In this article we tell you everything you need to know about how to become a business angel, and what it is like to be one. We cover everything from what the term means to tips on what to consider before you become a business angel.
What is a business angel?
A business angel is a private individual who invests money in a company and in return receives a certain ownership stake in the company. In addition to money, the business angel commonly contributes experience, contacts and guidance with the aim of maximising the company's growth.
Below we describe the typical steps people go through to become a business angel.
- Build up, through investing or saving, starting capital to invest with. Bear in mind that investments made as a business angel are risky and long-term, so only invest money you can afford to be without. Business angels have often been entrepreneurs themselves and succeeded in selling a company.
- Learn how the typical industries in angel investing work. Companies looking for business angels are generally active in IT, medical technology and environmental technology. It is important, however, that you stick to industries you understand.
- Network with other angel investors. It is not unusual to get good tips from other investors, and sometimes offers to be a co-investor in an investment in startups. Co-investing with others is a good way to spread the risks and learn from others.
- Identify one or more companies looking for angel investors, and review things such as the business idea, potential within the industry and the likelihood of succeeding with the product or service the company is building.
- Contribute money and know-how to the company or companies you want to support as a business angel. Being a business angel is a long-term process, so continuous contact with the company you invest in is important.
Benefits of being a business angel
Below we describe important benefits of being a business angel.
- It is possible to get a very high return on invested capital. If you come in as an angel investor early, and the company does very well, it will lead to a large financial gain. Examples of such companies include Spotify and Storytel, where early investors have made large profits.
- Being an angel investor commonly helps you develop personally and gain better insight into the industry. And the more knowledge of the industry you have, the more likely you are to make money on future angel investments.
- If the company is innovative and, for example, makes a new medicine, you contribute to positive development in society if the company succeeds in creating a good product.
- You get a great opportunity to influence the direction the company takes, since you come in with a significant ownership stake at an early stage. Once the company has grown and you, for example, buy shares in it, your ownership will be considerably smaller in percentage terms and your ability to influence will then be small.
Risks of being a business angel
Below we describe the most common risks of being a business angel.
- Being a business angel means high-risk investments in companies that may very well fail. If the company goes under, you lose all the money you invested.
- Angel investing is not a short-term placement; you need to be long-term, which means you follow and influence a company over a longer period.
- The companies you invest in generally have low liquidity, which means it is usually difficult to sell the stakes you have bought in the company. Companies listed on a stock exchange, by contrast, have good liquidity, since you can buy and sell their ownership stakes (shares) more or less whenever you want.
- It is difficult to predict how the company will do in the future. Even if the know-how and the business idea are there, something external can affect the market so that interest in the company's products disappears.
- You may face tough decisions. It is not unusual for business angels to face a situation where they either put more money into the companies they have invested in or the company goes under. This can lead to you being forced to invest more in a company than you planned from the start.
Which well-known business angels are there in Sweden
Some of the well-known business angels in Sweden are:
- Niklas Zennström, who founded Skype and owns the venture capital firm Atomico.
- Jane Walerud, who sold a software company for over SEK 1 billion. She has been involved as an angel investor in several Swedish companies such as Klarna and Lensway.
- Lena Apler, who founded Collector and has been an angel investor in companies such as Wint and Dreams.
- Sophia Bendz, who is a former marketing director at Spotify and has been part of the start-up of companies such as Tictail, Bokio and Prion.
Frequently asked questions
How much money does it take to become a business angel?
Capital of SEK 100,000–500,000 per company you want to invest in is generally regarded as a minimum level. The rule of thumb is: the later you want to come in and invest, the more money you need.
How much time does it take to be an angel investor?
How much time it takes varies, but to be of greater use as an angel investor it is good to take an advisory role and, for example, hold supportive conversations. Sitting on the board is sometimes also an option.
How can I reduce the risks as an angel investor?
As an angel investor you can buy unlisted shares in companies that have come some way and are already backed by other successful investors. Only investing in companies you understand is also a way to reduce the risk.
When do I get my return?
You normally get any return when the company is sold or goes public. Because of the generally low liquidity in the company's shares, it is usually difficult to get your investment back before then. It is, however, possible to sell unlisted shares via our platform. Contact us at info@eqvor.com if you would like more information about how to sell an unlisted holding through us.
What does "business angel wanted" mean?
"Business angel wanted" means that a company is looking for help to grow with the help of an investor. The business angel who invests in the company contributes money, know-how and contacts within the industry, among other things.
