Are you and your team working on transforming your valid business idea into a functioning startup? Most likely, there is only one thing missing to really get started: money. So, where do you get the necessary capital if not out of your own pocket?
Actually, there are are several possibilities how to finance your startup. The most common one for securing a first investment is to find a business angel.
What Is a Business Angel?
The termn business angel refers to experienced entrepreneurs who support founders in bulding their startups with their capital, their expertise, and access to their network. In more than 60% cases (according a ZEW study of 2020), business angels invest already in the first year of startup creation.
Since these angel investors usually have launched their own startups before or have long years of experience in company management, they know what’s important and can give the teams the best possible advice. They act as the founder’s guardian angels, so to say – which is where they get their name.
On average, a business angel invests around 25.00 and 100.000 EUR into a burgeoning startup for an agreed-upon period of time of usually 4 to 7 years, Financial support is therefore a crucial factor in the cooperation between startup and business angel.
According to a ZEW study, most startups indicate that they also receive active mentoring from their business angel. Also, the advantages of having a network is highly beneficial to the companies under the tutelage of a business angel. More than 80% of the tech companies financed by business angels state that profit from their angel’s networks by getting into touch with customers, consultants, or suppliers.
How Does the Business Angel Profit From His Investment?
A business angel, of course, doesn’t spend their time, experience, and especially their money into something that has no return value for them. Business angels aren’t selfless saints, even if the name implies otherwise. The answer is simple: Business angels receive shares in your company as a return for their investment.
By actively helping your startups becoming successful, the business angel themselves profit – they are making the “cake” bigger and consequently their profits rise. At the same time, they secure their return-of-invest. So far, so good. The greater goal of a business angel is, however, in most cases a successful exit for the startup since that way they can sell their company shares with a hefty profit.
What’s the Difference Between a Business Angel and Venture Capital?
Business angels can’t be equated with venture capital. The main difference lies in the moment of financing. Venture capitals firm usually invest at a much later time than business angel. In addition, you can’t expect a VC to provide the kind of mentoring that a business angel might give you.
So, you can expect more capital from a VC but decidedly less advice, compared to what business angels do.
How Do You Find the Ideal Business Angel For Your Startup?
The search for a business angel that suits your company can become really difficult. There is no centralized office or a comprehensive register of business angels. There are, however, 40 active business angels networks in Germany, among them the BAND – Business Angels Netzwerk Deutschland (“Business Angels Network Germany”) which might be a good place to start
Some advice: Always have a clean pitch deck at hand, just in case, when you are looking for investors. By the way, in our Startup School you can learn how to build a great pitch deck.
So, how do you take that first leap? According to a ZEW study, in 80% of all cases founders get into contact with possible business angels by means of private or business contacts – the classic friend of a friend route. Apart from that, there are programs for aspiring tech companies, which is what we from the Founders Foundations do, conventions, or startup competitions that can be a first point of contact with the world of angel investors.
When choosing a business angel, be absolutely sure that the person is a good fit for your you and the vision you have for your company. An angel investor shouldn’t just be the first random source of money for you but someone whose knowledge and support you can trust for a longer period of time – a mentor. That person should also have as much experience in your branch of industry as possible. Consequently: the match between angel investor and startup should also have a professional, tradecraft basis.
Also, look at the network that the potential candidate surrounds themselves with. A business angel that can get you into contact with various useful people is worth their weight in gold.
In essence, business angels can be a core factor in your startup’s success and provide you and your team with support on various levels. You should take your time to finde a suitable business angels. In case of doubt, trust your gut feeling when you have decide whom to approach.
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