Angel Investing in Germany
This thesis provides an overview of the German angel investor landscape as well as a comprehensive guideline for the angel investment journey. Angel investors are typically the first professional providers of external venture capital for young startups. Often being entrepreneurs themselves, they provide both capital and their own expertise, network and know-how. Angel investors are equally motivated by financial considerations and their own passion for entrepreneurship. In order to minimize the tax burden, angel investors typically invest through a dedicated investment corporation with the legal forms of a GmbH or a UG. The foundation process for a GmbH or UG is clearly regulated and has a duration of around two weeks with associated costs between 500 and 1,000 EUR.
The easiest ways to discover promising potential investment targets are the use of the own professional network, the collaboration with experienced angel groups or the attendance of business plan competitions. For the evaluation of startups, the entrepreneurial founding team is the key decisive factor, in addition to market and product characteristics as well as sales projections. The combination of different quantitative and qualitative valuation techniques yields an approximation of the current financial valuation of the venture.
Angel investors assure sufficient control, information and veto rights as well as the long-term commitment of the founding team through thorough term sheet negotiations. During the investment time, angel investors observe and influence the development of the venture on a regular basis and strive towards a new financing round or a successful exit of the investment. The preferred method of exit is a full trade sale of the venture to a strategic investor as this method typically yields the highest return. Successful exits have to cover a significantly higher number of unsuccessful investments in the angel investor’s portfolio.
Foreign investments may be an attractive opportunity to increase the inflow of promising investment opportunities. However, double taxation treaties and bureaucracy can seriously harm the financial returns of foreign investments. Crowdinvesting is a relatively new phenomenon that opens the angel investing market to private investors with lower budgets and less experience. For professional angel investors, crowdinvesting is less attractive due to limited control rights.
Non-financial motivators of angel investors, the interplay of angel investors and incubators as well as the impact of the legal framework remain promising avenues for further research.