs has to be increase, firstly ability to pitch and write an attractive business plan Overview of demand side of pre-start finance in Mid-West Latvia region In order to collect data, a questionnaire was circulated to start-ups representing Mid-West Latvia region. All together 20 filled questionnaires were handed in. All respondents represent registered companies, oldest of which is 1,5 years old and youngest of which is to be registered in the nearest future (client of the pre-incubator). Therefore the enterprises replying to the questionnaire were all suitable for analysing the demand side of pre-start funding. Most of the respondents representing enterprises come from areas of high growth potential, namely ICT, energy technology, manufacturing industry, mechanical engineering, electronic and optical products, etc. Respondents were asked to name key obstacles for enterprises during pre-seed and/or seed phase. The following were mentioned as the main ones: lack of financial resources (mentioned by 16 out of 20 respondents), lack of knowledge about different support possibilities (mentioned by 55%), and lack of people with necessary skills (mentioned by 50%), uncertainty of the next steps as well as no written business plan (mentioned respectively by 35% and 25% of respondents). Fewer respondents mentioned such 15

16 obstacles as lack of knowledge of basic issues of entrepreneurship (mentioned by 4 respondents), market access is complicated (mentioned by 3 respondents) and unsuitable personality for business (mentioned by only 1 respondent). What is to be considered disturbing is the result showing that only 55% have found some kind of support in dealing with the above mentioned obstacles. Following key support channels and tools were mentioned: potential clients (mentioned by 8 respondents 40%), family, friends, work acquaintances as well as science and technology parks (mentioned respectively by 20% and 20% of respondents), competitors (mentioned by 15%), followed by different experts and investors (mentioned respectively by 10% and 10% of respondents). As in fact there are rather many support opportunities for start-ups in the region, support organisations should pay more attention and organise events in order to inform star-ups and entrepreneurs-to-be about support tools and opportunities. According to mentality and specifics of business angels in Latvia they want to stay undisclosed to general society. Therefore formal BAN cannot be an effective tool for informing nascent entrepreneurs and start-up companies about business angels, but instead other intermediary structures which regularly interact with innovative business ideas holders and meantime has links with business angels would be appropriate, e.g., business incubators, science parks. However, working closely with start-ups on every day basis, it is also a fact that rather big part of them unfortunately lack commitment and are not eager to do absolutely anything and use every opportunity to support their business. They often lack focus and uncertainty of the next steps as well as no written business plan does not help. Respondent were also asked to name which additional funding providers are needed in Latvia. Most respondents mentioned seed funds (60%), additional public sector support measures (55%), venture capitalists (45%), business angel networks (40%) and business angels (35%). Only one respondent mentioned that no additional financial providers are needed. However, what is worth mentioning, 14 respondents (70%) said that they did not know any business angel and did not know how to contact them. Therefore, it could be the case that representatives of start-ups do not have sufficient information about funding providers at all and their judgement about additional funding providers needed could be questioned. One of the aims of the questionnaire was to find out investment needs of respondents. The following table reflects respondent (start-ups) needs across different phases of company s development. 16

