Business Angels | Angel Investors | Informal Investors
Business angels are (former) entrepreneurs who invest in your idea, have a relevant network, and can also coach you
Business Angels (also known as angel investors or informal investors) are an important source for financing risky ideas and startups. Especially in the phase of idea development where banks and other parties are not willing to provide capital due to the high risk, this is a group of entrepreneurs who are willing to do so. The classic business angel is a successful entrepreneur who has earned (a lot of) money from selling their business. Usually, they have also started that business themselves. They not only have money but also knowledge of a certain industry and a network with important contacts. In the Netherlands, there are estimated to be several hundred active ones, but their number is difficult to estimate because they often work in the background. They usually do not become visible directors of the company in which they invest but play a role as a coach, board member, or advisor.
Typically, business angels are older, sometimes even retirees who want to remain active. After all, they have already completed a success story. There are several reasons why they invest in your idea. First and foremost, they are interested in the return on their risky investment.
But perhaps even more important to them is the involvement in a new company and the excitement and pleasure that this brings. They also do not want to be too far away from your company to be able to act quickly. It's a form of hobbyism. They are often driven individuals who want to share their knowledge and experience with the young entrepreneur. Therefore, in this case, it is particularly important that both the entrepreneur and the angel behind it determine if they also fit together on a personal level. Mutual trust is crucial here as well and only arises after many conversations and thus the necessary time.
It is not uncommon for an angel to invest in a small company without revenue where only one person is employed. The Angel expects this company to quickly become very large within a few years with a new product in a new market with not too many competitors. The Angel makes this assessment based on their experience and knowledge of this specific market.
Business Angels invest with cash and in kind
The amount they want to invest varies from thousands to hundreds of thousands of dollars. Outliers to the upside also occur. It also depends on the current situation of the Angel. Sometimes they are still active entrepreneurs who are directors of a successful company in your region. The reason for them to invest is often the opportunity to gain access to a new market, which means increasing revenue if the idea becomes successful. Keep in mind that investing in such a case does not only mean cash. The angel can let their employees help develop your idea, with brainstorming, meeting rooms, the workshop, or the laboratory at your disposal. The angel can also help get subsidy and credit applications approved. After all, they are a well-known and successful entrepreneur. By associating their name with your idea and partner with you, they can convince others to believe in your story too. Although it's not cash, all of that can be very valuable and take you a few steps up the hill.
Business Angels are a very interesting source of private equity for young, high risk techno starters. But of course, the angel expects something (besides the invested sum) in return for his/her efforts and the risk he/she has taken. This can be any kind of interest, a dividend payment, or it is even possible to receive an invoice for the effort provided. At some point, you will want to part ways, the exit. The ideal is, of course, an IPO, although the current climate makes that unlikely. The entire company can also be sold to another party, allowing you and the angel to cash in.
There are also informal investors who have been managers or CEOs of a (large) company and have, whether voluntarily or not, left. They are then willing to invest a part of their compensation package in your idea and also make their time available. This can work well, but being a manager of a large company requires very different skills and ways of operating than starting a company from scratch with a lot of risk.
Former managers of large companies are often accustomed to support in the form of several secretaries, and then they find out in the startup that they have to make copies themselves, make their own coffee, and manage their own schedule. That's not so bad, but a startup often requires a different balance of activities than a large company. For example, I have experienced that a former manager of a large Dutch company constantly hired expensive external consultants for overviews that he could have simply asked the existing team for. Not only did it cost a lot of money, but it also frustrated the team members because they felt that they were not taken seriously and their expertise was questioned. And the guy missed every signal that he might have made the wrong choice. After all, he was the manager and made the decisions, right? So, at the end this had a very negative effect on the team spirit. Conclusion: each phase of a company requires a different type of entrepreneur.
Informal Investors who are not Business Angels but Business Devils
This brings us to the pitfalls to watch out for before getting involved with an informal investor.
- Enthusiasm. Enthusiasm comes in many forms. The ideal business angel remains somewhat at a distance, becomes active at your request, and provides advice where necessary and desired. The pitfall here is, of course, that the angel enthusiastically takes your seat under the motto "let me do it, I can do it better and faster". That cannot be the intention. It is even more difficult when the enthusiastic ex-entrepreneur has been extremely successful in bringing - for example - a line of unbreakable bike locks to market. When your business idea involves a biotech startup, an angel who thinks they know everything can pose a major problem. It is known that Nobel Prize winners - who generally also have a big ego - think they know everything. Illustrative in this regard is the story of the internet millionaires. The internet hype has produced several very young and very wealthy former entrepreneurs who, after spending a few months on the beach and the golf course, decided to start a new business again, now as a business angel. They sometimes forgot that they then had to fulfill the role of investor and not the role of the energetic entrepreneur.
- The cuckoo's egg. The angel who tries to push you out because they think it will go better without you. Then you really have a problem. Further comment is unnecessary.
- Engagement. The angel has invested their own money, which they have worked hard and long for in the past, in your company. Due to this emotional involvement, they may start making unreasonable demands in a subsequent investment round or block negotiations with an interested party by walking away or simply not showing up. In a more subtle form, this game can be played by continuously putting new or slightly different demands on the table until the other party frustratedly gives up.
- Misfortune. The angel can fall ill, have an accident, or, worse, die. Make good agreements about what will happen then and document this. Also infamous is the case of the angel whose wife suddenly indicates that she wants to move in with someone else, thus wanting a divorce and claiming her share of the wealth. The angel had no choice but to withdraw their investment from the company.....
So, do your homework here as well and find out the background of your business angel. Ask for references, check them, and also ask around for others' experiences with your potential partner. Before the meetings, also think carefully about the questions you want to ask. Try to find out the real reasons for wanting to work with you. Sometimes it may even be wiser to approach a venture capital firm when looking for money for your startup.