Introduction

Business Angels (BAs) are typically high net worth businessmen and women who invest both their personal money and time in high-growth potential, unlisted, early-stage ventures.  The BA investment ecosystem became very well developed in the United States during the 1970s. It was credited with playing a significant role in supporting, at the early-investment stage, high-tech start-ups such as Apple, Google, and Facebook.  BA investing has been spreading into developing countries, including China, in the 21^st century.  According to Chinese researchers Jiani Wang, Yi Tan, and Manhong Liu, BA investing in China is still a relatively recent phenomenon to the extent that there is a dearth of empirical analysis related to developing a BA investing ecosystem in China.  We recently completed a two-year field study of Chinese BA investing.

In this article, we first provide a brief introduction to BA investing in China, followed by an overview of our field research analyzing the current BA investing ecosystem in China. In 2017 and 2018, we completed 21 interviews of Chinese BAs located in Beijing, Shanghai, Ningbo, Hong Kong, Shenzhen, Qinhuangdao, and Xian/Guizhou.  Nineteen of these BAs were individual private-equity investors, while two BAs were part of an angel group (AG) that represents a relatively new organizational investment model operating both globally and within the Chinese BA community.  We present a profile of the 19 BA investors (15 males, 4 females) and analyze their investment strategies.  Based on our discussion of the development of AGs and a case study explaining this new type of BA investing organizational strategy, we argue that Chinese BAs are active, hands-on investors who report positive investment returns despite investing in an emerging country. Investors in China face significant challenges because of underdeveloped legal and financial institutions. However, the Chinese BA investment ecosystem is evolving from a market characterized by individual investors and informal and invisible groups to formalized syndicates and professional groups, which play a positive role in nurturing new BAs and consolidating angel capital to invest in start-ups.

BA Research in China

In 1986, the Chinese government introduced two programs that attempted, but failed, to play a pivotal role to support BA financing in early-stage ventures.  The programs failed primarily due to China’s status as an emerging economy, lacking both financial and legal institutions necessary to adequately support private equity investing such as venture capital (VC) and BA investing.  Wang and Scheela, in a recent book, have shown how China has been able to significantly improve its private equity ecosystem during the past decade by developing more supportive legal and financial regulations, which have specifically created investment opportunities for VC and BA investing.  While BA investing has improved dramatically in China, Wang and Scheela show that the investment climate is still institutionally challenging but economically emerging. The positive characteristics are the large size and consistently strong growth of the economy and a commensurate increasing development of high-technology sectors.  Since 2011, foreign and Chinese academicians are beginning to take notice by conducting substantive research and publishing scholarly papers in Western journals that have generated empirically-based policy recommendations to support BA investing in China.

Only six academic papers focusing on Chinese BAs have been published in established Western scholarly journals beginning in 2011 (see Wang & Scheela, 2020 for an overview of the six papers).  Cumulatively, these articles confirm that China is aggressively developing an entrepreneurial ecosystem that is increasingly supportive of a vibrant private equity format to include both VC and BA investing.  While these six studies presented interesting findings about BAs’ profiles and the challenges and opportunities of investing in China, many of the papers suffered from small, non-random sample sizes using Chinese students as proxies for BAs or focusing on investment deals, but not the actual BAs who made these deals.  We answered the call, in three of the six articles, for further in-depth research focusing specifically on Chinese BAs.  A major challenge when attempting to interview BAs, in both developed and developing countries, is to find them.  BAs prefer to maintain a low profile to the extent that they have been referred to by many researchers as being an invisible population.  While Chinese BAs are no exception to preferring a low profile, it is common for them to have active websites and participate in public forums, and are willing to be contacted via social networking.  In 2017 and 2018, we used social networking to develop a purposive judgment sample of the 21 BAs active investors in new ventures.  Each interview averaged 62 minutes, with the majority of the interviews occurring in Beijing.

Profile of Chinese BAs

In Table 1 we develop a profile of the 19 individual BA investors in our sample.  Similar to our research on ethnic Chinese VCs, the 19 BAs are highly educated with almost all of the BAs attending college and attaining at least an undergraduate degree.  Almost 75 percent have earned master’s degrees or above; with more than 25 percent attaining a Ph.D.  All of these BAs have significant business experience and have been fairly long-term investors averaging almost 11 years of investing in early-stage ventures.

