INFORMAL VENTURE CAPITAL MARKET: BUSINESS ANGELS

The informal venture capital market consists of private investors who invest their personal financial resources in new and growing small firms. They are called “informal investors”, or “business angels” (business angels).
Much less is known about this market than about the activities of venture funds. One of the significant differences between venture capital companies and business angels is that the former manage other people’s funds while the latter invest their own funds.
Most business angels are successful entrepreneurs who have significant experience in developing their own business. A smaller part are highly paid specialists in large companies, such as top managers, consultants, lawyers, etc. According to Western studies, the average age of business angels is 45-65 years. 99% of them are men, every fifth is a millionaire.
Business angels are the most important class of investors, filling the gap between the initial investments of the owners of companies with subsequent sources of financing, such as traditional venture capital, bank financing, placement of shares on the stock exchange, etc.
They got their name because few people besides them decide to invest in risky projects that do not have sufficient security. Sometimes a business angel makes a decision on the basis of a positive impression of the entrepreneur and confidence in the project. And the task of entrepreneurs wishing to attract investment in their project is to create such confidence in a business angel.
In general, Business Angels acquire a minority stake in companies, as they are interested in the entrepreneur being sufficiently motivated to implement his project. To ensure control over their investments, they rarely buy less than a blocking stake.
The size of the investment of business angels is in the range of 20 thousand to several million dollars and usually amounts to 5-20% of their funds. Business angels make several investments, thereby distributing their investments and reducing risk. About a third of the investment is made by involving two or more business angels. Thus, larger projects can be financed and the risk for investors reduced.
As for the main sectors for venture capital financing, it is IT, services, industrial production, retail and wholesale trade, finance and insurance. Thus, according to the data of the German Business Angels network, out of more than 100 applications for participation in the Business Angels Day, which will be held on November 13 in Wolfsburg, the main group (27%) is represented by enterprises in the field of IT – software development, security technology , eCommerce, VoIP platforms. The second place (24%) is occupied by the group Life Sciences (Pharmacology, biotechnology and medical equipment), and the third – the service sector (13%). Also submitted applications for funding projects in the automotive and aviation industry, the media, food and processing industries.
Two-thirds of business angels consider projects located in their own region, i.e., within 1-2 hours of travel to the company. If investors have certain investment interests or invest in high-tech sectors, they are ready to consider more distant projects. This is typical of enterprises in the field of import-export and projects related to the introduction of foreign technologies, for which a business angel can take advantage of its location.
After Business Angels invest in a company, its credibility rises and it becomes easier to attract additional funding from other sources. And Business angels often use this, for example, by providing their guarantees for bank loans.
In addition to finance, Business Angels bring to the company a valuable contribution – experience in the field of its activities and management skills, which companies usually lack in the initial stages, as well as their connections. Many entrepreneurs say that the knowledge and experience of business angels are more important to them than finance. Some of them may be involved in the day-to-day management of the company or just be passive investors. In 80% of cases, Business Angels are actively involved in the management of invested companies.
Investing in innovations in the initial stages is an extremely profitable business, therefore, business angels are motivated, above all, by a significant financial gain. The second reason that motivates investors is the pleasure experienced from participating in the management of a growing company and helping start-up entrepreneurs.
Usually Business angels do not advertise their activities and value anonymity, therefore, it is impossible to estimate the real size of the informal investment market. Experts estimate the number of active business angels in Europe at 125 thousand people, and potential ones over a million.