17 Table 3. Investment need of respondents in Mid-West Latvia (answered by 19 respondents) Count % Investments until prototype 0-50 thousand EUR 13 68,42% thousand EUR 2 10,53% thousand EUR 1 5,26% thousand EUR 1 5,26% more than 500 thousand EUR 2 10,53% Investments until market entry 0-50 thousand EUR 11 57,89% thousand EUR 4 21,05% thousand EUR 1 5,26% thousand EUR 1 5,26% more than 500 thousand EUR 2 10,53% Investments during next 2 years 0-50 thousand EUR 7 36,84% thousand EUR 6 31,58% thousand EUR 1 5,26% thousand EUR 3 15,79% more than 500 thousand EUR 2 10,53% Source: Composed by the authors based on the data from questionnaires The same as in Estonia, also Latvian start-ups do not need huge investments. And the amount of investments needed by start-ups match the sum business angels are willing to invest in a concrete company. If speaking about amount of share of the company that startups are willing to give to investors, the given answers differ widely, namely 37% of respondents would be ready to give up to 10% to the investors, 26% of respondents would be ready to give up to 33% to the investors, 32% of respondents would be ready to give up 34-51% to the investors and only 1 respondent would be ready to give more than 51% company share to the investors. Main investors for start-ups so far have been founders of the company (mentioned by 75%), friends and family (mentioned by 35%), banks (mentioned by 20%) as well as business angels, venture capital funds, seed funds and public sector institutions (each mentioned by 10% of respondents). Thus, analysing data in Mid-West Latvia, the same conclusions as in Estonia can be made. Firstly, entrepreneurs lack knowledge of support possibilities, therefore majority of them finance start-ups themselves and do not use full advantage of support possibilities. Thus, support organisations should pay more attention and organise events in order to inform starups and entrepreneurs-to-be about support tools and opportunities, including business angels initiative. On the other hand, entrepreneurs themselves should take responsibility in order to do anything possible for the development of their company and should be more committed and active in looking for support tools which are in fact present and available. 17

18 4 Possibilities to establish the BANs foundation in South Estonia and Mid-West Latvia Therefore, concluding from previous chapters of the report, starting entrepreneurs do feel the need for additional financial resources and there are active BAs willing to invest, but attention to both sides have to paid to reach the desirable outcome. In this chapter possibility to establish Business Angel Network is discussed as being one solution to existing problems. The first and probably the easiest way to increase the business angels investments, is to increase the awareness about business angels. This aspect was brought out both by business angels and entrepreneurs. Right now awareness is low and entrepreneurs have no information about active angels and how to approach them. Over 60% of respondents in Estonia and 70% in Latvia do not know any business angels. The increase in awareness would also increase the information exchange between those two parties and inside the demand and supply side itself also. Public sector could help in awareness rising activities. Currently there are no special policy measures for business angels implemented in Estonia, but awareness rising activities could be created. These measures would also not intervene market processes and competition would not be distorted. More direct measure which could activate business angles could be some kind of tax incentives but implementation of this measure needs more thorough analysis before developing it. There is no operating formal Business Angel Network either in Latvia or in Estonia. In Estonia some of the BAs are connected through LinkedIn group but it does not encompass all active angels, and entrepreneurs cannot participate in that group. In general, from the attitude of business angels it can be stated that the time for formal network is not yet ready. There could be at least two reasons for such conclusion, as stated by BAs, first of all, perception of low efficiency of top-bottom approaches (endorsed or funded by government) in working with private sector, secondly, avoidance of unnecessary publicity. Currently the pre-assumed benefits from existence of BAN do not outweigh the associated drawbacks perceived low efficiency and unnecessary publicity. Building trust from third party would take time therefore there is a need for some kind of virtual environment facilitating the information exchange though. To this environment entrepreneurs can post their proposals, angels see and evaluate them, also some kind of issues can be discussed experience exchanged. This environment would also help along to awareness rising mentioned above and entrepreneurs could approach angels. When this virtual environment starts to function effectively the creation of formal network could be considered as the next step. Creation of active and attractive virtual environment is not easy though. There we see the role of science parks or business incubators. These intermediaries could incorporate this virtual network into their homepage, and advertise the environment among its businesses and known business angels. Intermediaries could also manage the information and administer the page. Continuous renewal of information and initiation of discussions is very important because it shows that the page is active and worth visiting. This activity of intermediaries could be supported by public sector through support given to parks and incubators. 18