Table 1.  China Angel Investor Summary Profile

These BA investors have typically sourced their investment capital from their personal savings, much of which flows directly from their private equity returns as angel investors.  The BA’s individual investment fund represents money already invested in a company and money available for future BA investing.  Only 18 of the BAs divulged the size of their respective funds; one BA preferred to keep this information confidential for personal reasons.  The amounts of the investment funds were wide-ranging, from $150,000 to $75 million (represents only one BA); the latter amount is an outlier and is typically larger than many smaller VC investment funds that focus their investments in early-stage companies.  Because of the unique size of the largest reported investment fund compared to the other 17 BA investment funds (range from $150,000 to $44 million), the median of $3.25 million is a better descriptor of this sample’s fund size of 19 BAs than is the mean of $10.8 million.  Collectively, these 18 BAs report having access to $195.35 million, adding in the median amount of $3.25 million for BA 19 approximated a total investment capacity of almost $200 million for the BAs in our sample, which is a very impressive amount for BAs investing in an emerging country characterized as an institutional void.

The 19 BAs have invested in 291 companies during the past two-to-26 years of investing, ranging from one-to-70 deals per investor.  Because two BAs have been very active investors and each invested in 40 or more deals, we again use the median (10 investments/BA) as the best descriptor of the typical BA investor in this sample, indicating a very active investing culture for BAs in our sample.

So, what kind of investment results have these 19 BAs experienced during their, on average, 11 years of investing?  We specifically asked each BA to evaluate the performance of their respective investment funds compared to their expectations when they began investing.  As shown at the bottom of Table 1, only 10 percent of the BAs were disappointed with their investing results (reporting “not meeting expectations”) and 90 percent believe they are “meeting expectations” (53 percent) or “exceeding expectations” (37 percent).  This is a quite surprising self-reported outcome for BA investing in an emerging economy, which still lacks the fully developed legal and financial institutions necessary to effectively support private equity investing.  Even in developed countries, BA investing in early-stage ventures is perceived as high-risk.  Of course, much more research is needed to externally validate these very early results. Still, it appears there is increasing support over the past decade for substantive BA investing as a viable ongoing investing option in China.

Business Angel Investment Strategies

In Table 2 we show the different components that make up an investment strategy for each of the 19 BAs.  We analyzed each component based on the BA’s responses to eight separate questions ranging from “Do you have an investment strategy?” to “Do you have a geographical focus for investing?”  All 19 BAs indicate they have investment strategies, which we asked them to describe in one sentence.  The 19 strategies are each unique in their focus, yet extremely diversified in their broad investing landscape. Collectively, the strategies initially appear to not follow any type of investing patterns as these BAs invest in a wide range of industries, products, locations, and amounts of money per deal. Each strategy provides a well-articulated path for each BA’s equity investments in unlisted SMEs. However, as we will explain below, when operationalizing their investment strategies, clear patterns begin to emerge that suggest a robust networking strategy for BA investing in China as a way to offset the lack of institutional support for PE investing.

Table 2. Investment Strategy

We asked each BA if they had exit strategies in terms of cashing in their investments.  More specifically, we wanted to know what it is (listing on a stock exchange via IPO, management buyback or trade sale), how many years investee companies typically held until exiting, and how many exits they have made.  The typical exit or planned exit strategy was a trade sale (selling to/being acquired by) another company after holding an investment in an investee company for an average of 5.7 years.  Nine of the BAs reported exiting a total of 37 companies for an average of about four exits for those BAs who had experienced an exit. Based on earlier research on BA investing in Asia, exiting an investment has been a very difficult process (see Scheela, 2014).

Ten BAs indicated a narrow Beijing-only geographical investment preference as part of their investment strategy. Only one BA was open to investing in investee companies located outside of China.  Strategically, most of these Chinese BAs prefer investing close to home, which compares favorably with most BAs investing in the United States and other developed countries.  Also, similar to American BAs, the 19 Chinese BAs prefer to invest and work with relatively young companies.  They invested a median amount of $45,000 in 291 companies composed primarily (93 percent) of seed- and early-stage companies, five percent growth-stage, and only one percent invested in late-stage companies.  This overwhelming early-stage focus, combined with a close-to-home investee-company preference, would actually represent a significant but unstated (not clearly stated in their actual investment strategy) investing pattern we found in our analysis of the components of the respective19 investment strategies.

These BAs can be categorized as fairly active, hands-on investors (including the very active, active, and moderate categories as shown in Table 2) by analyzing the amount of time each BA spent weekly providing value-added activities (typically strategic planning, forming the board of directors, and introduction to suppliers and customers), besides money, to their respective investee companies.  Each BA spent an average of 24 percent of his/her time every week working with their investee companies.

