Most angel investors make a profit
Find business angels: this is how start-ups convince of an investment
1. Requirements for an angel investment
The entry of a business angel depends on whether their own start-up meets the basic requirements that make it interesting for private investors to invest. These include:
- Innovative and technology-oriented Product or offer
- Attractive size of the target market and Scalability the business model
- The start-up shows one USP and relevant competitive advantages
- A competent and passionate one Founding team
- First Traction: convincing concept, developed prototype or possibly proof of concept
- Attractive company valuation and suitable capital requirements for the investor
- Exit ability or Exit scenarios can be shown
Business angels invest in a variety of areas, such as B. IT & software, healthcare & medical technology, fintech, food, eCommerce or mobility. The individual angel investor usually focuses on selected industries. The reason is that he wants to actively support companies in which he participates with his contacts and experience from the industry. Only when this fit is given will he think about an investment. This should not be seen as a negative rating for the respective start-up. Rather, it is about finding the right investor for your own start-up and the respective industry.
Finally, good financial and liquidity planning as well as a clean legal set-up are among the basic requirements for an angel investment. We have put together more details on the legal component under Due Diligence & Contract.
A business angel invests for a limited time. Before making a decision to invest, possible exit strategies must be shownExit strategies for startups
2. This is how the "angels" invest in start-ups
Business angels are often among the first professional investors in a start-up. You rise in the early stage corporate development -as a pre- or seed phase designated. This can take place in parallel to participation in an accelerator or incubator program. The investment volume of most business angels is between € 50,000 and € 250,000. Accordingly, the capital requirement should be designed realistically if companies go on the hunt for an angel. Larger amounts of up to € 1 million are possible, but are often realized in cooperation with other business angels and / or venture capital companies (pooling).
The form of participation is usually one open participation. This means that the investor acquires shares in the company and the associated rights and obligations. In practice, this form of participation looks like this:
- The 3 founders keep ahead of funding 100% of your start-up GmbH. You have paid in equal parts of the share capital of 25,000 euros. You are looking for € 100,000 and convince a business angel to join.
- Both sides agree on one Company valuation of € 1 million - We leave out the difference between pre- and post-money at this point.
- For 100,000 € the investor receives 10% at the company. This will be Share capital from € 25,000 to € 27,778 increased (2,778 shares are equal to 10%). The remaining part of the investment of € 100,000 goes into the capital reserve (€ 97,222).
The business angel benefits from Distributions during its participation or through the sale at a later date (Exit). The time horizon of his investment is set for 4 to 7 years. A participation agreement is drawn up in connection with the angel's entry. What is there in addition to the participation amount can be found under point 5.
A rare form of participation is the silent participation dar - e.g. via mezzanine capital or a subordinated loan. These are equity-like instruments, but they do not mean any shares in the company.
Another tool to make an investment is the convertible loan. We have put together all the details of this form of financing on a separate page for convertible loans.
3. Funding: INVEST grant & EAF
There are funding instruments that support investments by business angels. In Germany, funding is provided through the Bafa INVEST program - grant for venture capital.
Core of the programINVEST - Venture Capital Grant is that private investors who invest in young, innovative companies with venture capital receive a grant. This amounts to 20% of the participation sum and flows back directly to the business angel. So he has more free funds for other investments. In the event of an exit, an exit grant is also possible under certain conditions as part of INVEST. Start-ups can apply to INVEST for eligibility. If they meet the requirements, they are eligible for one year. If an investor takes a stake in the company within this time, he or she receives the grant. This is of course a big plus when looking for investors. We have summarized all the details for applying for an INVEST venture capital grant.
European funding for private investor participation is available through the European Angels Fund (under the European Investment Fund). This enters into co-investments with the business angels who have successfully applied for the program. Start-ups cannot become active themselves at this point: more details on the European Angels Fund.
4. Search: Business Angel Networks & Co.
Finding a business angel as a start-up founder is not that easy, as there is no “central business angel register”. In recent years the business angel scene has become more professional and more visible. This helps in getting in touch with a business angel. The following channels are available for searching:
- Direct network: recommendations. LinkedIn & Co.
- Business angel networks
- Pitching events
- Business angel platforms
Before we introduce the individual channels, it is important to clarify the prerequisites (see point 1) and to work out your own documents (pitch deck, business plan and financial planning) perfectly. Otherwise, the request will be burned quickly and the search for investors will end before it has started. After all, the fishing scene is well networked with each other.
