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business angels funding by techangels
22 September 2020·10 min read

Andra Postolache

TechAngels

15 Advantages Of Business Angel Funding

Over the past few years, equity financing picked up significantly due to an increase in angel investment. It has become more mainstream for business angels to finance entrepreneurial endeavours, and the formation of several groups and associations has contributed to the professionalization of angels.

In the early stages of a company, the high level of risk associated with investing makes the company less appealing for financial institutions. Thus, entrepreneurs turn to equity financing as a way to increase cash flow or collateral. Angel investors fill in the gap between entrepreneurs’ savings and venture capital funds.

These investors who are executives, serial entrepreneurs or have industry experience, don’t just infuse the startup with capital and wait for it to become successful. They bring a wealth of experience and share their knowledge at critical stages to help startups through the initial stages.

A study conducted by the Kauffman Foundation has found that [startups] that received funding [from angel investors] were 20 to 25% more likely to survive after four years and 16 to 19% more likely to have grown to 75 employees.

Furthermore, according to the report from Entrepreneur Handbook, there are now around 300,000 active Business Angels in Europe, with roughly 18,000 of them being members of business angels networks, constantly searching for new opportunities.

It’s not a secret that startups with clear growth potential need to fund costly activities such as product development or market expansion. Therefore, they would benefit from both the expertise and advice of a business angel, not to mention the financial investment. So how much do angel investors usually invest in startups? In most cases, they are willing to invest between £10,000 and £750,000, EIS or SEIS assured, to slightly reduce the risk.


Let’s take a closer look at some of the most important advantages of business angels funding - dotted with real-life situations we encountered at TechAngels - and why you should consider it while in the startup stage.

What are the advantages of receiving an investment from business angels?

1. They make investment decisions quickly

Startups often go through times when they need a quick cash infusion. But we all know that it can be complicated to access funds between €10,000 and €250,000, especially in a timely manner. With a business angel (or more), startup founders can gain access to a significant amount of money, when they need it the most.

For example, we had a sudden request for funding from one of our startups last year. With our help, they raised more than €700,000 within 4 months. Over €500,000 of that sum was provided by angel investors.

2. They provide access to necessary knowledge and contacts

As mentioned above, a business angel doesn’t just infuse a company with capital, but also adds value to the business. Most angels are seasoned investors with a wealth of experience in the industry they invest in, meaning that they can also provide contacts and guidance, supporting startup growth.

Another great example from our own experience took place at a board meeting, where we were discussing a setback experienced by one of our startups. Their competitor came up with an unexpected approach, while the founder we were discussing with kept trying to reinvent the wheel.

We took him out for a beer after the meeting and suggested using the same approach as the competition from other countries. He confessed that there were some issues with entering that specific industry, and he had no connections there whatsoever. By the time we finished our beers, the our members had already warmly introduced him to the top two players in the industry.

Business angels don’t only offer you access to their network of contacts, you can also - for example - call them and ask to participate with you in a negotiation when you need the support of a more experienced professional. They are by your side throughout your journey, because they are deeply invested in your startup.

~ Dragos Nicolaescu, Angel Investor, invested in 70+ local and international startups

3. They don’t require repayment and interest

In this case, things are quite different than from financial institutions' perspective, business angels fund startups with the money they need for business growth. In exchange, they receive an equity stake in the business, usually around 10%. If the startup achieves their projected growth, both parties benefit. If not, angels do not receive their investment back.

4. They are not that difficult to find

As we mentioned above, there is currently a significant number of active business angels in Europe - finding them is not exactly the most difficult task. Convincing them that your startup is worth funding - that's another story. There are several groups of investors that meet regularly to explore newly available opportunities that could be worth investing in, both locally and regionally.

TechAngels Romania is a group of over 70 business angels and growing. For the past 3 months, we’ve changed our strategy and have switched from monthly meetings to weekly ones. In these meetings, we’re now allowing all the startups that reach us out to pitch.

5. They can attract additional financing

VC’s are actively looking to invest in startups already backed by business angels and  one of the most solid arguments in favour of partnering with business angels is that most companies funded this way are likely to survive for at least four years. Furthermore, if the startup proves to be successful after a relatively short time, it can raise additional financing from venture capital funds, thanks to the angels’ contacts.

6. They add credibility to a business 

Angel investors are typically experts in their fields, who already made a name for themselves, following the development of multiple successful businesses. Startup founders can use this to their advantage. Working with people who are well-known in a particular industry can act as a catalyst, significantly facilitating the startup's growth.