One way for a BA to more effectively operationalize an active, hands-on investor strategy is to negotiate, during the investment process, for a board seat on the investee companies’ board of directors.  In our sample, 13 BAs took at least one board seat with their 10 (median, Table 1) investee companies.  While six BAs preferred not to take board seats with any of their investments, three of them were still actively providing value-added activities to their investee companies on an ongoing basis.  One reason not to take any board seats or not to take board seats on all investee companies is that most of these BAs (16) co-invested, on average, with 3.6 other BAs when doing a deal.  Most likely, at least one of these co-investors would be the lead investor who would take a board seat to represent the investment team composed of four-to-five BAs.  Hands-on investing combined with extensive networking appears to play a key part in an effective investment strategy of most of the BAs in our sample resulting in positively perceived investment returns. Previously published BA research has suggested that a hands-on, networking investment strategy is also effective in emerging ASEAN economies (Vietnam – Scheela et al., 2018; Philippines – Scheela & Isidro, 2009; Thailand – Scheela & Jittrapanun, 2012 and Malaysia, Harrison et al., 2018).

Development of Business Angel Groups

From our interviews, BAs often seek deals from their acquaintances, and they like to co-invest with others, especially the members of the same AG. More and more Chinese BAs began to work together. Within the last ten years, the Chinese BA ecosystem has seen rapid growth, particularly in organized AGs and business angel networks (BANs).  This increasing collaboration is a natural evolution of the growth and maturation of individual angel investing. Challenges always exist for individual investors, particularly accessing a higher number of better deals. BANs are forming as a way to facilitate matchmaking between potential angel investors and entrepreneurs.  Besides, some BAs may not be able to effectively help and mentor their invested companies because of the lack of experience and resources. Even a sophisticated angel may be limited in capital size and industry experience. AGs, by pooling their resources and knowledge of their members, can overcome many limitations for solo investing. By pooling investors’ capital, they can make larger investments; by investing in more portfolio companies or syndicating investments, they share the risk.  AGs can also provide more efficient deal screening, due diligence, and post-investment management arising from increased numbers of investors and a diversity of knowledge about market, management, and technology.  Forming AGs can also improve the visibility and efficiency of the market by making it easier for BAs and entrepreneurs to find each other.  AGs also allow experienced BAs to share and exchange investing experience with new angels and to contribute to the creation of new and better government policies.

International experience shows that government policies can encourage angel investing, including tax incentives, co-investment funds, support for angel associations, networks or groups, and training and development of angel investors (see OECD, 2011). Similarly, the Chinese government offers significant public support to AGs and BANs (see State Council, 2016). The last five years have witnessed a rapid growth of AGs/BANs in China. Driven by these policies that increasingly support entrepreneurship and innovation, more and more BAs are working together. Dozens of AGs/BANs were founded in many first- and second-tier cities, including Beijing, Shanghai, Hangzhou, Suzhou, Nanjing, Wuhan, etc. Many of them are affiliated with government agencies or large enterprises, but some groups come from alumni associations. In 2018, Angels Association of China（中国天使投资人联盟), led by China Venture Capital Association （中国创投委), was co-founded by more than 20 AGs. This new community is an umbrella organization, aiming to cultivate and strengthen BAs and facilitate networking among AGs. According to their survey in 2019, there are 62 AGs/BANs in China, and 46 of these organizations have disclosed information publicly.

An Angel Group Case Study: Angel 100（中关村百人会天使投资联盟）

Angel 100, founded in 2013, is the first business angel organization approved by the Beijing civil affairs department. The sponsors and co-founders are mainly first-generation entrepreneurs in Beijing’s high-tech Z-park or EMBA alumni from China Europe International Business School (CEIBS), Cheung Kong Graduate School of Business, Peking University and Tsinghua University. The members are mainly BAs who are entrepreneurs over 40 years old. There are currently more than 500 angel members, 70 percent of whom are entrepreneurs and 30 percent are professional investors. Members span more than a dozen popular industries, and in each industry, there are dozens of expert investors. Its unique co-investment model of “experts leading and members co-investing” provide powerful leadership from the “entrepreneurial mentor group” for entrepreneurial projects.

