Business Angels

Young entrepreneurs conducting business, especially in the early stages of its operation, face many problems, in particular connected with financing of the planned projects. One of the forms of support, especially for innovative entrepreneurship in the early stages of its development, is the help provided by the angels of business.

An angel of business is a person who is dedicating his capital to start a business project in exchange for shares in it. Such a person agrees to certain risks, but at the same time, in case the project is successful, angel of business can gain a lot. Development of the market "angels of business" owes to the development of Venture Capital funds, in other words, investments in private equity, in order to achieve medium- and long-term profit from the increase in capital (defined by Polish Agency for Enterprise Development).

The above mentioned funds, investing in much larger projects, were not interested in the smaller ones. In such a situation small businesses were deprived of financial support. The gap which appeared in financial market began to fill by the private entrepreneurs.

The market of business angels has developed in the United States, and it is being developed most rapidly there as well. Approximately 260 000 active businessmen who annually invest 20 billion dollars in approx. 50 000 companies operate there. Due to their activities, there are business giants such as Google, Skype, Yahoo, Apple, Starbucks, Cisco and Dell.

Business angels at most are experienced businessmen and managers, former or current entrepreneurs seeking new investment opportunities, looking for innovative, often bold ideas and projects that have a high chance to succeed. These people are ready to invest their own funds in the project of small and medium scale. Often, such a project is still in the idea stage, but has a large potential for growth in value and may produce above-average returns.

The authors of a successful idea have a chance not only to get capital support from the business angel, but also the professional support and the ability to use their personal contacts in the industry. These people support the selected business’ ideas mainly in the early stages of their business. In addition to the capital, the angels of business share their own experience, knowledge, contacts, which are important especially for the starting entrepreneurs. Such cooperation strengthens the credibility of the entire project. The involvement of an angel in the project typically takes from 3 to 7 years. At the end he sells his shares. That’s why he is interested in the company's development and reaching its highest value.

Institution of business angels helps to create and develop young companies. Usually, at the initial stage, the young entrepreneur can’t count on a loan from the bank. Besides their own idea, young entrepreneurs don’t have any other security. There is also no chance on funding from venture capital funds that engage only in the subsequent stages of development of the company. This gap was filled by the capital of the business angels investing the amount of 100 thousand to 5 million. Actions taken largely contribute to faster growth of the newly created company Market of Business Angels in Poland is very young. At the beginning of 2004 the Polish Association of Business Angels (PolBAN) was established. With flow of time, market of business angels gradually expanded. In the country there are numerous networks, for example: Polish Network of Business Angels, Lewiatan Business Angels, or Silesian Network of Business Angels SILBAN, Regional Network of Capital Venture RESIK, Business Angels’ Network of Lublin.

The networks of business angels are professional institutions which associate individual investors – business angels. Main task of the networks is to support investing activities of business angels. Among the activities carried out by the network should be highlighted the following: identification of potential investors and innovative entrepreneurs, identifying their preferences, service of directly bringing together project proposals with investors, services connected with organizing a forum where selected entrepreneurs can present their business plans to the selected groups of investors, maintaining databases and websites, consulting and training.

Networks also provide a platform for the exchange of experiences between investors and promote inside of their circle knowledge about the specific environment and opportunities to raise capital from the business angels. They provide investors with anonymity and access to high-quality prospective projects. Entrepreneurs, in their turn, get access to capital and valuable partners.

An important advantage of this form of financing is that young businessmen can count on financing of the projects, which under normal market conditions have no chance of obtaining credit funds. Capital support is significant, usually in the range of one hundred thousand PLN to 1 million PLN, which allows to purchase necessary equipment, develop a technology or carry out the first promotional activities.

So far the networks of business angels contributed to the success of Goldenegg, café chain Run Café or price comparison website Ceneo. Business angels put their interest primarily to young companies, preferably already functioning on the market - which are in the start-up phase of (29%). That’s because they have already passed first verification of the market, but at the same time they are still on a stage of development when the value of the company is still fastest growing. Subsequently, business angels want to invest in companies that are in the seed phase - 23%, first and later stage - 24%.

Speaking about the industries, business angels are primarily focused on new technologies. They prefer industries such as telecommunications, media and multimedia, Internet, biotechnology and pharmaceuticals, health, environment and ecology, fuel-energy industry, software, computer industry, automation and robotics. Knowledge-based services, chemical and food industry are very popular as well. From the point of view of business angel investment process begins with the search for business ideas, and ends with the investment end. Once an initial analysis of the project by a network of business angels is positive, and the investor or investors are interested in the project - the process of analysis due diligence, valuation and negotiation begin.

Usually at the beginning the agreements of exclusivity and confidentiality between the originators and investors are signed. This guarantees the originator data security (often a key data of the project) which is disclosed for the analysis purposes, and the investor is given the priority to make an investment. Another essential document is the Term Sheet - presenting the initial terms of the transaction, not just financial, but also the rights and obligations of the parties, schedule and structure of the investment. It is the basis for carrying the participants through the process of analysis and negotiations, up to the signing of an investment agreement. After signing the contract and accomplishing all the necessary legal changes, an injection of capital to the company is being done. Thus, the stage of mutual work on developing and building the value of the company begins. When a company reaches a stage of the foreseen development and value, the investor leaves the project. This can be done by acquiring a professional or capital investor (eg. Venture Capital), putting the company on stock exchange or by manager redemption.

Tomasz Piasecki
– works for The Lublin Science and Technology Park. Business finance, R&D and investment consultant for entrepreneurs. Specialist in high-risk funds and financing innovative projects.

This article was written under “Get Inspired - entrepreneurship, startup, cooperation”
project co-financed by the Polish Ministry of Foreign Affairs
as part of the "Cooperation in the field of public diplomacy 2015" contest.