Activities of EstBAN, a business angels network created in Estonia in 2012, have lifted the nation to lead Europe in investments/GDP ratio. Even so, the success may swiftly evaporate if the state fails to offer angels benefits, says Paulo Andrez, president of European Trade Association for Business Angels, recently in Tallinn.
Business angels are entrepreneurs investing spare money into start-ups, mostly in technology and Internet companies as it stands. Increasingly, they dominate Europe in risk investments. According to EBAN, their 2013 investments in European start-ups totalled €5.5bn while hedge funds amounted to €2bn.
Mr Andrez foresees the danger of business angel investments shrinking in Estonia, in near future.
«I’ve seen several countries where, in the first couple of years, angel investor organisations have done a fantastic job. After that, the old investors run out of money, and the new generation is not there with new money. That’s not sustainable. Estonia risks going down the same path,» said Mr Andrez.
«Estonia has so much to its advantage: you have start-ups with great potential geared towards the global market; you are located in the midst of an area of several cultures and languages; you do already have several world renowned success-stories like Skype and TransferWise. But that will be of no benefit is things won’t change – if a more favourable environment isn’t decisively created for angel investors,» said Mr Andrez. According to him, this is what Denmark, Finland, and Latvia have already done, to name a few. There, business angels have been promised of awarded tax cuts and exemptions.
«Income tax incentives might be offered to business angels, while also considering tax incentives on dividends,» he suggested.
According to Aare Tammemäe, at helm of FinanceEstonia – an ASBL merging private and public sector interests – altering the Estonian tax system has so far been taboo; even so, the parties concerned might meet and discuss the tax incentives based on other nations’ experience.
«Tax incentives as such are nothing ugly. Provided that the main pillars of tax system remain in place, the state might offer tax incentives to bring in more alternative capital: business angels, private or risk capital. That would not be too much of a burden on the state; at the same time, it could provide a boost for the economic growth,» thinks Mr Tammemäe.
According to finance ministry spokesperson, Estonia is not about to create tax incentives for business angels right now. Whether or not they are about to discuss the issue with EstBAN and other players, the ministry commented not.
According to EBAN president, Estonia could learn a lesson from Israel – a leading start-up country in the world. Namely, in 1990 the country created a state fund to attract risk capital, equalling any amount placed by foreigners.
«If Estonian government were to create a scheme like that for business angels i.e. adding the same amount of state money to any angel investment, that would be a tremendous stimulus for investors,» said Mr Andrez.
According to foreign trade/business minister Anne Sulling, Estonia is aware of importance of business angels in financing of start-ups and, to involve such investments, a risk capital fund is planned in cooperation with European Investment Fund.
«It is planned to be built so that starting at a certain yield level, a business angel is able to earn more than the state, proportionally. Business angels should like that,» hopes the minister.
To get foreign angels more interested in Estonia, Mr Andrez thinks more should also be done to market Estonia abroad, and to create international contacts.
«If an angel sees a great opportunity for investment, in Estonia, but has no locals willing to invest with him, he will not bring his money into Estonia. Good opportunities also abound elsewhere. In order to attract money from the outside, a strong community of local business angels is needed,» said Mr Andrez, and praised EstBAN work what it has done.
Who are business angels?
According to EstBAN chief executive Heidi Kakko, a typical business angel is someone with good experience in business or management who, for some reason, feels sympathy towards start-ups in the same field as his, investing into them not only his money but his knowhow, skills and contacts.
«In Estonia, these aren’t the overly wealthy individuals, rather the enthusiasts,» she added.
Last year, a total of €4.6m was invested by EstBAN business angels, averaging a bit over €56,000 per investment. The ranks of business angels have been on a rapid increase – as at June, EstBAN already had 71 members, up from mere 25 at the start of last year.
While for those successful with start-up, becoming an angel himself feels natural, the traditional businessman is harder to recruit – the risks are big and one needs to be constantly involved in the enterprise he supports.
«For the wealthy, it is always easier to buy real estate or shares, as these don’t need constant attention and communication,» said Mr Andrez.