Business Angels - Business Angels

BUSINESS ANGELS

Fast-growing companies usually finance themselves in a certain sequence from different financing sources, although almost always at first proprietorial sources, when the risks are higher, are more appropriate. Later on companies also use debt sources (short- and long-term loans, itd.), if or when they are capable of getting them.

The biggest problem lies in the financing of companies in the really initial growth phases, that is the seed and early phase, when the risks are at their peak. In the seed phase the company has barely been established with a prototype or first alpha clients. Statistical data however show, that about 8 out of 10 companies do not reach this fast-growth phase, which means the risks are really high. The solution to this problem are normally business angels, venture capital funds and different state aids.

The very first financing source of the entrepreneur are normally the 4F – the ‘founders’, ‘friends’ – friends of the founders, ‘family’ – family members of the founders and ‘fools’. This financing source represents an important part of the financing of a company, which can enable the establishment of a company, the creation of a prototype or the execution of a pilot project, getting first alpha customers and such. In this phase one can see whether there is a market for the products or services, offered by the newly-established company. Before that is almost impossible to get any external financing sources.

When the entrepreneur gets some means from 4F, establishes a company and does not wish to grow organically but exponentially, he has to be able to acquire means from other sources as well. Fast growth of a company also means large needs in terms of means, which usually the entrepreneur him-/herself usually is not capable of getting on his/her own. As already mentioned the company is still in a phase, in which the risks are very high, as it only has a proven concept, prototype and the first few customers.

In this phase normally the essential role is played by a person familiar with the branch, in which the company operates, but also the technology and the most likely trends – mostly based on his/her past experience. This person then sees a business opportunity just like the entrepreneur, believes in him/her and his/her capabilities, while at the same time is in the position to invest part of his/her assets into more risky investments, when companies are still in their initial growth phases. These people, who play an essential role, are known as business angels (a professional term).

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Business angels are successful businesspeople who in the past have already built one or more successful companies. As already mentioned the financial situation of their company enables them to invest also in extremely risky investments, such as ‘start-up’ companies. They are normally the very first external investors into a company, before venture capital funds or other financing sources. When investing into a certain company the emotional component is also present. Business angels namely wish to help young entrepreneurs in building their company and at the same time also relieve their own success.

When the business angel invests into a company, he/she becomes co-owner of the firm and presents a large added value for the entrepreneur, as aside from his money he/she also invests all his knowledge, experience and social capital. Therefore business angels are usually actively involved in the operating of the company, while being some kind of mentors to the entrepreneur. The business angel’s investment is also a sophisticated money refinement with potential high profits and the possibility to influence the investment.

Experience shows that business angels on average invest for a period between 3 and 7 years, investments range from 5000 to 500 000 euros, the required profit on the investment has to be at least 30% on a yearly basis. Business angels invest into companies or entrepreneurs, which have the potential to grow fast, a very capable management and a clear exit strategy.

This is therefore a totally ‘win-win’ situation, as the business angel invests into a risky investment, which gives him the possibility of potential high profits and to actively influence his/her investment, while at the same time through the entrepreneur he/she once more experiences his/her own success in his/her career. On the other hand, the entrepreneur through a business angel gains an experience mentor, who aside from financial capital also invests his own knowledge, experience and contacts in the business.