German angels seek the light

Business angels in German-speaking countries have traditionally been shy about what they do. But a new breed of angel organisation is getting them to come out of hiding. Mary Lisbeth D’Amico takes a look at what’s on show.

Everything was as it always is at this kind of event. Enthusiastic company execs were making elevator pitches – some staying neatly within the three-minute limit, others seeking to squeeze in a few more points as the bell rung. Attendees were either listening intently, fiddling with their Blackberries, or had escaped into the lobby for some networking.

But this wasn’t a run-of-the mill VC event. The “private deal conference” held earlier this month in Zurich was a one-day, invitation-only meeting that brought together a select group of business angels with four potential investment opportunities – a medical device company, two different Internet search technologies and even a cod-farming venture in Norway. At the end of the day, attendees were expected to hand in evaluation sheets indicating if they would invest in a company, and, if so, how much. Within a few days, the St Gallen, Switzerland-based sponsor, BrainsToVentures (b-to-v), had gathered what it said was more than €1 million in funding commitments for two out of the four companies that presented.

This kind of approach to angel investing would have been unthinkable even five years ago among the notoriously shy and fragmented angel communities in Germany, Austria and Switzerland. But following a period after the technology crash in which many angel networks lost members, groups like b-to-v, Nürnberg-Germany based Netzwerk Nordbayern and Catcap in Hamburg are helping serious investors in the region professionalise, just as in other parts of Europe angels are increasingly cooperating and organising themselves. (See “Investing: Europe's angels get down to business”, Science Business 19 January 2006 [link])

Doing so can only help both the entrepreneur and the investor in a market that is even, at best, a high-stakes gamble. And organising angel activities is becoming more important as angels take up the slack for VCs in the early-stage market. According to the Business Angels Netzwerk Deutschland, for example, in 2004 business angels in Germany invested roughly €100 million in seed-phase deals, compared with only €22 million by German VCs.

VCs see the value of such organisations as well. “It’s a good way to systematically generate deal flow,” says Dirk Lupberger, managing partner with Polytechnos Ventures in Munich. But, while groups that stand out go beyond loosely organized angel networks, the approach to making angel investing work on a professional basis varies greatly – as a look at three such organisations shows.

Making good deals pay

Privately-held b-to-v, for example, focuses solely on acting as a service provider to angels, stopping just short of acting as a VC itself. The company charges members of its recommendation-only “investors circle” a one-time fee of €10,000, an annual membership fee of €2,000 as well as an additional retainer of €5,000 for its services. These include deal screening and sourcing, performing due diligence on companies before and after investment, organising semi-annual investors conferences and helping build syndicates for deals. And b-to-v also has dedicated staff that focus on specific areas such as biotech.

If a deal comes together, b-to-v gets a success fee of 5 per cent of the amount invested, which investors can deduct from the annual retainer. To satisfy German financial regulations, the angel commitments gathered are technically non-binding, says company co-founder Jan Bomholt. (Otherwise, b-to-v would be acting as a financial institution, rather than as a mere broker.) But to make sure that angels stay on board, they must put up another €2,500 when they commit to a deal – which they can deduct from their retainer only if they go forward with the deal.

While the charges may seem steep, 45 members have been willing to pay the price. “I was in some other networks, but they didn’t do anything to keep the crew together,” says b-to-v investor circle member Michael Steinbeis, executive director Steinbeis Holding, which is based in Brannenburg, Bavaria. “I’m willing to pay more for more services.”

Bomholt also says that the 5 per cent cut motivates the company to pick out good deals for members. “We make more money if our deals are successful,” he says. He won’t specify revenues, but says b-to-v is profitable. Last year it sourced 13 deals worth €10 million, and it already has 3 deals worth €7 million this year.

Among its success stories are Open BC, a Hamburg-based social networking company that received follow-on venture capital. Bomholt says angels have received ten times their money from that deal. Mybet.com, an online betting firm funded partly by b-to-v angels, as well as angels from competitor CatCap, was recently sold to Altenholz, Germany-based Fluxx, a publicly-traded gaming company.

Bomholt says he doesn’t necessarily see his angels as filling the early-stage gap, however. In some instances the angels actually compete with VCs for deals. “We try to get a sense of which deals are hot before the VCs do,” he says.

Local sponsors, supporting innovation

Another German angel network with a high success rate takes an entirely different approach from b-to-v. Netzwerk Nordbayern lives via sponsorship from a mix of local government and business sponsors, including the Bavarian Ministry of Economics, Siemens, the local Sparkasse, the government-supported Lfa Förderbank, Microsoft Germany and the government-support seed fund, High Tech Gründer Fond, among others.

The organisation sees itself as supporting local entrepreneurs and angels, in a region that has strong roots in IT, biotech as well as medical technologies. A staff of eight do everything from business plan coaching to running entrepreneur seminars, as well as sponsoring a local business plan competition that has active participation from local universities. Netzwerk Nordbayern says its efforts have resulted in 82 rounds of financing since its founding in 1999, with a value of €93.5 million.

The company’s 68 angel members are not charged fees to join, according to Arne-G.Hostrup, managing director, although several prominent angels have now taken on sponsorship of the network. Instead the organisation regularly prunes the network of members it doesn’t believe are active or serious enough. Last year, for example, Netzwerk Nordbayern asked 13 members to leave the network, but added another 10 members.

Some 1020 participants have taken part in its yearly business plan competition over the years, and of those, 332 operate as businesses today, bringing in €138 million in annual revenues and employing 2,226 people.

Its reputation has grown, too. Last year, six new sponsors joined the organisation. It concludes annual contracts each year with its sponsors.

Among its best deals has been the sale of ribopharma, an angel-funded company to emerge from the University of Bayreuth, to Alnylam, an RNA interference therapeutics company that is traded on the NASDAQ. Alnylam also recently struck a collaboration deal with Novartis to develop therapeutics for pandemic flu.

Covering the whole palette

In Northern Germany, corporate financier CatCap also sponsors regular “angel lounges” to present its roughly 60 active private investors with deal opportunities. Angels in the network do not have to pay a fee to join, but, like b-to-v, if a deal does emerge, CatCap gets a 5 per cent provision.

But angel activities account only for about 15 per cent of the company’s business, according to Mark Miller, managing director with CatCap. The company’s other activities include VC-startup matching, fund raising and M&A. “We think it is exciting to follow a company throughout the funding process,” says Miller, and more synergies – and perhaps less risk – arise from covering all the bases.

Miller says, however, that CatCap expects to intensify its early-stage activities in particular since the launch last year of the government-sponsored High Tech Gründer Fond, which provides matching funds for angel and other investors in seed-stage companies. “We will be working more intensively with angels and seeing how we can best use the capital from the High Tech Gründer Fond,” notes Miller.

It’s not clear which business model works best in the long run in the angel investing market. What is clear is that it takes a lot of hard work in what still is a high-risk, but sometimes very rewarding business.