Aron Braun - experience of a business angel
Aron Braun is a serial entrepreneur and Swiss Business Angel who has supported Swiss EP activities since 2017 - in this interview he shares his experience about startup investing.
Aron Brown is a serial entrepreneur and business angel who has been active with Business Angels Switzerland (BAS) in the last 15 years. Initiated by Swiss EP and in collaboration with business angel networks from five Balkan countries, the first online gathering of business angels was recently held. Aron Brown presented his portfolio and experience as an investor in order to support the initiative and encourage more investment in the Balkans.
What is the difference between Angel investing and other forms of financial support?
The key difference between angel investors and other types of investors like e.g. institutional or public investors is that business angels are private people investing their own money. They are more personally exposed to the financial risk, but have also more freedom and flexibility to decide where and how they want to invest their money. After all, they are not taking responsibility for anyone else’s money but their own. For that reason, business angels often invest into very early-stage companies which might be too risky for other types of investors. Like all investors, business angels aim at earning an attractive return on their investment, but often, they are also motivated by some additional, non-monetary aspects. For example, some business angels may want to give something back to society, support the economic development of their country, enjoy being part of an exciting project, gain insight into a new industry, extend their personal network or enhance their reputation. Typically, they don’t only invest money into the company but actively support it with their experience, network and by mentoring the founders.
Why what are the basic lessons for anyone who wants to become a business angel or is in the starting phase (about the motivation)?
It is important to become very clear about the reasons why you want to be a business angel and what your exact expectations are. If your only motivation is return on investment in an alternative asset class, then it might be a better choice to invest into a well-managed seed or venture fund. Or otherwise, you should at least make sure that you invest into a sufficiently large number of different companies and also have the time for managing that portfolio well. Given the high risk of any individual seed investment, a high level of diversification helps to realize a more reliable overall return. On the other hand, if your motivation goes beyond only monetary aspects, you might be a bit more relaxed about the level of diversification of your portfolio, and be happy being invested just in a limited number of companies. You certainly remain on the safe side if you do not invest more money into startup companies than you could afford to lose, if things go really wrong. In any case, a good alignment between the interests of the founders and the business angel is essential for a fruitful relationship between the two parties. This relationship may easily last 5 or more years, before the business angel can hopefully realize a return through an exit. As a business angel, it is helpful to be patient and flexible about your investments, and to remember that the buildup of a new company can be a long, complicated and bumpy journey full of surprises.
What does the investment process look like and how long it takes for an investor to make a decision?
In my experience, there is no standard rule for this, as business angels are only accountable to themselves and can therefore completely adapt the investment process to their personal tastes, attitudes and needs which can be quite different from person to person. In many cases, investments are not made alone by one single business angel, but together by a group of several investors. Before starting the whole process, the involved investors should agree on how they want to go about it. I have been involved in investments which took just a few weeks between the first contact with the founders and the closing of the deal. In other cases, that process has taken half a year or even more. In some cases, the whole due diligence process (i.e. the thorough assessment of the investment case) consisted of just a few intensive discussions with the founders, in other cases a whole team of investors, sometimes even supported by external experts, spent several days thoroughly looking at every available document of the company and conducting dozens of interviews with different experts in the respective fields. I have signed very simple and basic investment and shareholder agreements consisting only of a few pages and drafted without the help of lawyers, but also complex documents of almost 100 pages on which lawyers and all involved parties have invested an enormous amount of time. Personally, I prefer to keep things rather simple, lean and short, but sometimes fellow investors have attitudes. Many of the key risks of a startup company cannot really be eliminated event with the most sophisticated contracts and the most meticulous due diligence process.
Generally, the investment process consists of an initiation phase which is often starting with a pitch of the founders and followed by some more or less informal meetings with them. The purpose of this phase is to get a first overview and basic understanding about the company, its business idea and the founders, and to decide whether you are seriously interested in the case or not. The next phase then is called “due diligence”, i.e. taking a more thorough look at all aspects which you find relevant for your decision. In parallel, you might start negotiating the investment agreement and / or shareholder agreement. The valuation of the company is just one, although important aspect to be agreed, among several other important terms. Once there is an agreement on everything, you can proceed to the closing of the investment round. That is just the beginning of an often long and twisted, but also interesting and fruitful journey together with the company.
How many investments have you made?
By now a total of 15 companies in various fields like biotech / medtech, education, tourism, online services, fintech, virtual reality and sensors. I have experience in some of these fields. In some of the other fields I have only limited knowledge but great curiosity to learn more about them. That’s certainly a difference to professional, institutional investors who should never make investments into areas in which they are not experts.
Typically, I have invested not only once but at several subsequent financing rounds of the same company. So the total number of investment transaction is significantly higher than the 15 companies. Some of these subsequent rounds were explicitly planned from the beginning, but most of them not. This is very typical for many startup companies, and experienced investors mentally prepare for follow-up investments when investing into a new company. But of course you are not obliged to participate in follow-up rounds and have to separately assess every new financing round.
What type of support the Business Club offers to its member angels? Tell us more about your Club!
In my club, the Business Angels Switzerland, the main support consists of the sourcing of a significant number of new candidate companies, the pre-selection of the most interesting one, and the organization of dinner events at which the selected companies pitch. Furthermore, the club provides an interesting network to other entrepreneurial business angels and experts from all kinds of fields, know-how in various skills related to angel investing, useful templates and documents such as e.g. due diligence checklists, and occasional training events. The club is driven bottom-up by its members and involves a significant amount of voluntary work by engaged members. There is a general spirit of mutual trust and support, and members generally like to share their respective experiences with each other.
What is required for an angel scene to develop in one country? Any specific support for investors in Switzerland
I guess a basic pre-requirement is to have a sufficient level of entrepreneurial spirit in the country, i.e. a sufficient number of people starting up innovative companies with scalable business models. Respective support programs by the government can play an important role in this context, as we have seen in different European countries. Of course, having an active business angel community will also encourage entrepreneurial activities in a country. But of course, we have some kind of hen-and-egg problem, here. Another very important pre-requirement for developing a solid angel scene is to have a favorable legal framework. The minimum requirement for it is not to unnecessarily obstruct and discourage angel investments by unfavorable and cumbersome legislation and regulations. A next level would be to crate specific conditions which explicitly encourage seed investments by private persons and institutional investors. Some European countries have established specific tax discounts for capital gains from startup investments, or have established investment instruments which participate in investment rounds lead by angel or VC investors. If they are well designed, such legal provisions and support instruments can significantly encourage angel investment activities in a country. As most people do not have a very good understanding of the specific issues regarding startup companies and seed investing, it is very important that new regulation aimed at promoting angel investing are established in collaboration with the local startup and business angel community. It is certainly a good idea for business angels to invest some energy into respective lobbying.
How do you see the Angel investing scene in Macedonia and what is it missing? Your recommendations?
I have visited Macedonia a few time in the last three years, but of course I don’t have a very deep insight into the local ecosystem. My impression is that the angel investing scene is still very young, but I have met some really skilled local business angels who are entrepreneurs themselves and who have a great mindset. They have already gained some significant experience from first angel investments. This is very encouraging, and hopefully, early pioneers like that will be able to inspire and support others to follow their example.
I heard from several people, both entrepreneurs and business angels, that there seem to be certainly obstacles on the legal side which might have to be removed in order to create a better climate for angel investors. Like in some other European countries, dedicated incentive models could furthermore be beneficial for intensifying local investing, and possibly also cross-border investments.