Angel investing as unique type of private capital

Angel investing is a form of Private Equity, generally defined as capital invested in private companies in exchange for equity or ownership. Within the private equity landscape, angel investing is a type of strategy that differs from other private equity strategies in the maturity of the portfolio companies invested in. Typically young, start-up, or early stage businesses that are pre-revenue and pre-product and that have the potential to grow quickly. This is why business angels are a unique and vital component of the private capital markets, playing a vital role in the early stages of a company's lifecycle. 

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Angel investors are in essence private individuals who invest their own capital in startups, in contrast with venture capital funds and institutional investors, which manage and invest other investors' capital. 

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This distinction is what makes angel capital a unique type of private capital for founders and entrepreneurs. The fact that angel investors invest they own money often translates into:

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• Reduced bureaucracy and fewer investment criteria compared to traditional financial institutions, as they do not have what is called a "fiduciary responsibility". Fiduciary responsibility is the legal obligation to act in the best financial interests of another person or group, which comes with a set of governance and compliance policies and a subset of investment evaluation and reporting obligations. While professional angels do have a set of investment processes and criterias, they don’t have governance and compliance obligations which means they can make faster investment decisions faster and take more risks.
• More flexibility to decide how and where to invest. Unlike many institutional investors, business angels aren't bound by "investment mandates", essentially rulebooks dictating institutional investors what, where, and how an investor can invest their money. This includes specifying asset classes, sectors, geographies, risk tolerance, and return objectives. Institutional investors need to agree investment mandates with their investors beforehand and then they are legally bound by them. Again, since angels are investing their own money, they don’t need to pre-define where and how to invest, which means that they can invest in any opportunity they deem promising and that they are more agile to invest in new emerging trends, technologies or sectors.
• A hands-on approach and better alignment with founders. Precisely because they are investing their own money, they have what is called “skin in the game” and they are the first ones interested to see the company succeed. Because no one likes to lose money, angels are specially motivated to work closely with founders to help the company succeed and that gives them a much more active and hands-on approach compared to other investors. This often translates into a deeper involvement in the company, offering not just financial support, but also mentorship, strategic guidance, and industry connections. ‍

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With increased awareness of startup investment opportunities and improved access through networks, events, and platforms, more investors are venturing into private markets, particularly through direct investments in companies. This increase of interest and access, once primarily limited to institutional investors, marks a significant evolution in the investment landscape and promises to play an increasingly vital role in supporting European companies, helping them bring innovative products to market and solve some of the most pressing societal challenges in Europe and the world.

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The role of angels in the startup ecosystem

Angel investors are crucial for any startup ecosystem's health and development, and they are particularly vital in the European startup ecosystem, where access to early-stage funding can be challenging. Europe boasts exceptional talent, cutting-edge technologies, and groundbreaking research, yet often struggles to translate these advancements into market-ready solutions for end-users. Business angels play a pivotal role in bridging this gap, ensuring that European innovation reaches the market and secures further funding to scale. 

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Business angels' main role is to fill up the financial gap between bootstrapping and venture capital funding. In other words, they help early-stage companies overcome what is called the "valley of death." This "valley of death" refers to the critical period in a startup's life cycle when the company is developing its product or service but hasn't yet launched it to market. During this phase, costs are high as the company invests in research, development, and initial marketing efforts, while revenue is typically non-existent. This period of high costs and no revenue is only possible due to the infusion of early-stage capital, often provided by angel investors. This funding is specifically targeted to cover the expenses associated with product development and the subsequent go-to-market strategy, enabling the startup to reach potential customers and start generating revenue to be viable by itself. 

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Simply put, without this early-stage funding, many promising products and solutions would never make it to market, that is why this stage is referred to as the valley of death, because most startups don’t survive it. By filling this funding gap, angel investors provide a lifeline for promising startups, enabling them to develop their ideas, build prototypes, and reach key milestones that allow them to start generating revenue and attract further capital.

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Key numbers of the angel market in 2023

Based on the reports provided by organisations such as the Center for Venture Research (CVR), Nordic Angels, European Commission, EBAN and Eurostats, we have summarized some of the key numbers of the European angel market in 2023 to paint the picture of the current state of the Angel market in Europe.

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• Total investments: In 2023 a total of €17.4 billion was invested in European startups by angel investors, down from €20.25 billion in 2022, a 16.4% decrease compared to the previous year.
• Number of deals: The number of angel deals reached 54,735 in 2023, down from 62,345  in 2022, a 12.2% decline compared to the previous year.
• Active angel investors: The number of active angel investors in Europe reached 422,350 in 2023, a significant increase of 14.8% compared to 2022.
• Nationalities of these investors: UK hosts the largest number of active angel investors in Europe, estimated to be a total of 10,000 angel investors.This is followed by Germany, with 7,500 active investors, France, with 5,500 active investors, Spain with 3,800 and Turkey with 1,500 active angel investors.
• ‍Average deal size: The average angel deal size in 2023 was €318,120, down by 4.8% compared to 2022. 
• Average ticket size by angel: The ticket sizes by angel investor can range between €10,000 and €200,000 however the average angel ticket size in Europe is estimated to be below €25,000.
• Sector trends: HealthTech and B2B SaaS emerged as the dominant sectors, each securing 25% of total angel investments in European startups, followed by ‍FinTech (12.9%) and Energy Tech (12.1%), Retail (5.7%) and BioTech (5.1%)
• Stage focus: From all angel investments in Europe 41% were directed towards seed and start-up stage companies, 35% to early stage and 18% to the expansion stage, this last one down from 35% in 2022.