We interviewed Mr. Qiao Qian, the Chairman of Angel 100, twice (in May 2013 and July 2017). Mrs. Hu Xueqin, the Secretary-General, also joined the interview in 2017.  Mr. Qiao Qian has 25 years of experience related to the science and technology industry. In 2010, Qiao founded an investment company focused on investing in innovative and early-stage enterprises, helping people realize their entrepreneurial dreams.

Running a business is not easy. When he realized that entrepreneurs needed more resources, Qiao came up with the idea to unite more people to make investments. He believed that if there were more angels, then entrepreneurs could get more help. As a result, he promoted the concept of “Angel 100.”  The idea was to collect 100 people’s wisdom to help entrepreneurs realize their dreams. We asked Qiao, “What are the most important qualities that an angel investor must possess to become a member of Angels100?” Qiao said each BA should have three qualities. One was that he or she should get prepared mentally to understand that all his/her money might go for nothing, and therefore be able to bear the financial risks. Another quality was that he or she should be willing and motivated to be a BA and invest in start-ups. The last one was that he or she should have at least ten years of business experience because this guaranteed that he or she probably had started a business or had been a senior manager and thus developed deep insights into the development and future of a particular industry. In other words, Angel 100 was an organization covering many industries whereby its members had different industrial backgrounds and the number of members from the same industry should not exceed five. In this way, people could share diverse experiences. These qualities alone would be greatly helpful for entrepreneurs. Qiao also emphasized that based on its members’ qualities as well as the group’s intention to help entrepreneurs, “Angel 100” was positioned principally as a “non-professional angel investor.” That is, each member had his/her full-time job and making investments was just a hobby. Being an AG member, investors have a chance to make investments together. Therefore, those angels without experience would also get the courage to make investments and entrepreneurs could get better assistance from this angel group.

Based on Qiao’s experience both in China and abroad, he believes group investing is difficult: the challenge is how to organize members to effectively make investments.  Qiao says he plans to launch 100 activities annually to nurture the cohesive power among members. There would be four kinds of activities in general. The first is to offer a dinner meeting each Friday (about 40 times a year). These meetings are principally open to the members of Angel 100. On these Fridays, a member would invite 10 to 12 people to join the meeting and these people may communicate with each other about an investing deal or an industry opportunity. The second is investor pitching (monthly). Several entrepreneurs are invited to give a presentation during an investment screening meeting, followed by a Q&A session. Interested members can make co-investment intentions and then initiate the due diligence process. By 2017, Angel 100 has made 25 co-investment deals, for a total amount of more than 80 million yuan.  According to the interview, investment performance is very positive:  80 percent of deals with investee companies are meeting or exceeding their expectations after approximately five years of investing. The third is visiting enterprises (about ten visits per year). Initially, members of Angel 100 recommend which start-ups to visit. For each visit, 10 to 15 members would be invited to the enterprise to discuss the development of the potential investee company during the visitation. The fourth is meetings with famous investors (about ten meetings per year). Since all its members are non-professional, they need to learn from professional investors and famous institutional investors (VCs) about their experiences of successful investments. In other words, the activities double as training courses for the members.

Angel 100 continuously develops new business opportunities and services. Hu told us the first Angel 100 Seed Fund was founded in 2016. More than 70 members subscribed with the fund, raising a 30 million yuan investment fund. This fund is legally structured as a typical limited partnership that can co-invest with other group members. By March 2019, the Angel 100 Seed Fund has invested in 13 deals. These portfolio companies have shown consistently positive development, 30 percent of which are likely to exhibit significant growth. In 2017, a series of training and education activities were launched for group members.  An Angel 100 Investment Institute was founded in 2019 and members use case studies to discuss experiences and lessons from their deals. In the first half of 2020, 10 professional committees were founded to focus on different industries and help start-ups become successful. After years of effort, Angel 100 has developed into one of China’s most active and influential AGs. Particularly, the trust among members, the development of powerful industry mentors, and their novel co-investing mechanism are impressive.

Conclusion

Chinese BAs are highly educated, very experienced businessmen and women who are experienced, private equity investors. They form informal institutions by actively networking with other angel investors to find deals for co-investing and together practice a hands-on, value-added post-investment strategy. AGs and BANs have become a generalized global phenomenon (see May and Liu, 2015). Similar formal networking developments are evident in China. Globally and in China, the BA investment ecosystem is evolving from a market characterized by individual investors and informal and invisible groups to formalized syndicates and professional groups that play a positive role in nurturing new BAs and consolidating angel capital to invest in start-ups. 

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Wechat Official Accounts of Angel 100: tianshibairenhui（天使百人会）