7. Their business agreements can be more flexible

Traditional lenders may insist on formal investment criteria while, in contrast, business angels are not that strict when it comes to the agreements. The fact that they invest their own money also means that they can be open to negotiating the terms of the agreement, hence are generally more flexible and open to suggestions.

Moreover, traditional backers can be positively impacted by companies that already have reputable investors in their shareholding structure.

8. They can see the bigger picture

There are situations where angel investors ‘bet’ their money on businesses that they feel are close to their heart. This happens because they can see their investment benefiting the local community by creating new employment opportunities and stimulating local economic growth, aside from their own financial gain.

Oftentimes, startups keep a close connection with business angels in more mature stages, and sometimes even if angels are no longer part of their board. Once they invest in your startup, business angels are fully committed to helping you grow.

9. They can lead by example

Business angels aren’t the only ones who can give back to their community by investing in a company, as they can have a positive influence and nudge founders to do the same thing. Angel investors see the bigger picture and encourage founders to foster an ecosystem of help and growth, while also expanding the business.

Many angel investors are in fact, previous startup founders. In Romania, most of the successful founders with exits have joined the our community.

10. They don’t step away from risky investments

As we’ve mentioned above, startups are usually associated with a relatively high degree of risk, especially if they don’t have a solid and successful track record. However, angel investors are confident in their investment choices and ask for a significant return, to balance the level of risk.

11. There is no need to pay monthly fees

Another untapped advantage of obtaining funds from business angels is that you don’t need to make monthly payments on your investment, such as interest rates. Unlike financial institutions, angels receive the share of profits that equates with their initial investment. This usually happens when founders make an exit or at least, only after the business begins generating profit.

12. Their due diligence process doesn’t take very long

Most types of capital or debt a business can access also involves a lengthy due diligence process. Unlike that, business angels act quite rapidly. Many of them can complete the process in 30 days or less, as they usually invest in startups ran by people they trust.

The ‘quickest’ investment I made took one month. Of course, it can sometimes take more, but during that time I already start getting involved and offer mentoring and advice to that particular startup - until they gain my trust and I see that I can invest in them.

~ Dragos Nicolaescu, Angel Investor, broadly experienced in investing in local and international startups

 13. They can join your business at any stage

Angel investors aren’t a suitable option just for startups. They might as well join a late-stage venture, already on the brink of success for example, as long as their contribution can have a significant impact. Thanks to the flexibility in agreements, they are often willing to negotiate, so both parties involved can obtain the best possible deal.

 14. They can help you build your brand

Aside from the experience, angel investors come with a high degree of notoriety. This can play a very important role in building your brand. Surely, it depends greatly on the investors, as some of them prefer maintaining a low-key profile, but gaining access to their connections in the industry will definitely make a difference in the long-term.

Furthermore, when a reputable business angel or group of angels invest in your startup, that’s usually a good reason for issuing a press release.

15. They become more than an investor

There are a lot of cases in which a business angel turns out to be more than an investor. Successful startups, that took off after an investor took notice of their potential led to great business relationships - and the two ended up developing new ventures together.

We had several cases, where investors became involved hands-on in helping to generate leads, growth hacking or doing R&D work.

A business angel invested in us back in 2016. And for us, it wasn’t so much about the financing itself, since we had always been profitable. For us (and for me especially), the moral support and the advice we got from him mattered a lot more. I was looking for a mentor at that point, and I found a mentor/friend in Dan.

He boosted my confidence in myself and my mission. He gave us unbiased feedback in key moments when we really needed it. He guided us with advice, introduced us to key players, and made us aware of the risks we were exposing ourselves to

~ Mihai Darzan, CEO at Ringhel

Conclusion

After taking a closer look at the advantages of business angel financing, one thing is clear: the right partnership can take your business to new heights. Angel investors have a keen eye for companies that can achieve their desired growth. Receiving funding from them is in itself a recognition that you are on the right track to building your vision.

Related Posts:

VC Tips For Successfull Startup Fundraising (by Magdalena Balcerzak, Manager, Vestbee)

How To Create A Pitch Deck That Will Get Your Startup Funded (by Ewa Chronowska, Partner, Next Road Ventures)

Types Of Startup Funding Rounds (by Marcin Laczynski, Partner, Next Road Ventures)

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