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Angel investments for start-ups

For start-ups and young companies with ambitious plans, initial financing is often a challenge. The more innovative a product is, the harder it is to convince banks and other institutional investors. Especially in conservative Germany, investments in start-ups are considered too risky. In view of the fact that only every second newly founded company is profitable or even still exists after five years, this is basically understandable. However, the lack of risk appetite 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 specialise in investing in promising, innovative start-ups.

What exactly are angel investors?

Business angels are comparatively wealthy individual investors who have the opportunity to invest considerable amounts of money in small companies. It is difficult to define the investment volume at which one can speak of an angel investor. In the Anglo-Saxon world, people with liquid assets of about one million US dollars or more are usually classified as angels. For founders, this means that the possible investments of angels range between the possibilities 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 fund the first year of the company. After that, further investments may be possible. In the USA, investors are considered super-angels if their investment exceeds 500,000 US dollars: This may give an idea of the typical investment volume of regular business angels. In Germany, investments between 50,000 and 250,000 euros by individual investors are common. Start-ups that need larger amounts of 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 start-up when you first raise funding. Factors such as the (potential) customer base, a unique, patented product or own investments already brought into the company play a role here. Since an angel’s investment practically means that he or she acquires a part of the start-up, 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 give inexperienced founders valuable advice on how to position the company in the respective industry. Auch kann er gegebenenfalls Kontakt zu weiteren Geldgebern und anderen Geschäftspartnern herstellen. Die Kehrseite dieser Medaille besteht darin, dass die Engel mit ihrer Beratung oft natürlich Einfluss auf die Ausrichtung des Unternehmens haben. Wer sich als Start-up-Gründerin oder -Gründer von einer einzelnen Investorin oder einem einzelnen Investor abhängig macht, sollte im Vorhinein abklären, welchen Einfluss der Business Angel auf das Start-up ausüben will. Gerade bei größeren Beteiligungen und mit Blick auf einen potenziellen Exit des Investors (siehe weiter unten) ist das wichtig. Wer Zugang zu mehr als einem Geldgeber hat, kann die Abhängigkeit reduzieren.

Angel investment groups

Meanwhile, business angels often join together to form angel investment groups. The aim of these mergers is to remain as flexible and innovative as other angel investors, but at the same time to enable a better spread of investment risks. Angel investment groups often specialise in specific industries such as digital or tech. As a founder, gaining access to such a group can be very rewarding. Especially because here, in addition to the financial resources, the other capacities of an individual investor are also often available. Conversely, however, the number of demands on founders often increases as well. Because although the desire for flexibility is usually at the centre of the merger of several angels, a certain formalisation naturally occurs and the willingness to take risks decreases.

What profitability do angel investors expect from a start-up?

Start-ups haben es, wenn es um Kredite bei Banken und anderen konventionellen Investoren geht, oft nicht leicht. Das Risiko, dass ein Start-up binnen kurzer Zeit wieder von der Bildfläche verschwindet ist hoch. Business Angels preisen das in ihre Kalkulation ein und investieren oft in hochriskante Ideen und Gründungen. Das Kalkül dahinter ist, dass auch wenn viele der Start-ups niemals die Rentabilitätsschwelle erreichen, es ausreicht, wenn sich wenige der Investitionen vervielfachen. Der Traum als früher Investor bei einem Unicorn einzusteigen, mag viele Angel-Investoren antreiben, typischerweise besteht aber der Anspruch, den Wert der Anteile an einem erfolgreichen Start-up etwa zu verzehnfachen. Über eine Reihe von Finanzierungen ergibt sich bei typischen Angel Investments damit ein Rentabilitätsfaktor von etwa 2,5. Damit ist Angel-Investing mit anderen Venture-Kapital-Investitionen konkurrenzfähig.

How does an Angel’s exit work?

Business angels and angel investment groups typically acquire fixed shares in a fledgling start-up with their investment. Anders als bei den Aktien etablierter Unternehmen besteht nicht ohne Weiteres die Möglichkeit, diese weiterzuverkaufen. Auch Dividendenzahlungen oder Gewinnbeteiligungen sind während der ersten Jahre des Geschäftsbetriebs kaum zu erwarten. Die beiden typischsten Exit-Varianten für die frühen Investoren bestehen daher darin, entweder auf ein IPO zu warten oder darauf hin zu wirken, das Unternehmen an einen Konkurrenten zu verkaufen. Für Start-up-Gründerinnen und -Gründer, die aus Überzeugung hinter ihrem Start-up stehen und weil sie an ihr Produkt glauben, kann zumindest die zweite Variante einen unangenehmen Beigeschmack haben. Bei den Verhandlungen mit einer potenziellen Investorin sollte das Thema Exit daher auf jeden Fall angesprochen werden.

Wie seriös sind Angel Investments?

Grundsätzlich sind Angel Investments ein absolut seriöses Feld. Im angelsächsischen Raum werden vor allem Tech-Start-ups inzwischen zum allergrößten Teil auf diese Weise erstfinanziert. Nevertheless, it is important to address the fact that where there is a lot of money in circulation, there are often windy traders on the move. If you are a founding team looking for financially strong investment partners, you should therefore exercise a certain amount of caution. It is therefore important to find out in which other companies a potential partner is or was invested. The type and number of successful exits can also give clues as to how the angel does business. If founders are not primarily interested in quick money but in developing a sustainable business model, it is important to find an investment partner who supports this. Nevertheless, an investor who is counting on a quick exit and takeover by a competitor can of course also be a serious business partner. Above all, it is important that the founders and investors agree from the outset on how the partnership should work and what the red lines are.

How is contact made between founders and angels?

For start-up founders in need of funding, the question of how to make the first contact with a business angel is often crucial. Those who are not serial entrepreneurs often do not yet have the necessary contacts in the scene. In recent years, however, various possibilities have emerged to make contact easier. For example, there are regional pitching events where founders present their companies to a group of potential investors. You can imagine this a bit like a serious version of TV shows like Dragon’s Den, Shark Tank or the German Höhle der Löwen. In addition, there is a central network, the Business Angels Netzwerk Deutschland (BAND), in which many potential investors have joined forces. In the English-speaking world, there are also the first online platforms that function similarly to crowd-investment services, but only allow investment access to financially strong individuals.

These industries are exciting for business angels

For angel investors, innovative and scalable companies are particularly exciting. Therefore, technology and online products are currently the primary focus of many potential investors. Fintechs, mobile commerce and subscription services, for example, are raising a lot of money. The health and energy sectors are also popular with business angels. In principle, however, it is also possible to get angels interested in a product in more established sectors, as long as it is innovative and has a promising business model behind it.