Your money has run out. Something many of us have experience with. But did you know that this is also the main reason small businesses fail? 82% of business owners who fail have it due to cash flow problems. You probably know someone yourself with a good idea, working 80 hours a week to make her business a success. Often these entrepreneurs do not (yet) have enough profit to hire a team or spend money on marketing and technology development. This is certainly the case with startups. So those will often start looking for people who believe in their plans and are willing to invest in their startup. This is where angel investing comes in.
What is angel investing and how can it help entrepreneurs?
Early-stage investors who invest in a company are often called “angel investors. An angel investor is an individual who invests with his or her own money in an early-stage startup. In return, the investor becomes part-owner of the company and receives shares. It is estimated that nearly 90% of young businesses are started with this form of financial assistance. Angel investing is a bit different from so-called Venture Capital (“VC”) funds, because they manage someone else’s money in a pool. Another difference is that angel investors are more willing to invest in an idea, where the majority of VC funds expect that there is already a proof-of-concept.
Angel investing is done only in a private company. This also means that once you’ve invested, you can’t be sure when (and if) you’ll get your money back… That can only happen at an “exit event” which is a sale or listing on an exchange such as Euronext.
Why invest sting?
There are lots of reasons why you might want to invest in a startup with your own money, but the most common reasons people give are:
- Investing in new technology is exciting and relevant
- Making an impact with your money in topics you care about
- Support a team you believe in
- Giving money and experience back to society
- Chance to have high returns
Some angel investors focus on specific topics, such as software, tech, climate change, diversity and inclusiveness, or the future of work. They often do so because they themselves have expertise in these markets and want to contribute positively to the future. A special group of entrepreneurs in need of additional financial support are women entrepreneurs. By 2021, less than 2% of all VC investments went to women entrepreneurs!
And there are more than 2% women entrepreneurs, so there is a significant funding gap that needs to be solved. Do you think it’s important to invest in women entrepreneurs who are changing the world? Then check out Joanna Invests because that is exactly what they do.
But make no mistake, all angel investors also do it to increase their wealth.They expect a pretty high long-term return. The horizon in angel investing to get your money back is between five and 10 years (and of course there is no guarantee!), but then you should also be able to get a return of two to three your original deposit back. You will have to be patient, but then it can definitely be worth it.
Where can you start?
Entrepreneurs often seek funding from angel investors when they are still too small for a VC fund investment and have already invested money themselves, sometimes along with family and friends. Some angel investors are (have been) successful entrepreneurs themselves and now want to give back to the community. But more often angel investing begins in your own circle of acquaintances. So, go find that entrepreneur in your network! Maybe you know someone who wants to grow her business?
If you begin angel investing you won’t be the only one. In Europe, there are already nearly 325,000 active angel investors. Sifted recently published a list of 150+ female angel investors in Europe, so there is work to be done there as well to equalize it with men. These angel investors invest from a few thousand euros to a maximum of a million euros in a startup, but the majority are between 10,000 euros and 100,000 euros.
Don’t have the right network or not that much money available?
Don’t worry, there are many alternatives to get started with smaller amounts and where you don’t have to search for your own companies to invest in. A good way, for example, is to invest through crowdfunding platforms, and there are many of them! There are more than 50 in the Netherlands alone, and they raised EUR 730 million last year for all kinds of startups and projects. Most of the financing raised through these platforms was in the form of a loan, but EUR 30 million was invested in equity. Some of the most well-known platforms to invest in stocks are:
- Leapfunder; Leapfunder is a Dutch platform that focuses on simply angel investing in startups
- Eyevestor; Eyevestor is a Dutch platform that focuses on SMEs, start-ups and scale-ups that want to issue shares to employees, customers and other stakeholders
- Seedrs; Seedrs is an international platform that helps all kinds of growth-focused companies raise funding and build a community
- Joanna Invests; Joanna Invests is a new community where women can invest in women entrepreneurs who are changing the world.
Take a look at what these platforms have to offer and compare costs.
Important questions to ask yourself before angel investing
Before investing in a startup, it is advisable to read, listen and learn about the company. Ask yourself and the company’s founders as many questions as you can about the business plan, the market, the team and the economy. The following questions are a good start;
- Do I understand the product?
- Do I understand how the company is going to make money?
- Is the market big enough for a large company?
- Do I trust the founders and believe they will make the company successful?
- What are the risks?
If you have good answers to all these questions, you are ready to decide whether to invest.
Finally, angel investing can be an exciting but risky part of your entire investment strategy
You probably only look at possible angel investments when you’ve already invested in less risky investments, as in a savings account, your own f**k up pot, real estate or in the stock market in ETFs. Don’t have any investments in less risky investments yet? ELFIN helps you get started in membership!
The standard rules for investing also apply to angel investing, such as spreading your risk across different products, sectors, regions and timing. For example, invest in multiple startups operating in different sectors that will increase your chances of success.
Because your returns from angel investing are very unpredictable, angel investors often invest for other reasons as well. Beyond a good return, supporting entrepreneurs engaged in new technologies that have positive impact is often a key driver. If you feel you can’t yet trust your own research well enough to invest or not, or if you find it difficult to find good startups, also check out Joanna Invests‘ website. They will take this off your hands.
Final tip: angel investing is for the long term. There will be ups and downs. But startups are bursting with energy, so enjoy the journey with them!
By Claire Tange & Annemarie Kruijer