19 5 Lessons learnt and Recommendations This chapter summarizes the lessons learnt and recommendations made on the basis of the previously described research. Lessons learnt: The main obstacle for starting entrepreneurs is the lack of finances followed by the lack of people with necessary skills and no formal business plan. Latter two are at the same time very important in attracting business angels. The investment need of enterprises and idea holders is not great. Majority of them need up to 50 thousand EUR to enter the market. This is in accordance with the investment willingness of business angels. Latvian business angels have more experience and have been active longer than Estonian business angels. This may be the reason why Latvian business angels are more ready to invest also into other countries besides Latvia. At the same time investments into the region are preferred. Business angels in Latvia and Estonia mainly do not have specific sector they prefer, though there is some level of specialisation. Therefore high growth technology based enterprises do not have any significant advantage and they have to compete with all available ideas for investments. In comparison, Business angels in United Kingdom also invest across wide range of industries, but with a strong focus on technology sectors. Angels investing through BAN focus on ICT (including software) (25%) and biotech/medical/health (19%). Scottish angel groups have a much stronger focus on biotech/medical/health (33%) (British Business Angels Association). Strong specialisation could be attributable to larger and more sophisticated markets where due to larger and more qualitative deal flow specialisation is necessary. Business angels in the developed countries on average make larger investment per investee than in Latvian and Estonia. There are no formal channels and networks through which BAs find the business ideas. Mainly ideas and investment opportunities are found through personal networks. In developed countries personal networks still have major role in attracting investees, but also BANs have proved to be a good source of perspective business ideas. Recommendations: Currently the situation does not favour the creation of formal network. At the same time there is a need for some kind of formal channel. Therefore, we suggest to create two virtual networks one in Latvia, one in Estonia where BAs can change the information and experience, and idea holders submit their ideas. Although there are investor forums organised by Connect, Seed Forum, Development Agencies, a continuous and existing virtual network would create a good basis for establishing formal BAN later after these virtual networks have proved their usefulness for participating BAs. Previous also increases the number of BA and possibility to find finance for good ideas. 19

20 These virtual networks should be administered by Tartu Science Park and Ventspils High Technology Park because these two intermediaries are most known in those regions and they have links to both idea holders and business angels. The initiator of this network could be manager of the incubator. Such best practice experience we see in Oxford Innovation company. These networks should also be incorporated into national VC networks and in Estonia it could be supported by Estonian Development Fund. Administrators of these networks should be known and highly appreciated by both business angels and starting entrepreneurs. They also have to be ready to invest their time and energy in propulsion of the virtual network. If the administer is not 100% devoted to this the virtual network will not start. Therefore separate position have to be created to administer the virtual network. The wages of these positions could be covered by EE in Estonia at the beginning with the clause to be selffinanced after a certain period of time. Parallel to creation of virtual network Tartu Science Park and Ventspils High Technology Park should start rising the awareness about business angels. Also support for entrepreneurs in writing good business plan has to be continued. 20

21 6 References Ambient Sound Investments. [ Accessed at Avotiņš, Valdis, private communication (PC) on 28 May, British Business Angels Association. Business demography. - Statistical Office of Estonia. [ mography.asp]. Accessed at European Commission, Eurobarometer. SME Access to Finance. October European Commission, Eurobarometer. SME Access to Finance in the New Member States. Analytical report. July i.finanses.lv [ Accessed at Illing, S. Business Angels Network. To be or not to be. [ Accessed at Juhkam, A. Riskikapital I. [ Accessed at Latvijas Republikas Ekonomikas ministrija. Ziņojums par Latvijas tautsaimniecības attīstību, Riga, June, Lillemets, A. Regional Scan. Overview of early stage financing system. Leonardo da Vinci Transfer of Innovation Project report Martinson Trigon Sells Hostex to Baltic Data Center. Invest IQ. [ Accessed at Nelson Gray. Business Angel Maser Class Investing with Others Angel Groups. March, SIA Biznesa augstskola Turība. Komercdarbības un pašnodarbinātības uzsākšanas analīze, pētījuma 1. posms. Riga, May Sihtasutusest. Ettevõtluse Arendamise Sihtasutus. [ sihtasutusest/ueldist]. Accessed at Tamm, D. Alignment between the factors of the innovation process and public sector innovation support measures: an analysis of Estonian diary processors and biotechnology enterprises. Dissertationes Rerum Oeconomicarum Universitatis Tartuensis, No. 33, 2010, 231 p. 21