ConnectAngels 2019: Four ways business angels add value
What happens if you put fifty-four business angels from ten countries in one room? A lively debate on what being an active investor means. At the EIF’s ConnectAngels 2019 event, four angels grappled with this question, and more. Read on to find out their ideas on how to add value as an active investor…
Business angels are key to supporting entrepreneurs in Europe, not just through funding but through the active investment support they provide.
If you partner with a business angel, you hand over a portion of the company you have loved, nurtured, and sacrificed for since day one. You also agree to work closely with an angel — often formerly an entrepreneur — one with perhaps different ideas to you, a different personality, a different skillset.
That’s a challenge. So what do business angels offer entrepreneurs besides money?
Well, most business angels consider themselves to be active investors, that is, investors who get excited about the project, act as an entrepreneur, take an active role. As one angel put it, “do you want to have fun and enjoy yourself, or do you only want a return?”
Being an active investor means taking the time to get to know the team in which you are investing, to ask questions (and demand answers), to have a view on the running of the company, the market, the product, and hopefully, to play a significant role in its eventual success.
And what’s in it for the entrepreneurs? Well, business angels bring their own expertise, actively shaping the strategy and direction, asking the difficult questions, foreseeing potential roadblocks, and pushing them outside of their comfort zone. Yet, due to the highly personal work of business angels, surely the expertise depends on the angel? Yes and no — while angels bring different skills to the mix, they tend to fall into four broad categories. These are:
- The investor perspective
A business angel is likely to be an ex-entrepreneur…but she or he is now an investor, and the investor perspective is essential. No matter what kind of entrepreneur you are, you will find yourself going through the experience of seeking investment many, many times in your career, often for the same business.
If you are an entrepreneur in life sciences, you will need to get research funding. Then funding to patent your discovery. Funding for clinical trials. Funding to bring it to market. Then funding to grow. Funding to expand internationally and so on.
At each stage, your company will be different, your investment needs will be different, and your investors will be different. Convincing a different set of investors every time takes skill, and it’s not always possible to get it right first time. Enter the business angel. They understand the investor perspective. They have pitched, won, and lost before.
Shaping you to take the next step on your journey, is the difference between building momentum and taking opportunities — and grinding to a halt and missing out. Business angels play an essential role in Europe’s equity financing ecosystem, along with other options supported by the EIF, such as technology transfer funds, venture capital, and private equity.
2. Knowing the common mistakes
They say that every happy family is identical but every unhappy family is unhappy in its own way. Not so with entrepreneurs. If an entrepreneur’s business has failed, one business angel at ConnectAngels believes it is likely to have failed for one of three reasons:
- The product-market fit and traction
- The management team
- The funding
Add to this that 75–80% of start-ups no longer exist after five years, and you start to see the benefit of focusing on these three points.
As the business angel put it: “There is no single answer to success, no magic pill. But, we try to add value in these segments, because these are the top areas in which companies alone don’t make it.”
The product-market fit and traction is clear: a business angel could be instrumental in finding a suitable market for a product. The management team less so. For most entrepreneurs, their management team will be key to their success. According to one business angel, the same management team can rarely take the whole company forward from inception onwards.
“To scale, to go to the next stage, entrepreneurs sometimes need to appoint a new person, if not a new team. The ownership thing, it’s a myth,” said one business angel. “You need to add value by putting the right person there.”
Funding is not always positive for a company, either. The wrong kind of funding (for example, debt you can’t service) or poor terms (too large a chunk of equity in return for too little investment), or too little funding (forcing too many follow-on rounds) can all expedite a company’s demise.
3. Going in first
You have the right product, the right plan, the right team…all you need is for someone to take a chance on you. Correct? Many entrepreneurs can put their success down to someone ‘going in first’, whether that be the first order for products, the first clinical trial, the first funding. However, going in first requires a healthy risk appetite. It requires an entrepreneurial attitude and not a conservative one. It requires someone with funding that they are willing to risk…up to a point.
Investing at the start of someone’s career is what business angels do. They invest without track record. Without proof of product. Without assets.
“Investing pre-seed and seed — anything ‘first time’ for companies. This is where I add value,” said one business angel.
Through co-investments with the EIF alone, business angels have made over 570 early-stage investments in European companies.
4. Thinking big
That start-up which is doing exactly what you do, but better? Acquire it. Those countries and markets that can be hard to break into? Break in. Thinking big is somewhere where business angels can add value. “If there are no exits, we become nothing more than collectors of companies,” said an angel.
“We can add value by helping the company expand its market to other countries. After all, if we sell too early, we create nothing meaningful.”
His opinion is shared by other angels, and to an extent, the VC community. The US leads with a strong example. According to the report Financial Integration and Shock Absorption within the EU, US companies are financed by significantly larger funds at the scale-up stage. Both syndicate sizes and ticket sizes are bigger in the US than in Europe.
For example, looking across all fund vintages from 2005–15, 28% of the US funds were larger than USD 250m, in contrast to only 10% in Europe.
A business angel can help position companies for their next stage of investment, or even enter a long-term relationship with the company itself, investing in multiple rounds as they grow. For example, making an early-stage investment in an entrepreneur, and then helping them to position themselves for larger-scale investments from venture capital and growth funds — while re-investing themselves. As one business angel put it: “I recently invested in the same entrepreneur for the third time. I prefer serial entrepreneurs, as first-time entrepreneurs make the same mistake over and over again.”
So horses for courses. It appears that for almost every business need, and every investment profile, there is a business angel to suit it.
Why business angels?
The EIF supports business angels and family offices through the European Angels Fund (EAF), a programme rolled out in nine different countries (plus a pan-European pocket) and at a volume of close to EUR 700m. Through the EAF, the EIF has entered into agreements with more than 100 business angels who have, in turn, made over 570 co-investments. The fund unites the angel’s unique expertise with the EIF’s experience and network, reducing risk for the angel but maximising the capital that reaches the entrepreneur.
The EIF’s ConnectAngels event, which is growing year on year (twenty-six guests were first-timers at the event in 2019), is an annual chance for Europe’s business angel community to come together, network, and exchange views on current issues in business and investing. In addition, the EIF also offers business angels membership of a digital networking platform, where ideas are shared throughout the year.
Interested in co-investing with the EIF?
Our process is simple and you can apply anytime — a screening call, due diligence, a final decision and signature should take around three months. To be considered as a co-investment partner under the European Angels Fund, please email: EAF-Applications@eif.org
