An Introduction to Angel Investors: What You Need to Know
Brigitte Baumann, European Angel of the year 2015 and Deal Leader for Seeders Masterclass for Business Angels -a program managed by IM Capital- gave a workshop last Friday in Beirut Digital District (BDD). The workshop titled 'Pitching to Angel Investors’ was organized by IM Capital and hosted by UK Lebanon Tech Hub in BDD.
Baumann, an investor for 14 years, as well as an entrepreneur, spoke on startup investment from both sides: investors and entrepreneurs, sharing some of the observations she encountered as Deal Leader of a group of Business Angels in Lebanon.
With over 80 investments in startups, Baumann talked of her experience and touched upon what it is like to be an investor, what investors look for in startups and entrepreneurs, and grounds for agreement between investors and founders. Here is some of the insight she shared:
4 Types of Angel Investors
Investors come from different backgrounds. Because of this diversity, there are several approaches to investment. According to Baumann, there are 4 types of investors:
Retired Investors: They make up 20% of total investors. They are people who retire from their professions and turn to investing. They often work from home and put together portfolios of promising startups; Transitioning Investors: They make up another 20% of total investors. They take the time to actively learn about investing, before cashing in; Active Professionals: The largest category, making up 40% of the total. Investors in this category make at least 3 to 10 investments per year. Today, this category of investors is growing the most; Future Entrepreneurs: The last 20% of investors are made up of professionals in other fields who have an interest in entrepreneurship. Investors in this category are often in their 30s or early 40s, and have the business experience. They want to learn about investments, have a lot of knowledge about the latest technologies, but lack the needed capital.
While all investors are motivated by financial rewards, investors planning to be entrepreneurs are especially interested in mentoring and helping the startups they’re financing, to gain learning experience. For some, investment can also be a way to prepare for a future job.
Investment and Money-Making
“If I’m prepared to lose it all, I won’t be helpful to the entrepreneur community.”
Only 20% of early-stage investors earn money, while a massive 80% lose, according to the European average estimated by EBAIN.
Despite this, Baumann says investors should not be prepared to fail. Instead, she suggests investors make a portfolio of companies at different stages to diversify the risks of failure and balance them out. Another tip she gives to minimize risks to first go in as an advisor. Then, start investing very small amounts, and only later on introduce the entrepreneur to the angel community.
Another thing important to note is that strategy plays a crucial role for investors aiming for liquidity. According to Baumann, out of 10 Startups:
- 4 will fail.
- 4 will survive, but won’t generate sufficient profit.
- 2 will thrive.
Since 80% of startups turn out to be unprofitable, investors have to rely on the 20% that thrive to generate at least 10 times profit on investment. Otherwise, investors can’t make up for losses of other investments that have failed. By strategizing and ensuring sufficient profit from successful startups, angel investors can achieve liquidity despite loses.
What Angel Investors Look For Before Cashing in
According to Baumann, the ideal Entrepreneurship is at the intersection of three dimensions: Art, Science and Psychology: “We’re not going to find an entrepreneur who has it all. It’s all about balance in these 3 dimensions.”
For investors, it’s not just about what business the entrepreneur is trying to build. It’s about their approach to building it. “When I meet an entrepreneur, I do a quick analysis of their wealth and how much money they’ve put in the business,” says Baumann.
When investors find something they would like to invest in, they first look at how they can add value compared to other investors. Because of this, it’s important for entrepreneurs to decide on and discuss the reach of their business beforehand. This helps in choosing the right type of investor. Startups aiming for geographical require a different type of investor than those aiming for a regional or even world reach.
What investors also look for in startups is reasonable valuations. Investors and entrepreneurs should find common ground on valuations, especially in Lebanon. According to Baumann, a global investor, starting valuations of companies in Lebanon are too high: “Mathematically, it really hurts the entrepreneur. A business that comes out with no revenues and says they’re valued at $1 Million just doesn’t work.”
The ultimate reward for investors, in terms of profit, comes is exit. Because of this, investors are keen on entrepreneurs who agree on terms of exit from early investment stages. In a big market with high risks, growing a $1 Million business to $10-$20 Million at exit is a massive challenge, so investors want to know if the risks they would be taking will be worth the pay.
To reach the maximum potential of funding, Brigitte Baumann gives the following tips to entrepreneurs:
- Find the best time for fundraising, but don’t wait too long. The average company runs out of cash in 4 to 6 months.
- Be prepared as a founder to readjust valuation, be flexible with personal shares and valuation to best accommodate the market.
- Find one lead investor who will manage investments. Investors don’t like negotiating with too many fellow investors.
- Facilitate fundraising by making sure existing investors reinvest.
- Have a clear term sheet and shareholder agreement. Decide on financing terms, governance and exit early on.
About Seeders Masterclass for Business Angels (Seeders MBA)
Managed by IM Capital, Seeders is a community of qualified Business Angels with a mandate to serve the Lebanese entrepreneurial landscape by injecting smart money in early-stage high-risk ventures. Seeders Master Classes in Business Angels (MBA) in partnership with GoBeyond, is a program aiming at democratizing angel investing and graduating batches of qualified Business Angels, and thus filling a gap in the funding cycle of early-stage ventures in the country.
For more info: www.seeders.co