Early Stage Investing Explained

Worldwide, there are about 300 million people trying to start about 150 million businesses. About one third will be launched, assuming 50 million new firm births per year. Or about 137,000 per day. Many of these will fail, but some will become the success stories of the future, transforming sectors and making fortunes for the angel investors who helped them at the very early stage.

Emerging countries both from the Middle-East, Asia and Africa are far ahead of Europe in starting new businesses, but few startups have the potential to make an impact on jobs and growth, and a negligible number benefit from venture capital, with the vast majority reliant on informal funding (FFF).

The world of entrepreneurial startups is where the most exciting and creative action is happening in today’s business world, with angel investing entering the mainstream; more than €7.5 billion are being invested annually in Europe, with a sustained growth over the past years.

Business angel investors are high net worth individuals who usually provide smaller amounts of finance (€25,000 to €500,000) at an earlier stage than many venture capital funds are able to invest. They are increasingly investing alongside seed venture capital funds.

Angels usually contribute much more than pure cash – they often have industry knowledge and contacts that they pass on to entrepreneurs. Angels will often take non-executive board positions in the companies in which they invest.

The importance of business angels to the equity capital industry has grown significantly in recent years. With the recent formation and growth of angel syndicates, equity from business angels is becoming more and more important to the equity capital industry in Europe.

Business Angel (BA) is a private individual, mostly high net worth, usually with business experience, who directly invests part of his or her personal assets in new and growing unquoted businesses. BA could invest individually or alternatively invest in syndicates where typically one angel in the syndicate takes a lead role. Besides capital, BAs provide business management experience, skills and contacts for the entrepreneur. Good BAs can provide “smart and patient capital”.

BAs play an important role in the economy, and in many countries constitute the largest source of external funding, after family and friends, in newly established ventures. They are increasingly important in providing risk capital as well as contributing to economic growth and technological advances. Moreover, the supply of start-up and early-stage equity finance has to some extent become more dependent on BAs, as venture capital funds are not able to accommodate a large number of small deals. The traditional source of start-up and early-stage financing – bank lending – is limited due to risk level and handling costs.

BAs provide both financing and managerial experience, which increase the likelihood of start-up enterprises to survive. Given the importance of informal investors for the creation and maintenance of an entrepreneurial economy, fostering their investment could have a significant leverage effect. Increasing the awareness about their activity or about available policies and programmes in some countries or regions (best practices), could positively impact the industry, SME financing and regional development.