Spain may not the first country that comes to mind when thinking about successful European technology companies. Try telling that to Luis Martin Cabiedes, one of Spain’s most active angel investors and a scheduled speaker at the annual meeting of the European Trade Association for Business Angels and Early Stage Investors (EBAN) in Madrid April 27-28. Cabiedes made a 500% return on the first batch of investments and expects to make a 72% return on his current portfolio, after only one exit.
Cabiedes’s family owns Europa Press, a kind of Spanish version of Reuters. His father bought it because he thought the news business was a romantic and exciting sector. It was, however, not a very lucrative business, until technology transformed it in the 1990s. Europa Press, the first to give away its news to MSN, quickly realized the potential of the Web and received shares in several small Internet start-ups, in exchange for news. It went on to create a new company, a joint venture with Ole, the largest search engine in Spain. The company was later sold to Terra Networks for an undisclosed sum.
The joint venture with Ole was one of eight companies in Cabiedes’ first round of investments. My Alert, a company focused on designing and implementing wireless alert services to the mass market which merged with Buongiorno, an Italian public company, was another. The exits of these companies earned him the 500% return. Cabiedes says he is currently negotiating a trade sale of one of the 14 companies in the second batch he has invested in and the profits from that sale alone will earn him many times the money he invested in all fourteen.
Cabiedes’ track record is difficult for most angels to replicate. Normally, private individuals such as entrepreneurs, retirees or executives in transition, who are prepared to invest between 2% and 5% of their total wealth into highly innovative but risky start-up companies, hit a home-run only about once every ten years, says the Spanish business angel. His strategy is to invest about €200,000 in each of about 10 companies. He holds in reserve enough to be able to plow in around €1 million when one of the ten starts to get significant traction.
Like other successful angel investors , Cabiedes takes a hands on approach to the management of young companies he invests in. He usually invests in start-ups in the same geographical area so that in one day he can attend monthly board meetings at most of the companies.
Cabiedes encourages others to include angel investments in their portfolios. As long as investors spread their bets they can usually expect to make at least two to three times their original investment, he says. That is far less risky than letting others manage your money, a lesson learned by those who invested in funds like those led by Bernie Maddox.
Cabiedes is one of about half a dozen very active business angels in Spain, the host country for the 2009 annual meeting of EBAN, a trade organization representing investors in early stage companies. When EBAN was created there were only 50 business angel networks in Europe to support high-growth start-ups, with more than half operating out of Britain. The number of angel groups has since grown to around 300, spread throughout the EU. England, the most mature market, now has approximately 22 member networks which represent roughly 5,000 angels. EBAN has grown along with the market, expanding its membership from 15 to 90 groups, including members from close to 30 countries in Europe and beyond.
The April 27-28 meeting will address a number of issues, including how the financial crisis is increasing the equity gap and how angels and VCs can team together to bridge it.
The current economic crisis and resulting credit crunch has spiked demand for capital from business angels networks across Europe not only from the usual very early stage companies but also from three-year-old companies which have revenues of €3 million to €5 million in sales, so- called gazelles which traditionally do not have to worry about follow-on financing, says EBAN..
This means “extraordinarily good deal flow for business angels,” who now have the opportunity to finance good companies at a valuation which has come from from 20% to 30% over the last few months, according to EBAN.
At the same time, many business angels have lost money on the stock markets or in real estate during the financial downturn. While great companies at attractive valuations represent good opportunities, many business angels now feel a need to stay focused on their portfolio, in order to make sure that they have enough money for follow-on round investments. The financial crisis is also putting some angel groups at risk. Some of their members, especially recent ones who have not previously experienced a downturn, are no longer making new investments and may have to withdraw from the network, according to EBAN.
This is creating some important challenges for early stage companies and investors but also opportunities which policy makers should help to tackle and leverage, says EBAN. Cabiedes suggests, for example, that governments could give incentives to boost angels investments by helping early stage investors, who can expect to lose money on eight out of ten of their investments, to offset their losses.
As for Cabiedes, he intends to keep investing, despite the downturn. “I am not sure it is a bad time to be raising money,” says Cabiedes. “If you have a good idea you can still get funded.” Europe’s entrepreneurs can only hope that angels in other countries will be just as ready to make new investments.