Creativity is a success factor in the search for capital, as the following video of a start-up shows, which at the time wanted to attract the attention of an angel investor:
# 1 Direct network: Recommendations, LinkedIn & Co.
Recommendations are the silver bullet in the search for investors. Many business angels have been told that they are following tips from other entrepreneurs who have already successfully completed financing rounds. It is therefore worth taking a look at your own network: with which founders are you linked who have already received an investment? Also actively spread in the networkThat your own start-up is looking for an investor can lead to recommendations and a door opener.
In times of LinkedIn & Co., addressing them directly is promising. However, not with standardized mass messages. Individual, short, concise and from the perspective of the highly relevant angel, the messages should be worded to arouse interest. After all, there are many entrepreneurs on the network trying to draw attention to their own start-up. This also applies to emails sent to potential investors.
Important: Finding a business angel is not about simply finding an investment. The business angel should be a good match for the start-up. Find out which investor you don't want on board. Trust and sympathy must be guaranteed in both directions.
# 2 Business Angels Networks
The Business Angels Network Germany (BAND) can help with the search for investors. The network provides a one pager for downloading for this purpose. Start-ups that use the One-pager fill in and send it back to the Business Angels Network Germany, you have the chance that the One Pager will be distributed to the connected regional Business Angels Networks and other members of the network. In order to use this multiplier effect, the following things must be observed:
- the founder personally fills out the one-pager
- the one pager is complete, especially when it comes to financial metrics
- the start-up implements innovative and technology-oriented products
- the USP is clearly visible
- the company is at an early stage
This also reflects the criteria mentioned under point 1 for the requirements of a business angel investment.
The aim of the one-pager is to match the numerous regional business angels networks to be invited. As a rule, 4 to 6 start-ups present at the matching events. The pitch takes place in small groups in front of interested investors who have already dealt with the information from the one-pager in advance. The regional business angels networks such as B. Business Angels Frankfurt Rhein Main, Business Angels Club Berlin-Brandenburg or the Cyberforum in Baden-Württemberg can of course also approach start-ups directly. We have the most important and largest networks in Germany compiled.
On European level the European Business Angels Network (EBAN), based in Brussels, offers support in the search for an angel. The range of services includes pitch training and advice on financing strategies, events for networking between start-ups and investors as well as self-organized pitching events where start-ups have the chance to present themselves to investors.
# 3 pitching events
An integral part of many start-up conferences are pitching sessions at which start-ups can present themselves. The audience is not exclusively made up of potential investors, but bringing your own story as far into the world as possible has already helped many founders in their search for investors. The key to this is a convincing pitch. We have put together tips for the perfect elevator pitch including events as well as the content for the pitch deck. Even if you do not present yourself, the pitching events offer the opportunity to network successfully during the breaks and to talk to investors.
# 4 business angels platforms
As a further development of crowd investing, platforms have emerged that want to link start-ups online with private investors. In the first step, start-ups have to register themselves in a database (sometimes subject to a fee). Then the Business Angel Exchange presents the business concept to a number of investors or starts an online financing round, which investors can join. Providers in this area include B. Companisto, PrimeCrowd or salsup.
Anyone considering such a platform should pay attention to the seriousness. Membership in the Business Angels Network Germany is an indicator of this. It can be checked whether well-known business angels are on the platforms. It is also worth making contact with start-ups that have completed financing there.
Tips for searching
The German business angels market is large, diverse and, above all, one thing: not homogeneous. It is all the more important that you observe the following points:
- Good preparation - the A&O for the interview. Prepare well for the interview with a business angel. Take the time to work out the business plan and only contact the investors when you are 100% convinced of your presence.
- The admission ticket: The One-Pager (Executive Summary).Most networks require a one-pager that contains the most important information about the start-up (e.g. market, product, USP, management, etc.).
- Stay tuned - take the initiative! Once you have sent the one-pager or a pitch deck, the motto is stay tuned! Call and inquire about the state of affairs. With this you show initiative and appear committed and professional.
- Drive on multiple tracks! Don't put everything on one card. Talk to different networks and use the different possibilities to get in contact with a business angel.
- In conversation with the business angel: Open and honest. Business angels don't expect a start-up company to be perfect. Investors quickly recognize whether a founding team is not taking the truth too seriously. Play with the cards face up. In order for a business angel to be able to provide optimal support, it is important that he knows possible weak points.
- Find out about the business angel. For example, talk to the BAND and ask about the business angel. Get references from portfolio companies. It is also important that the chemistry between both parties is right.
5. Due diligence & participation agreement
A success factor for negotiations: being open to feedback.
