Business Angels: the funding tool for startups

Business angels the main financiers of European startups

Total investments by business angels in Europe increased by 9% in 2017 (compared to 2016). In 2017, total investments reached a new high of €7.3 billion. This makes business angels the main financiers of European startups. Indeed, all other types of early-stage investors, operating actively within the borders of Europe, reached a total of €11.4 billion in investments in 2017 (source: eban.org).

Informal investors versus business angels

In practice, the terms informal investor and business angel are still sometimes used interchangeably. How can we actually define informal investors? According to Panteia (2014), informal investors are individuals who use part of their capital to invest in startups or already existing companies, which they themselves do not own. An informal investor only counts as a business angel if the company being invested in belongs to an unknown person.

Companies owned by friends, family or colleagues are excluded from this definition. Only a limited group of Dutch informal investors is therefore considered a real business angel. Related to that, you see that in addition to a "bag of money," this so-called business angel often brings with him knowledge, experience and a network and acts as a sparring partner for the entrepreneur. Moreover, the business angel is naturally also looking for financial gain.

So when is it interesting to look for a business angel?

Especially in the start-up and early growth phase of your business, it is relevant to think of business angels as a relevant funding tool. As an entrepreneur in the start-up phase, for example, you are in the process of getting your product ready for the market and thinking about how to introduce it to the market. This obviously takes a lot of time and money, and there is little or no profit yet. In the early growth phase there is (growing) turnover and you are probably looking for capital to invest in scaling up your production, in marketing activities and in professionalizing your organization.

Broadly speaking, at this stage you are probably past the stage of grants and lack a track record (historical figures), assets, or a positive cash flow that can provide security for a bank loan, for example. This is precisely when the business angel is interesting, as it does not require collateral. Business angels usually want a minority stake in your company.

Business angels in different shapes and sizes

There are quite a few preconceptions about business angels in the marketplace. For example, the expectation that business angels are old men far removed from emerging technologies, or that business angels tend to take control in the company. Looking at our own network, we can broadly state that business angels differ in several ways:

• Number of investments made and their size: If we look at the business angels from "our" funding network, they have a portfolio of about 2 to 5 investments. The range of investment size is approximately between €50,000 to €750,000 (source: bannederland.nl).
• Motivation: from the fun factor, community involvement to business angels looking for high risk, high return investments.
• Competencies (education and experience): ranging from angels experienced in setting up a distribution network to internationalizing a startup.
• Type of network: think strategic partners, launching customers, as well as angels who can connect you with individuals, for example to expand your management team.
• Type of contribution to invested companies: e.g. not involved in day-to-day operations, but wanting to play the role of a solid sparring partner to e.g. very involved and wanting to play the role of a CEO or CCO, for example.

Without going too much into the studies on this, our network also shows that the majority of our business angels are overwhelmingly male.

How do you achieve a successful match?

In practice, the main reasons a startup funding fails are often:

1. An insufficient content match between the startups and the business angel and;
2. The agreement on (financial) terms.

Clearly, matching a business angel and an entrepreneur does not happen overnight. To prevent a matching from failing, much attention must be paid to the funding process.

For this, it is mainly important that you think about what type of investor you are looking for and come well prepared to the table with the investor.

What type of investor are you looking for?

So business angels come in different shapes and sizes, but as an entrepreneur, before actively seeking a business angel, ask yourself above all else what you need. Consider the following:

• Think about the role of the business angel, do you like the business angel to take the wheel or do you prefer a business angel from a distance?
• As an entrepreneur, it is important to be able to spar with an investor who has gone through the same stages of a business. For example, building a business from the ground up requires different expertise than taking over a business;
• Finally, it is very important for both parties to have broadly clear financial terms and other requirements prior to a "match" in order to increase the success rate.

Well prepared at the table

Moreover, it is a misconception that business angels are not waiting for comprehensive business plans. So if you want the funding process to succeed, you would do well to at least clearly outline your plans. Broadly speaking, this should show the following:

• what does your team look like?
• What "problem" does the product or service solve in the marketplace and is it scalable?
• the revenue model underlying this;
• what does the market and competition look like?
• How to generate monthly recurring revenue (cash flow) so that financial obligations can be met and, in the long run, create an interesting financial return for shareholders;
• The exit strategy: start thinking about selling (part of) your business. Business angels are ultimately looking for returns, take into account an exit period of about 5 to 7 years.

Business angels, valuable or not?

In my opinion, we may conclude that a business angel can be a very valuable funding tool for innovative entrepreneurs, provided the process is carried out at the right stage of the business and in a careful manner. But is a business angel's decision to fund an entrepreneur based only on reason? Or does emotion also play an important role?

Do you need funding?

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