Business angel practice — a term that covers a variety of individual situations and approaches — has grown slowly but noticeably over the past few years in Ukraine. Not only did the political tumult of this year not stop this development, 2014 even saw the creation of a dedicated association, UAngel, along with that of UVCA, which gathers venture capitalists.
UAngel chairman Natalia Berezovska shares her vision of this emerging practice, its challenges and prospects. This analysis is an excerpt from “The Deal Book of Ukraine,” a report on the Ukrainian venture and startup scene to be released later this week.
From erratic activity to structured environment
Angel investing is not absolutely new for Ukraine: there have always been individuals supporting risky ventures. They just didn’t happen to know this comforting term ‘angel’ that could describe their sometimes impulsive and not very business-savvy actions.
They didn’t know the title for this activity, but they also didn’t know the right way to operate. Mostly, they followed the emotional impulse, not an accurate calculation and a considered strategy. The majority do not know the basis of angel investing even now, with many acting erratically and not taking it as a hands-on process.
Nevertheless, the Ukrainian venture industry has changed significantly over the last few years – a number of new members from various spheres have emerged and formed an ecosystem. These are funds that target early- and late-stage investments, incubators, accelerators, various hubs and co-working spaces, grant and education initiatives for entrepreneurs, numerous branch events from small meet-ups to internationally recognized conferences, and, of course, the whole segment of fervent entrepreneurs or those aiming to become them. As a result, the number of people that can be referred to as angel investors has increased.
Until recently, such an important element of the ecosystem as a classic business angel network didn’t exist in Ukraine. Thus, with the launch of UAngel we have not only a communication platform for angels, but also a channel for getting more information on Ukrainian angels and the peculiarities of their investment behavior.
Still few angels on the market
An accurate number of angels operating in Ukraine is still not available. Each of the leading angel networks in the USA unites around 200 members. In Ukraine, experts could distinguish only around 50 to 200 more or less active angels. It is quite problematic to receive accurate statistics due to a number of reasons. On one hand, it has never been safe to make public statements about your income and assets. On the other hand, the absence of legal certification similar to that in the USA confirming the status of an accredited investor does not stimulate people to publicize their activities.
This anonymity factor makes the whole process more difficult for both angels – even if they don’t realize it – and entrepreneurs. The latter usually don’t know for sure where to look for an early-stage investment. In the media, one could find news on investments in a number of Ukrainian companies (including MyRobot, Kwambio, Kupazh, Multitest, JetMe, MouseHouse and others) that involved angels. However, actual names usually remain undisclosed.
Ukrainian business angels typically invest in a limited number of companies (3-4 is the common practice; some feel discouraged as soon as their startups face difficulties). ‘Portfolio’ approaches are virtually non-existent, while business angels have a variety of attitudes or invested amounts (we know of examples from $5,000 to $500,000). It means that very few people in this category have a genuine strategy for sustainable startup investment practice. However, step by step they tend to become more mature and some stay angels for a longer period.
A variety of situations
Business angels in Ukraine mostly fall into four categories:
- Business owners or top executives within an IT-related business (they already earn money in tech and invest in projects they could verify based on their own skills and connections in this area);
- Owners or executives in other industries, mostly traditional offline sectors (we observe people from such different areas as private equity or retail making their first steps as angels. We also see some people from Eastern Ukraine interested in angel investing, whose traditional operating business was lost due to the ongoing turmoil);
- Entrepreneurs with relevant skills, changing their roles occasionally (at one time they could be operating their business full-time and may switch to the role of an angel after selling their company shares);
- Entrepreneurs who are permanently involved in handling or incubating their fully controlled ventures, but at the same time are experimenting with creating venture investment departments or divisions.
Free from obligations that tend to be typical for venture funds, business angels rarely try to evaluate their portfolio in terms of an average annual return. That’s why the number and specialty of their deals cannot always be regarded according to coherent logic. Angels often experiment with various approaches – they invest in stand-alone projects, become limited partners of venture funds or launch and inspire their own projects.
Regarding their motivations, Ukrainian angels rarely mention high return expectations (as we know, angels all over the world target yearly investment return rates of 25-30%) as their main reason. At this stage of market development, they are guided by other things – an opportunity to be engaged with innovation, to keep up with trends, find synergy for their current businesses, obtain a technology, be closer to the creative class of young entrepreneurs and talent pool – but not primarily by the desire to earn more money. Maybe, they preserve this desire somewhere internally, but don’t believe it is realistically possible, due to few major success stories and the present problems in our market.
Ukrainian angels’ specific challenges
The problems faced by Ukrainian angels are somehow different from those in other emerging markets. Among them is a lack of industry expertise, weak regulatory frameworks and low trust levels, a weak entrepreneurial ecosystem and limited educational resources. However, the most serious problem is a limited deal flow of a good quality. A typical conversation between angels mentions “1000 projects screened and not even one invested,” while good projects stay under a low profile until they become too big for angels.
Another huge macro problem that restrains venture market development and angel investments is the small size of the domestic market, with customer behavior still unformed in numerous categories. In a country with a 46-million population, it will always be more profitable to sell FMCG goods and clothing. Many Ukrainians are active smartphone users that are not leveraged by 3G opportunities, are not used to paying with their bank cards online or downloading paid applications. As a result, tech entrepreneurs have a hard time validating their hypothesis on this market, achieving fast growth of their product and surviving. And not just surviving, but scaling their product and making it successful on a global market, which is expected by investors, as well as reaching an exit.
Nevertheless, angel investing remains alluring for investors who cherish being in-line with innovations. Technology penetration changes every sphere of our life and the deceleration of the traditional economy is pushing angels and entrepreneurs into each other’s arms. Angels should therefore not only realize what their status comprises, but why they should stay together and what benefits they can receive from cooperation and associations such as UAngel.
Considering the positive changes that will occur despite the conditions of an unstable economy that Ukraine will face in the following years, we invite all interested parties to join UAngel and overcome these obstacles together.