Once contact has been established and interest is aroused via a meaningful pitch deck, then the details are to be dealt with. As part of a due diligence, the business angel looks deeper into the start-up. Of course, there is often not much to see. It is all the more important that the documents such as the financial planning or the prototype together with the vision and the team are convincing. The focus of due diligence is accordingly on:
- the founding team (passion, ability to suffer, skill set)
- Market & competition
- Finance & liquidity planning
- Technology and legal aspects (patents)
- Sales (how should customers be won, what do customers cost?)
Company valuation is closely linked to financial planning. The evaluation question can quickly become a crucial question. Exaggerated evaluation ideas of the founders and hockey stick financial plans often mean the end of the talks. Business angels usually have a good overview of the market and are able to do so company valuations in line with the market derive. The aim of the negotiations is to produce an assessment that is fair to both sides. Open and constructive discussions that also take feedback into account help. The same applies to the discussion about the salaries of the founders after the financing.
Further details are set out in the participation agreement. These include B. Milestones, vesting regulations or liquidity preferences.
6. Conclusion: find business angels & alternatives
Business angels are wealthy and entrepreneurially minded people who contribute venture or venture capital, know-how and their network to young, mostly innovative, high-growth companies. For his capital he receives shares in the company and becomes a co-owner. Business angels rely on the fact that the acquired company shares will increase significantly in value due to good business development and that they will be able to sell their shares at a profit after a few years.
There is no exact number of active business angels in Germany. A study from 2014 estimates the number at around 7,500. Only a small part (1,400) of these are registered in one of the Business Angels networks.
Business angels hold an average of 50,000 euros. The participation amount is 10 to 20%. Typically there is an open participation, rarely a silent participation. A convertible loan is also possible.
Business angels mainly invest in the seed and / or start-up phase of a young company (early stage) so that they can participate in the company's increase in value at an early stage and use their know-how to influence the company's development (and, if necessary, take countermeasures).
Angel investments are usually followed by classic VC investors with financing rounds of 0.5 to 1 million euros (A round) or from 2 million euros (B round).
Business angels usually invest earlier than classic venture capital investors. In this context, however, the financing volume is lower. Venture capital providers are more often said to be purely financial investors. A business angel, on the other hand, is more actively involved in corporate activities and tries to advance the start-up operationally.
Business angels are often not present in public. The Business Angels Network Germany awards the Business Angel of the Year every year. The winners include Nikolaus Bayer, Florian Huber, Christian Vollmann, Prof. Dr. Tobias Kollmann.
More prominent private investors are, for example.Joko Winterscheidt, Frank Thelen, Ralf Dümmel (Cave of the Lions), Carsten Maschmeyer.
In addition, successful entrepreneurs who have made successful exits are on the road as business angels for start-ups. These include, for example. Christian Reber, Lea-Sophie Cramer or Max Wittrock.
What is important to you?
Business angels differ in terms of investment amount, industry focus and company phase, but the following points are important for all business angels:
- Business idea: Business angels are mainly interested in companies with an innovative business idea with good growth prospects. Ideally, the company offers a product or service that is superior to the competition and cannot be quickly imitated.
- Founding team: The qualification of the founding team is usually the most important criterion for the investment decision. Technical, commercial and personal skills and the absolute will to lead a company to success must be present.
- Business and financial planning: Further requirements are that the business plan is properly worked out, the earnings perspective is realistic and the financing issues can be resolved (see financial plan).
Advantages and disadvantages
For many start-ups, business angel financing is the first stage in a longer financing route. We have summarized the advantages and disadvantages:
- Advantages: Focus on pre-seed and seed phase, support through capital and know-how, relatively lean investment process, INVEST grant promotes investments
- Disadvantage: Surrender of company shares, search for investors takes time, lower investment amount compared to VC, legal setup relevant for future financing, separation from investor difficult
Alternatives to Angel Financing
There are now a number of alternatives to private investors in early-stage financing as well. These include:
To skip the first funding phase, bootstrapping can be a strategy. The aim is to achieve the growth phase on your own. If a financing round then takes place, the founders still have all the shares and a better negotiating position, as they have demonstrated entrepreneurial success even without growth capital.
As editor-in-chief, René Klein has been responsible for the content of the portal and all publications by Für-Gründer.de for over 10 years. He is a regular interlocutor in other media and writes numerous external specialist articles on start-up topics. Before his time as editor-in-chief and co-founder of Für-Gründer.de, he advised listed companies in the field of financial market communication.
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