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The contraction in terms of total investments, total number of deals and average deal sizes in the European angel market has followed the same trends as the overall Venture market, which experienced in 2023 what has been called the “Great correction” or great pullback. After a decade of zero interest rates, COVID and the war in Ukraine, increased inflation and increased prices of commodities has made money more expensive, and therefore less available in the private markets. 

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What is positive to see from these numbers is a strong increase of new angels in the European market indicating a growing interest of more investors into startup investing as an asset class. This increased engagement is with no doubt the result of over two decades of development in the European startup and investor ecosystem, leading to heightened awareness of angel investing as a viable and attractive asset class. The trend also reflects a notable shift, with more individuals choosing to invest directly in early-stage companies rather than relying solely on traditional financial institutions.

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Key Challenges Facing Angel Investors

What are the main challenges European business angels are facing? Below we have summarized some of the most important and more raised by the angel community:

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• Regulatory fragmentation. A significant challenge lies in the fragmented regulatory environment across European countries. In contrast with the US angel market, in Europe each country has unique rules and tax systems that create complexities for cross-border investments. This fragmentation contributes to slower investment decision making processes, more expensive due diligence processes and a general perception of increased risk and uncertainty for investors unfamiliar with the diverse legal frameworks.
• Increased competition. More types of investors, including large institutional investors as well as international investors are increasingly venturing into pre-seed and seed stages in Europe, traditionally the domain of angel investors. This influx of capital means an increased competition for the best deals and increased valuations at the very early stages.
• Increased specialization. More types of investors and an increased level of competition are making more investors choose to narrow their scope and increase their levels of specialization to be able to spot the best opportunities earlier and to provide a more compelling value proposition to founders to win the deal. An increasing number of specializations in the venture industry is forcing many investors, including angels, to re-define what is their unique value proposition and which investment opportunities they should focus on.  
• Time commitment. The time-intensive nature of angel investing presents another significant challenge. Proper startup investing is a full time job. Thoroughly evaluating numerous startups, conducting comprehensive due diligence, and providing ongoing mentorship and support to portfolio companies demands a substantial time commitment that many individuals may find difficult to accommodate alongside other professional or personal obligations. Combined with an increased competition and specialization of the European venture landscape, many angel investors risk to be outcompeted by full time investors.
• Bargain power. Finally, angel investors because they don’t represent investment firms, have recognizable names or brands and do not provide large sums of capital sometimes face challenges in terms of bargaining power compared to established venture capital firms, limiting their capacity to lead rounds or negotiate the deal.

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Our recommendations to address these challenges

‍While non-exhaustive, here are some of our recommendations for European business angels and the European angel market to address some of these key challenges limiting more angel investments in Europe:

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• Harmonized regulations and incentives: European countries should recognize the vital role business angels play in driving innovation and economic development. Additionally, the EU could harmonize shareholder regulations and investment procedures for private companies, codifying simple and universally recognisable processes and creating a level playing field for all investors. By implementing angel-friendly policies, tax incentives, and harmonizing regulations across the EU, governments can create a more attractive and accessible investment environment for angel investors. ‍‍
• ‍Targeted investment strategies: With limited time and increased competition, angel investors can adopt more focused and intentional investment strategies aligned with their goals and expected outcomes, rather than adopting a broad, opportunistic approach. By concentrating on specific sectors, stages, or geographies where they have expertise and passion, angels can optimize their time and resources while maximizing their impact on the startups they support. ‍
• Professionalization and differentiation: Angel investors can learn from the practices of institutional investors and adopt a more professional approach. By clearly defining their investment thesis, articulating their unique value proposition, and building a strong track record and brand in their ecosystem, angels can enhance their credibility, differentiate themselves from the competition, and gain access to high-quality deal flow. By adopting a more "institutional" approach to startup investing, they can also increase their bargaining power and gain access to top-tier opportunities.‍
• Leveraging Indirect Investments and co-investments: For angel investors with limited time or resources, collaboration and co-investment can be a valuable strategy. By partnering with other angel investors, joining angel groups or networks, or investing alongside experienced venture capital firms, angels can leverage collective expertise, diversify their portfolios, and access a wider range of investment opportunities. They can also consider allocating a portion of their capital to funds aligned with their investment objectives, thus outsourcing some of the time-consuming tasks associated with sourcing, due diligence and portfolio management responsibilities.

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The Future of European Angel Investing

The European angel investment landscape is still in its early days, demonstrating significant growth potential and signaling a promising journey ahead. As of today only 0.09% of the EU population actively participated as angel investors, representing less than 0.02% of the estimated total wealth in the EU.  

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We predict that many new actors will enter the European angel market, and that this will evolve into a thriving industry in itself, as more investors choose to diversify their portfolio with private equity investments, either by doing it directly themselves, or by investing through funds. The trajectory of European angel investing suggests continued growth in the number of active investors and the amount of capital deployed in startups and an overall increase of the private equity activity in Europe. We are bullish about the investment opportunities in European ventures and the future of European Angel Investing. We cannot wait for the future of European Angel Investing to arrive.