By Claire Tange & Annemarie Kruijer
What is angel investing and how can it help entrepreneurs?
Running out of cash. Something many of us have experiences with. But did you know that this is the main reason small businesses fail? 82% of entrepreneurs fail due to cash flow problems. You will probably know someone in your own network, with a great idea, making 80 hour workweeks trying to make their business successful. Often these business owners don’t make (enough) profits yet to hire a team or spend money on marketing and technology. This is especially true for startups. So they will try to find people that believe in their plans and are willing to invest in their startup.
Psst: do you want to learn more about Angel Investing and how to analyse a project? Join the live workshop in the 29th of August!
The investors making these early stage investments are often called “angel investors”. An angel investor is an individual who funds startups at the early stages with their own money. In return, the investors will become co-owners of the company and will hold shares. It is estimated that nearly 90 percent of small businesses are started with this type of financial help. This is in contrast to venture capital (“VC”) funds that manage other people’s money in a pool. Another difference is that angel investors are more likely to provide money for an idea whereas the majority of VCs would like a proof of concept.
Angel investing is only done in a private company. This means that once invested, you don’t know when (or if) you will receive your money back… You will only get it back at a so-called ‘exit’ event, which could be a sale of the company or a listing on a stock exchange like Euronext.
Why angel invest?
There are many reasons why you perhaps want to invest your own money in a startup, but the most common reasons people give are:
- Investing in new technology is exciting
- Having impact with your money in topics that you care about
- Supporting a team that you believe in
- Being able to contribute and give back to a company as active investor
- Having a chance at a high return on your investment
Some angel investors like to focus on specific topics, such as software, tech, climate change, diversity & inclusion, or future of work. Often because they have experiences in these areas themselves and want to have a positive impact. One particular group of entrepreneurs that is in need of extra financial support is female entrepreneurs. In 2021, less than 2% of all VC investments went to female founders!
And there are more than 2% female entrepreneurs, so there is a large funding gap that needs to be solved. Do you want to invest in female entrepreneurs that change the world? Have a look at Joanna Invests as they do exactly that.
Make no mistake, all angels invest to increase their wealth. They will expect a sizable return in the long run. The general time horizon of angel investing is waiting five to ten years to get your money back (there is of course no guarantee!), but by then you should expect a return of two or three times the original investment. So you will have to be patient, but then it can pay off.
Where to start?
Entrepreneurs are often looking for funding from angel investors when they are still too small for an investment from a VC fund and have already invested themselves, sometimes together with family and friends. Some angel investors are successful entrepreneurs themselves that actively want to give back to the startup community. But often angel investing starts through your own personal network. So, look around in your own network. Maybe you know someone who is looking to grow their company?
When you start angel investing, you won’t be alone. In Europe, the number of active angel investors is close to 325,000. Sifted has recently published a list of 150+ female angel investors in Europe, so there is a long way to go to achieve an equal share of men and women investing. These angel investors typically invest in a range from a few thousand to a maximum one million euros, but the majority is between EUR 10,000 and EUR 100,000.
Don’t have that extensive network or that kind of money in the bank?
No worries, there are many alternatives to start with smaller amounts and where you don’t need to search for your own investment opportunities. A good option is to invest in startups through (crowdfunding) platforms of which there are many! There are already over 50 crowdfunding platforms in the Netherlands alone that raised EUR 730 million last year for all kinds of projects. The majority was debt but EUR 30 million was invested in equity. Some of the most known platforms for investing in equity in startups are:
- Leapfunder; Leapfunder is a Netherlands-based platform that focuses on straightforward angel investing in startups
- Eyevestor; Eyevestor is a Dutch platform that focuses on SME’s, start- and scaleups that want to issue shares to employees, customers and other stakeholders
- Seedrs; Seedrs is an international platform that enables all types of growth-focused businesses to raise capital and a community in the process.
- Joanna Invests; a new community where women can invest in female founded startups that change the world.
Have a look at what kind of companies these platforms offer and compare the costs.
Key questions to ask yourself before angel investing
Before you start investing in a startup, it is advised to read, listen and learn about the company. Ask yourself and the founders of the startup as many questions as you can think of about the business plan, the market, the team and economy. The next questions are a good starting point;
- Do I understand the product?
- Do I understand the business model?
- Is the market large enough to validate a large company?
- Do I trust the founders and do I believe that they will make this company successful?
- What are the main risks?
Once you have satisfying answers to all these questions, you are in a good position to decide whether you want to invest.
Last but no least, angel investing can be an exciting, but risky part of your total investment strategy
So make sure you will look into angel investing if you have already invested in less risky investments, like in your savings, your own f**k fund, real estate or on the stock market in ETF’s. If you are not investing in less risky investments yet, ELFIN will help you how to do this (currently only available in Dutch).
The general rules to investing apply also to angel investment, such as spreading your risk across products, sectors, regions and timing. For example, try to invest in multiple startups, so you get exposure to different teams and sectors and increase your chances of success.
Because the return on investment is very unpredictable, many angel investors invest in startups for different reasons, as mentioned earlier. Besides making a good return, the most important reason is to support entrepreneurs and invest in new technologies that have a positive impact on the world. If you are not yet fully comfortable in doing your own research whether to invest or not, or if you have trouble finding these companies you truly believe in, have a look at Joanna Invests website.