Especially in conservative Germany, investments in startups are considered too risky. In view of the fact that only every second newly founded company is economically active after five years or even exists at all, this is fundamentally understandable. However, the lack of willingness to take risks on the part of major lenders also means that it is difficult for founders to raise the necessary capital for the first few years of business. One way to counter this is to work with so-called angel investors or business angels. These are wealthy individuals or small groups of investors who specialize in investing in promising, innovative startups.
What are angel investors exactly?
Business angels are comparatively wealthy individual investors who have the opportunity to invest significant amounts of money in small companies. It is difficult to differentiate the investment volume from which an angel investor can be talking about. In the Anglo-Saxon region, people with liquid fixed assets of around one million US dollars are usually classified as angels. For founders, this means that the potential investments of fishing range between the opportunities of friends-and-family investments and the potential of a Series A investment round. Depending on the size of a business angel investment, company success and pace of expansion, angel investments are usually sufficient to finance the first year of the company. Further investments may then be possible. In the USA, investors with an investment sum of 500,000 US dollars or more are listed as super angels: This may give an idea of the typical investment volume of regular business angels. In Germany, investments of between 50,000 and 250,000 euros by individual investors are common. Startups that require greater capital typically have to try to raise the money from several investment partners.
At the same time, it is important to have a realistic idea of the value of your own start-up when making initial financing. Factors such as the (potential) customer base, a unique, patented product or your own investments already made into the company play a role. Since an angel's investment effectively means that they buy part of the startup, the valuation results in the share that the angel buys. For example, if the founders agree with an investor on a valuation of one million euros and an investment of 100,000 euros, this means the sale of 10% of the company.
Angel investors are often people who have an entrepreneurial background and have earned their money themselves as founders or as executives in a larger company. Their investments in start-ups are therefore often accompanied by a certain amount of advice. With their experience, investors can provide inexperienced founders with valuable advice on how they should position the company in the respective sector. If necessary, he can also establish contact with other financiers and other business partners. The flip side of this coin is that the angels often have a natural influence on the direction of the company with their advice. Anyone who, as a startup founder, depends on an individual investor should clarify in advance what influence the business angel wants to exert on the startup. This is particularly important for larger investments and with a view to a potential investor exit (see below). If you have access to more than one donor, you can reduce dependency.
Angel investment groups
In the meantime, business angels often join forces to form angel investment groups. The aim of these mergers is to remain as flexible and innovative as other angel investors, while at the same time enabling a better diversification of investment risks. Angel investment groups often specialize in specific industries such as the digital or tech sector. As a founder, getting access to such a group can be very rewarding. In particular because, in addition to financial resources, the remaining capacities of an individual investor are also often available here. Conversely, however, the number of requirements placed on founders is also frequently increasing. Because although the desire for flexibility is usually the focus when merging several angels, there is of course a certain formalization and the willingness to take risks decreases.
What profitability do angel investors expect from a startup?
Startups often don't have an easy time when it comes to loans from banks and other conventional investors. The risk that a startup will disappear from the scene within a short period of time is high. Business angels include this in their calculations and often invest in high-risk ideas and start-ups. The calculation behind this is that even though many of the startups never reach the profitability threshold, it is sufficient if a few of the investments multiply. The dream of joining a unicorn as an early investor may drive many angel investors, but the typical aim is to increase the value of the shares in a successful start-up approximately tenfold. As a result of a series of financings, typical angel investments result in a profitability factor of around 2.5. This makes angel investing competitive with other venture capital investments.
How does an angel's exit work?
With their investment, business angels and angel investment groups typically acquire fixed shares in a still young start-up. Unlike the shares of established companies, it is not easy to resell them. Dividend payments or profit sharing are also hardly to be expected during the first few years of business operations. The two most typical exit options for early investors therefore consist of either waiting for an IPO or working to sell the company to a competitor. For startup founders who stand behind their startup out of conviction and because they believe in their product, at least the second variant can have an unpleasant aftertaste. When negotiating with a potential investor, the issue of exit should therefore definitely be addressed.
How reputable are angel investments?
Basically, angel investments are an absolutely reputable field. In the Anglo-Saxon region, tech startups in particular are now largely financed in this way. Nevertheless, it is important to address the fact that wherever there is a lot of money in circulation, there are often windy profiteers on the move. Anyone looking for financially strong investment partners as a founding team should therefore exercise a certain amount of caution. It is therefore important to look at which other companies a potential partner is or was invested in. The type and number of successful exits can also provide clues as to how the angel does business. If founders are not primarily concerned with quick money, but rather with developing a sustainable business model, it is important to find an investment partner who supports this. Nevertheless, an investor who relies on a quick exit and takeover by a competitor can of course also be a reputable business partner. It is particularly important that the founders and investors agree from the outset on how the partnership should work and what red lines there are.
How is contact between founders and angels established?
For female startup founders with financial needs, the question of how to establish initial contact with a business angel is often decisive. Anyone who is not currently working as a serial entrepreneur often does not yet have the necessary contacts in the scene. In recent years, however, various options have been developed to simplify contact. For example, there are regional pitching events where founders present their companies to a group of potential investors. You can think of it a bit like a reputable version of TV shows such as Dragon's Den, Shark Tank or the German Lion's Den. In addition, the Business Angels Network Germany (BAND) is a central network in which many potential investors have come together. In English-speaking countries, there are also the first online platforms that work in a similar way to crowd investment services, but only provide investment access to financially strong individuals.
These industries are exciting for business angels
For angel investors, innovative and scalable companies are particularly exciting. As a result, many potential investors are currently primarily focusing on technology and online products. Fintechs, mobile commerce and subscription services, for example, collect a lot of money. The health and energy sectors are also popular with business angels. In principle, however, it is also possible in more established industries to get Engel excited about a product, provided that it is innovative and backed by a promising business model.
