Business Angel

A business angel is an experienced entrepreneur or founder who supports prospective founders both financially and with their expertise. In most cases, a business angel is a person who has already successfully founded a company themselves or has extensive industry know-how as a successful entrepreneur or manager. Business angels then pass this knowledge on to the prospective entrepreneurs in return for an investment in a new start-up. A business angel acts as a coach as well as a networker and financial supporter. In return, business angels receive a stake in the shares of the start-up. If the start-up is successful, the business angel also benefits as they also share in the profits through their shares. The overriding goal of a business angel is usually a successful exit.

Differentiation from venture capital

If you are a founder looking for a suitable source of capital, you can hardly avoid venture capital. However, the main difference between venture capital and a business angel is the timing of the investment. While venture capital companies tend to invest in a start-up at a later stage, business angels invest in prospective start-ups at a very early stage. Both venture capital companies and business angels provide equity capital and receive shares in the start-up in return. Venture capital companies, however, usually invest the money of private investors and must therefore be able to justify their investments sufficiently and have undergone a thorough risk assessment. Business angels, on the other hand, invest their own capital and are therefore not accountable to anyone. Business angels naturally also have financial interests, but they are also very interested in supporting young, innovative companies in their development. Venture capital companies, on the other hand, are primarily concerned with financial aspects and a rapid multiplication of the capital invested.

Investment by business angels

The amount invested by individual business angels is usually between €25,000 and €100,000. For larger investment sums, you should turn to business angel networks. The duration of the investment varies between 4-7 years. If there is no exit by then, most business angels try to sell their company shares at a profit after this time.

Advantages and disadvantages of business angels

One of the biggest advantages of business angels is definitely the support and advice they provide as experienced entrepreneurs. At the beginning of a start-up, there are often few contacts and a lack of know-how in certain areas. Successful serial entrepreneurs or long-standing successful entrepreneurs who act as business angels can be a great support. In addition, as a young company it is often difficult or almost impossible to obtain traditional bank loans for corporate financing and it is also too early for venture capital companies to invest in start-ups during the seed phase (initial phase of founding a start-up). In this case, financial support from business angels is an immense advantage.

One disadvantage, however, is that an investment also represents a major risk for the business angels, which they must try to hedge. For this reason, the internal interest rates that business angels demand on their capital are often very high, averaging between 20-30%.

In addition, it is not suitable for every founder to take a business angel on board. Business angels are more than just a source of capital; a business angel is less suitable for those who are reluctant to cooperate and allow themselves to be talked into their business. You should also consider whether you are prepared to cede company shares to a third party or whether financing from your own funds is more suitable for you (see: Bootstrapping).

In principle, however, a business angel can be a great asset for the development of a start-up, provided they are a good fit for the start-up and can provide the necessary industry knowledge and network. More on how to make the right choice in a moment.

Advantages of business angels

• Financial support in an early company phase (venture capital not yet possible & bank loans often too)
• Provision of a network
• Advice and expertise
• Act as a sparring partner, providing founders with help and advice on various problems

Disadvantages of business angels

• High internal interest rates on capital (20-30%)
• Receives company shares and can therefore exert influence
• only suitable for founders who also want support and advice, does not just provide capital
• some business angels are not very helpful, as they are not interested in the development of the company, but rather in quick returns; you should be able to assess this beforehand if possible

How do I find a business angel for my start-up?

Personal contacts

One of the first options for finding a business angel is to rely on personal contacts. Perhaps you know someone who has already been financed by a business angel. If not, it sometimes helps to spread your idea widely among friends and acquaintances, as most business angels choose their investments primarily through recommendations.

Business angel networks

Most business angels in Germany are organized in regional networks. There are around 40 of these. A total of 1,500 business angels are organized here. However, it is estimated that there are up to 9,000 business angels in Germany. To get in touch with one of these BAs, you should already have a pitch deck or one-pager that briefly describes your company and business model as well as you as the founder. With such a pitch deck, it is then possible to contact the business angels via a regional business angels network.

You can find a list of some networks here:

• https://www.business-angels.de/
• https://auxxo.de/
• https://www.angelsforhealth.com/
• https://www.baystartup.de/
• https://www.baar-ev.de/
• https://bacb.de/
• https://www.cyberforum.de/angebote/startups/startkapital/
• https://www.ba-frm.de/
• https://forum-kiedrich.de/
• http://www.fundersclub.de/
• http://www.vf-n.de/
• https://www.promotion-nordhessen.de/acceleratebusinessangels/businessangels/
• https://www.angel-engine.de/
• https://www.avesta-bac.de/
• https://bba-sh.de/
• https://www.business-angels-region-stuttgart.de/
• https://www.nbank.de/Unternehmen/Investition-Wachstum/NCapital/index.jsp
• https://www.business-angels-saarland.de/
• https://businessangels-nordwest.de/
• https://www.startup-wow.de/business-angels-netzwerk/
• https://www.b-a-web.de/
• https://investforum.de
• https://startupangels.de/zollernalb-startups.html?language=de

Start-up competitions

You also have the opportunity to present your own idea at pitch events or start-up competitions and then network with potential business angels. You can find a selection of possible pitch events and start-up competitions in our event radar: www.startbase.de/events

Social networks

To get in direct personal contact with business angels, you can also track them down via social networks such as LinkedIn or XING. Most business angels are represented there and can be contacted easily. For the initial contact, it makes sense to describe your idea briefly and concisely in 3-5 lines. If the business angel is then interested, you should provide a one-pager or pitch deck directly so that the business angel can obtain further information about your startup.

Which business angel is right for me?

In addition to the challenge of making a business angel aware of your startup, you should also make sure that the business angel is a good fit for you. The human level is particularly important here, as a relationship between startup and business angel is based primarily on mutual trust. Furthermore, it is of course important to choose a business angel who really wants to support your company in its further development and not just make a profit. When choosing a business angel, you should also take a brief look at their CV: Does the business angel really know their way around the industry? What was their previous investment focus? A business angel also acts primarily as a sparring partner, and their experience and industry knowledge can be very valuable.

What do business angels invest in?

As already described, business angels often invest at the beginning of a business start-up, i.e. at a very early stage. They are very risk-averse, as such young companies often have a high failure rate. For this reason, most business angels also invest their portfolio in such a way that they can compensate for possible losses through high profit distributions and exits. It therefore often makes sense to organize a business angel network, as this spreads the risk for each individual business angel and can also increase the know-how within the network. As business angel investments are often associated with a high level of risk, they pay particular attention when selecting their portfolio companies to ensuring that they are particularly innovative and can be scaled up easily. Digital business models are particularly attractive here.

However, in addition to the business idea, the personal level is also important for business angels. Personal characteristics and professional qualities of the founders are therefore also an indicator that business angels must take into account, because if it does not work on a personal level, the investment is more of a disadvantage than an advantage for both sides.

Prerequisite for a business angel investment

For business angels to invest in a startup, the following requirements must be met:

• The company should not have been in existence for more than 7 years
• The maximum number of employees is 50
• The maximum turnover is 10 million euros
• The company must not yet be listed on the stock exchange
• At least 75% of the company's activities are in an innovative sector
• The company's headquarters should be in the EU and at least one branch in Germany.