Moves to boost the ranks of angel investors in Widening countries

An EU-funded project is aiming to increase the number of private individuals making equity investments in small companies in eastern Europe, in a bid to increase the flow of capital that deep tech start-ups need to scale.

The Early Stage Investing LaunchPad (ESIL) has selected six countries where local leaders will deliver two-day training sessions for people looking to get into angel investing. The first will take place in Poland, with applications opening later this month. This will be followed by workshops in Romania, Bulgaria, Czechia, Croatia and Hungary later this year.

The countries have been selected following an analysis of where there are the biggest gaps between demand and supply for start-up funding.

The objective is to train around 20 new angels per country, with the aim that there is gender equality. It is hoped these individuals will go on to join or form syndicates where their cash is pooled to provide more substantial financial backing for start-ups.

The resources available to get these groups off the ground include mentorship, a library of outline agreements that can be used to structure deals, and connections to business angels across Europe, in the hopes of stimulating co-investment opportunities.

This is ESIL’s second round of angel-boosting activity, having originally launched in 2017 with €2.5 million in EU funding. Business Angels Europe, the French state bank Bpifrance and META Group, an Italian organisation supporting science-based entrepreneurialism, will deliver the programme.

“One of the big issues we have in Europe is a dichotomy between the well-developed angel markets on the western side, and much less developed angel markets in central, eastern and southern Europe,” said Jenny Tooth, a board member of Business Angels Europe, which represents over 40,000 angels across Europe.

“We have an opportunity to transfer that experience to support and build the angel ecosystem,” she said.

Industry knowledge

While European seed-stage and angel investments into start-ups came in at $7.3 billion in 2023, according to Crunchbase, only €395.9 million of this went to eastern Europe.

Business angels not only provide cash but also industry knowledge, business knowhow and contacts. There is no comprehensive data on where their - often undisclosed - deals take place, but according to the pan-European angel network EBAN, which represents 100 member organisations, there are only 18 business angel networks across the six countries ESIL is targeting. In comparison there are 83 networks in France and 58 in the UK.

“Business angels are the first investors in start-ups, but also their mentors and coaches,” said Jana Drzkova, project manager at Bpifrance. “It’s crucial for scaling that companies have that mentor and expert, and it’s important for companies to know that, in my country, I can find the first investor for my start-up.”

EBAN estimates that in 2018 business angels invested €7.5 billion into small private companies across all European countries, with the most cash coming from UK German and Spanish angels.

For deeptech start-ups in particular, accessing angel investment can be particularly challenging. The technologies involved are often too complex for generalist investors to assess, and the long time horizons involved can be off-putting. Increased understanding of advanced technologies like artificial intelligence and climate mitigation could encourage more angels to dip their toes in the water.

Marius Istrate, chair of the business angel network TechAngels Romania, estimates that 25 – 30% of the €45 million its members have deployed to date has gone to deeptech start-ups. “Deeptech is the second-most important tech domain where we invest as angels, and the reason is that a lot of founders in Romania [have] technical [backgrounds],” he said. “There is an opportunity to deploy more money into these companies. They need more capital, and it needs to be the sum of angels, VCs and, in time, other types of strategic investors.”

More education on the benefits and practical aspects of business angel investing will provide a welcome boost to Romania’s start-up sector, Istrate said. TechAngels currently has 140 members, however it estimates there are an additional 400 - 500 people in Romania who fit the profile of a tech angel investor.

Getting access to funding opportunities outside Romania, one of ESIL’s objectives, could persuade more investors with specialist knowledge to come on board. “When you’re looking at specific fields, like I am looking at deeptech and enterprise business to business, the pipeline is going to dry up in your country, and at some point you are going to want to invest abroad,” said Istrate.

De-risking angel investing

Education, mentoring and contacts are not the only ingredients a vibrant angel investing system needs. Tax incentives that de-risk investment in start-ups can stimulate further investment. In the UK, for example, the Enterprise Investment Scheme provides 30% tax relief on investments in UK companies, up to £1 million a year. In Germany, business angels receive a 20% tax-free reimbursement on investments above €10,000.

Milen Ivanov, the co-founder and chair of the Bulgarian Angels Club, says other governments should take note. “We started to talk to the minister of innovation about creating programmes similar to Germany and the UK,” he said. “If it happens, it would be a good boost. [We know] that in locations where you have investment schemes it works, and people become active because there is less risk. And the biggest beneficiaries are the founders.”

Building strong business angel networks requires time and patience. As tech companies in eastern Europe reach an exit, a flywheel will be created where angels invest their returns in new ventures, founders will put their knowledge and expertise in new start-ups, and investors in general will to pay attention to the innovation narrative that is emerging in their domestic market.

“We see a lot of growing interest in becoming angel investors, and not just from the usual CEOs and family offices, but middle management, exited founders and people who have been rubbing shoulders with the start-up ecosystem,” said Ivanov. More exits are needed to show “angels making money,” he said.