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NEW RESEARCH | Four types of business angels – and how to get them to invest in your business
- Published: 30 Oct 2024,
- 11:06 AM
- Updated: 30 Oct 2024,
- 5:08 PM
They are an important source of investment for start-ups. But who are the business angels? And which companies do they invest in? Researchers have identified four groups of business angels who work in different ways.
Business angels are private individuals who invest their own money and knowledge in start-ups, usually because they have run a business themselves and want to contribute to the start-up’s development through their own work.
– It is important for them to feel a personal commitment, and therefore often choose to invest in companies with a business idea that is close to their hearts, says Kalyan Pasumarthy, Lund University.
Challengers to venture capital
Business angels have been a phenomenon in Sweden since the 1980s. In the last five to eight years, Swedish business angels have increasingly organized themselves by working in professional groups. This development sparked Kalyan Pasumarthy’s interest and became the subject of his doctoral thesis research.
– There has been a huge change in the way business angels work and invest now that they act in teams. Today, they work in a more systematic and organized way, which is a great advantage for many entrepreneurs in the start-up phase.
Four types of business angels groups
Typically, angel groups invest between three and eight million SEK, sometimes up to 20 million SEK in each company. The average group invests in three companies per year. The larger and more professional ones invest in up to 20 companies annually. The study also shows that no one group dominates among the investments.
– In Sweden, the distribution between the groups is very even.
The main differences between the groups are the degree of formalization, how decisions are made and how specialized the business angels are in different sectors. In his research, Kalyan Pasumarthys has identified four groups:
Informal angel networks:
- Consists of a loose collection of business angels who share business opportunities and ideas.
- Members are autonomous and can choose whether or not to invest, making the group less organized and formalized.
- These networks tend to invest in young, early-stage start-ups, but often lack the professionalism needed to compete for more established companies.
Professionalized angel groups:
- Smaller groups with a central leadership that sets the overall direction while maintaining a flexible and informal structure.
- They have a balanced skill set and experience in their respective fields, and often make strategic and informed investments in specific sectors.
- The groups are more organized and have more impact thanks to their niche expertise.
Rule-governed democratic groups:
- This group follows a set of formal rules and processes, but all members participate in decision-making.
- The groups are more democratic and often invest in a broader portfolio across multiple sectors, thanks to the varied expertise of their members.
Hybridgrupper:
- They are both structured and flexible, and also have great autonomy as they invest their own money.
- Hybrid groups often have a clear exit strategy from the outset, but are adaptable and make adjustments based on market conditions and the progress of the investee company.
– In Sweden, informal angel networks are the most popular. It is up to the members to make whatever investments they want. Decisions are made organically and exit strategies are flexible and adapted to market feedback, says Kaylan Pasumarthy, explaining what entrepreneurs can expect.
– They can benefit from a wide range of ideas and a dynamic exit strategy.
The second group, the so-called professional angel groups, are characterized by their broad expertise and often niche nature of their investments.
– This means that in some cases they can compete with venture capital funds because they have the same amount of capital, knowledge and networks, but are not as bound by contracts and rules. And the passion they often have for a company they invest in means they can have a much greater impact on entrepreneurs than venture capitalists can.
– Entrepreneurs working with angels from this group can expect structured processes with an emphasis on achieving predetermined exit goals.
Specific skills
The third variant, rule-governed democratic groups, is the group that has the most rules to abide by – but is also the most democratic. Often, the group is made up of angels with different backgrounds and specific skills. But this does not preclude cooperation. On the contrary, explains Kaylan Pasumarthy:
– Let’s say there is one business angel in medical technology, one in fintech and another in real estate technology. Then each angel is responsible for companies in his or her own sector, but also enlists the help of other angels. In other words, there is no manager in the group, but different angels are responsible for each of the different companies.
– The group is responsive but guided by leadership, so for the entrepreneurs it means a combination of top-down approach with some customization.
Hybrid groups, in turn, combine the best of business angels and venture capital funds. They are properly organized while having great freedom to be flexible in their investments and decisions.
– Entrepreneurs working with hybrid teams can expect a balance between strategic guidance and responsiveness. It ensures that decisions can evolve in line with the company’s journey.
What are your top tips for entrepreneurs when seeking investment from business angels?
– Entrepreneurs need to do a proper analysis of what kind of angel might be interested in them. Since angel investments are already very risky, they do not like to go outside their comfort zone.
– Secondly, entrepreneurs need to be well prepared and tailor their presentations to the angel/angel group they are seeking investment from. So the pitches should look different. Finally, it is better to target a few suitable investors than many unsuitable ones, says Kaylan Pasumarthy.
Contact kalyan.pasumarthy@fek.lu.se
More about the thesis
Kaylan Pasumarthy recently defended his thesis at Lund University Business Angel Groups and Exit Strategies – A Mixed Method Approach.
Read also:
What you did not know about business angels
