Investing in Start-ups: How investment platforms and Business Angels make new projects possible

Ideas become business

The COVID-19 pandemic may have played into the hands of the founders of the digital learning platform SchuBu, but it wasn't the sole reason for their success. Launched in early March 2020, the portal now records 1.5 million accesses per month. It offers interactive learning books and materials for compulsory education, which are available to students for free, aiming not only to make learning fun but also to impart digital skills. Additionally, there is a paid model for teachers to monitor learning progress and customize the user interface. Currently, around 5,000 educators across Austria are using this feature.

Five founders, each with different competencies, came together to create this platform with the goal of providing the younger generation with a better learning experience. "We all have school-aged children, and it was shocking for us to see how little has changed since our school days," says Paul Beyer Klinkosch, one of the five founders of the EduTech start-up.

Financing phase

The successful implementation of this project, which is now entering its second financing round, would not have been possible with equity alone. Although the team had equity and found private investors among friends to finance the initial stages, it eventually became unavoidable to resort to external capital.

In the first financing round, the team attracted investors including two non-profit foundations or organizations and Business Angels. They also secured a grant. "It is advisable for a start-up to rely on several Business Angels as well as multiple forms of financing," Beyer Klinkosch asserts. The SchuBu team had a significant advantage from the start: "All five of us already had experience in founding companies. Some of us had even become Business Angels after selling our companies," says Beyer Klinkosch. This meant the team had a good network and prior experience, which boosted the confidence of potential investors. "Nothing works without trust here. That’s why it’s also easier when you start as a team, bringing in different strengths and competencies," Beyer Klinkosch explains. This makes it easier for interested investors to trust the founders to achieve substantial success.

Moreover, SchuBu was careful not to bring on Business Angels who were only interested in making quick profits. "We knew that we would only grow linearly in the first few years; in our industry, there’s no other way," Beyer Klinkosch is convinced.

Diversification is key

The days when Business Angels could make quick money are, according to Gernot Singer, over. Singer, who founded the platform immosuchmaschine, built it up, and sold the portal in 2018, has been active as a Business Angel since then and is currently involved in 15 start-ups. "You can only draw a real balance sheet after ten or more years. It is risk capital. You have to be aware of that. But if you act professionally and diversify well, you can get two to three times what you invested after about ten years," Singer explains. Furthermore, the companies that go bankrupt are the ones you hear about first—and the successes come much later.

Therefore, spreading investments and not putting everything into one start-up is crucial. Two of the start-ups Singer has invested in have already failed: "Even if you examine all the projects carefully beforehand, as a Business Angel, you’re involved in a company at such an early stage that you can’t predict what will happen afterward." The investment really pays off when the company is eventually sold. "But whether and when that will happen, you never know," says the investor.

But why invest personal money in the ventures of others? "As different as Business Angels may be in their personalities, in most cases they have an entrepreneurial or management background. They find it appealing to pass on knowledge and stay close to the action without having to stand in the second row," Singer believes. Besides the desire to invest money profitably, it's also about a general appreciation for entrepreneurship and the desire to support others in this area. But what should start-ups keep in mind when looking for investors? "In addition to a competent and trustworthy team, you need a credible business concept, market knowledge, and an outstanding product idea," summarizes Beyer Klinkosch. He believes it has become disproportionately harder to obtain financing in recent years. "It must be an idea that’s not a copy of something that already exists. And it must be understandable to every Business Angel why this innovation is needed," adds the SchuBu co-founder.

However, the personal component should not be underestimated. Beyer Klinkosch: "You have some really tough times ahead of you, and you need to get along well with the investor—very well, actually. If they don’t have the nerves for it, it’s going to be difficult." Singer also considers patience and perseverance to be crucial: "You have to be able to live with the fact that the money is just gone for a while." He believes that the influence a Business Angel has on a start-up is sometimes overestimated. "The founders steer the company. I’m happy to support and throw ideas into the mix, but I can’t do much more. Those are the rules of the game, and you have to know and endure them."

Beyer Klinkosch also advises against founders agreeing to investors' demands for guarantees in the form of access to personal property like a private house or apartment. "I find that extremely unfriendly to investment," says Beyer Klinkosch.

Setting incentives & strengthening the location

To offer private individuals more incentives to invest in companies, the Vienna Chamber of Commerce (WK Wien) has long been calling on the government to create a participation allowance of 100,000 euros. Those who supply Austrian companies with fresh risk capital should be able to deduct it from taxes within five years. This measure would be a significant lever for mobilizing private funds for the domestic economy. In addition, the WK Wien is advocating for a package of improvements to boost all forms of risk financing. These include, among other things, lower taxation of capital companies, improvements in the taxation of capital income, and more clarity regarding the taxation of employee participation.

Vienna’s companies aim high

The latest survey conducted annually by the Austrian Federal Economic Chamber (WKÖ) and Austria Wirtschaftsservice (aws) since 2009 shows that alternative financing remains a trend among Viennese companies when it comes to implementing investments, innovations, or expansions. According to the survey, 9.5 percent of Viennese companies have used alternative financing in recent years, and nearly 16 percent plan to do so in the coming years. In addition to silent partnerships, venture capital (see box on page 7) and Business Angels are among the most popular forms of financing.

What plans will actually be implemented will be revealed by future surveys. What is certain is that Viennese companies continue to lead the way in alternative financing compared to other Austrian regions, with nearly twice as much usage as the national average. So far, mainly smaller projects have been realized, but Vienna's companies aim high: Nearly one in five Viennese companies that plan to use alternative financing—six times more than those that did so recently—want to finance more than one million euros. Particularly one-person businesses (EPUs) and small businesses with fewer than ten employees have high expectations for this financing option.

Important for small investors

It’s not always about big investors when it comes to start-up financing, as demonstrated by the European crowd-investing provider SeedBlink, which has had an office in Vienna since the beginning of the year but has been active in the Austrian venture capital market for some time, aiming to attract more Austrian investors for local start-ups. "EU-wide, we currently have just over 100 start-ups in our invested portfolio, and we’ve raised around 65 million euros in equity for them. Some of these start-ups come from Austria or have Austrian founders," reports Ronald Rapberger, Regional Manager at SeedBlink.

SeedBlink specializes in technology-oriented start-ups and aims to attract private small investors with its curated selection across Europe. "We look at things like how the core team is composed, what the go-to-market strategy is, what problem the product aims to solve, whether there are unique selling points and co-investors, and how the investment money already received has been managed," explains Rapberger. For private investors, who usually enter a start-up with just a few thousand euros, it’s often an emotional investment, and many like to stay close to the start-up.

"Through our platform, small investors can also personally support the start-up founders if both sides want it," Rapberger explains. They are then somewhat like "micro-angels." "This happens quite frequently with us. More than half of our private investors can be considered active investors," says Rapberger. What they hope for in the best-case scenario is a profitable "exit" when the start-up takes off. However, most don’t make it that far. "It’s a high-risk investment," Rapberger clarifies. He prefers to rely on investment rounds that also involve institutional investors and business angels. "You want to place your investments smartly to increase the likelihood of returns through future exits," says Rapberger.