Investment in Progress
In our latest webinar our board member Niki Futter answered some of the most pressing questions of our current and prospective business angels. In this article, we summarize the most important questions and answers for you. Note that all answers are based on Niki’s extensive but still personal experience and therefore are not necessarily universally applicable.
Niki Futter is a born entrepreneur – for 35 years he managed the family-owned Compass group before he left the company last year to become a full-time business angel. While his experience makes him a classic representative of the old economy, his passion as an angel lie in new technologies, digital transformation and data-driven business models. His portfolio of 20 startups is mainly focused on the sectors mobility, employment, blockchain and biotech.
Q: How did you (Niki) start angel investing?
Niki already started investing in the early 2000s, that time still via the Compass group that invested in smaller companies. The investment was very successful with an exit only one year later and the group continued to invest in promising ventures. Eventually, in 2008, Niki made his first independent investment in a company of an old acquaintance.
Q: Why is now a good time to start angel investing?
We are all in crisis mode right now and it may not seem like the logical time to start with angel investing. However, some current developments may come in very handy for novice angels:
Q: Is now the right time to invest in pre-revenue startups, e.g. in the biotech sector?
Not necessarily – after all, everyone counts on revenues to continue at some point. It’s more important to look at the phase the startup is currently in – the additional time companies get right now to focus on product development before they re-enter the market can be very beneficial. However, if you want to invest in a market that is expected to stagnate for a longer period, it may make sense to invest in pre-revenue startups to increase the chances that the market will recover by the time the company starts to sell its products or services. Biotech could be one option if you want to follow this strategy, but opportunities should be judged case by case.
Q: What are the risks that one should keep in mind?
The risks did not change, but the market conditions did. Some markets will be damaged substantially, e.g. tourism and travel. You should check carefully if the sector of a startup has the potential to recover in the near future.
Q: What is the minimum budget to seriously consider becoming a business angel?
You definitely should have free liquidity to start angel investing and not rely on the money that you want to invest. The smallest possible ticket size is 20.000€, more common are 50.000€ or more. Smaller tickets than that are not recommendable, as too many investors make decisions and future rounds difficult. To support a ticket of 50.000€, you should have at least 80.000€ available to be able to increase your ticket in later stages. If you do not have that much capital and still want to support startups, you should look into crowd investing platforms like primeCROWD, CONDA, or the European Super Angels Club.
However, if you want to seriously start angel investing in an independent manner and not just a one-time investment, 200.000€ free liquidity is considered a minimum.
Q: How can you find co-investors?
It definitely makes sense to look for co-investors to enter a venture with, especially if it is your first investment as you can profit from the experience of other angels. You should look for co-investors that have expertise in the specific sector of the startup or can bring other important know-how to the table. It’s not about the money, but about being able to evaluate and guide all parts of a project. Additionally, you should prioritize what’s best for the startups over personal likings, i.e. choose collaborators based on their professional skills instead of sympathy.
Q: Why is it important to meet all co-investors?
Sometimes founders actively try to separate the invested angels from one another. However, it is a bad idea to take part in a financing round where you did not get to know every other co-investor thoroughly. If the interests of all angels are not aligned, there may be a clash in the future that leads to severe problems concerning voting rights. In the worst case, the startup may become unable to make important decisions because of a veto in every vote. Therefore: make sure you know not only every founder, but also every investor before you make a decision.
Q: When do you meet your co-investors?
Definitely before the investment is signed. Only in exception it may be sufficient to meet them when signing the deal. It’s essential to agree explicitly or implicitly on a lead investor beforehand – this enables all angels to act and decide unified, which is important in the correspondence and negotiations with the founders. This does not need to be the investor with the biggest ticket size, but someone who shows the initiative to take care of the venture and lead it to success.
Additionally, all shareholders should meet about once every quarter and receive monthly reports from the founders, depending on the intensity of the current phase of the startup.
Q: With how many shares should the lead investor enter?
Rule of thumb: the lead investor should have about half of the seed ticket. However, be careful to avoid a dilution of shares – the founders should keep between 65-75% of a company before a VC enters. Ideally, the lead investor should get around 5% in the seed round, with the whole ticket not being bigger than 10%, to ensure there can be a second seed round with about 10% before the series A round.
Q: How do you get into the participation process and how do you agree on an evaluation?
It’s a negotiation – the starting evaluation depends on how much capital the startup needs, how much shares the angels asks for and how much shares the founders are willing to give to them. A high evaluation means that business angels need to pay more for their shares or only get a very small share. If a company seems overvalued, it may be a better idea to walk away.
Q: How well do you need to know someone to let him or her act fiduciary for you?
This depends on the details of the trusteeship – communication and transparency are key, especially within the company and between the founders and all trustors. It should also be clearly defined how decisions are made within the trusteeship. To be on the safe side, include a ripcord option in the agreement that allows you to cancel the trusteeship at any time. If these criteria are met, you should still have a basic level of trust in the trustee, but it’s not indispensable to know them very well.
Q: Does a work-for-equity approach still make sense given the current status of the ecosystem?
If you consider using work-for-equity in an investment, it’s essential to ensure that the terms are clearly defined and can be claimed. However, the approach is generally difficult to execute and often did not work in the past.