Business angels: Who are they and what role do they play in the growth of startups?

The concept of business angels originated on Broadway in the 20th century, when wealthy New Yorkers financed musicals and plays. Like angels, they came down from the upper and wealthy part of the city to the lower part to provide their private capital to creators and artists. From stages to startups, these angel investors have become a common choice for funding early-stage ventures.

The role of business angels

In the early stages of the business, startups look for various sources of funding, including their own resources, those coming from family and friends (known as friends, family and fools), funding rounds, crowdfunding, venture capital or public funds. At this stage, startups can also approach professionals with financial resources who invest in startups in exchange for a future stake in the company.

Business angels play a key role in the entrepreneurial ecosystem by providing financial resources and expertise to companies in their early stages of development that may have difficulty accessing funding from more traditional sources. Their investment is made in the early stages of the company, when the risk is high but the growth potential is also high, and fills the gap between seed capital and venture capital, which comes from investment funds at more advanced stages. In Spain, the average investment of a business angel is 158,608 euros, according to the Spanish Business Angels Association (AEBAN).

Angel investors are often interested in specific sectors where they have experience and see capacity for development. Their approach goes beyond pure financial analysis; they are often guided by intuition, the vision and strengths of the founding team and the innovation that the startup can bring to the market.

Unlike traditional investments, they provide not only capital, but also business expertise, valuable connections and strategic advice. This specialisation not only adds value to the startup by providing industry knowledge, but also expands the company’s network of contacts. Often these investors have been entrepreneurs before and the connections can open doors to strategic opportunities, business partnerships and potential customers, which is particularly valuable for growing companies.

Unicorn companies have had the support of business angels in their early stages to help them grow. This is the case of the Spain’s Cabify, which was backed by the renowned business angel Luis Martín Cabiedes; Colombia’s Rappi, whose CEO Simón Borrero now acts as mentor and business angel to emerging startups, and Brazil’s Nubank, which was backed by American investor Douglas Leone, also known for backing companies such as Apple and WhatsApp in their early days. Argentina’s Despegar was initially backed by the founder of Mercado Libre, Marcos Galperin, and in Mexico, Kavak was backed by business angel and serial entrepreneur Martín Varsavsky.

Business angel investment trends

AEBAN points out that investment by business angels is in full growth, focusing on funding in short and medium term sectors such as agritech and foodtech, health technologies, green technologies, energy and water, biotechnology, cybersecurity and edtech. In its latest report, the association notes that the entrepreneurial and innovation ecosystem is consolidating as a source of opportunity for these investors, with some key trends:

• Growth. Increasing professionalisation of the sector in a growing market and convergence between business angels and other alternative entrepreneurial funding instruments. Among them, those offered by BBVA Spark, where venture debt and growth loans stand out.
• Investment. Investors are increasingly participating in larger rounds at the post-seed stage (startup, series A and B). They are also using their own vehicles or more indirect investment from more experienced investors.
• Social impact and sustainability criteria. Progressive recognition and standardisation of ESG criteria in the entrepreneurial ecosystem. Most business angels take these into account in their current decision-making processes.
• Gender criteria. AEBAN explains that the results regarding their sensitivity to gender diversity in the founding teams they evaluate for investment are more ambiguous. The presence of women in startups as founders or in entrepreneurial leadership positions is limited and the gender gap in access to venture capital funding is still significant. However, the organisation is seeing an increased interest in promoting access to the market for women business angels.
• Exchange and research. There is a growing interaction between the entrepreneurial ecosystem and private investors, universities and research centres. There is also an increased availability of data and the use of technology in investment decision-making.

How to attract investors?

The investment landscape is evolving and business angels are becoming more prominent as architects of business take-off in the entrepreneurial ecosystem. However, they are not always easy to find and their decisions are based on criteria that are sometimes difficult to meet. Beyond the value provided by these investors, startups should consider a wide range of funding options to make the project flourish.

It is necessary to know the different tools and strategies available to ensure business continuity at each stage of the business. Attracting funding is always a challenge and there are many options for startups, from business angels to investment funds or funding solutions such as BBVA Spark.