The State Of Angel Investment In Luxembourg

(Photo © Chris Liverani / Unsplash)

The need for early stage investment in Luxembourg has grown as the startup ecosystem has developed in recent years. Angel investment has gone some way in filling that gap. Business angels are private investors who are willing to take a bigger risk by investing their money in startups who are just beginning to bring their business ideas to life. And the long-term success of many entrepreneurs is down to this early stage investment.

Not only are business angels able to support entrepreneurs financially, but also through mentorship, giving new businesses a better chance of success. According to a Harvard and MIT study, startups receiving angel investment were 20-25% more likely to survive after four years and 16-19% percent more likely to have grown to 75 employees.

This is the key difference between angel investment and venture capital (VC). Whilst VC funding provides the all important financial input, it’s up to the startups themselves to turn that money into profits. The investment business angels put in, on the other hand, is more personal. In addition to funding, they also offer advice based on their own business experience, and can activate their network to ensure new entrepreneurs are set up with a good foundation for success.

Global growth of angel investment over the last ten years

Over the last ten years, angel-seed funding globally has grown dramatically according to Crunchbase’s Global VC Report 2020, in both dollar volume and, in particular, deal volume. Deal volume has more-or-less doubled from around 7K deals in 2011, to around 14K in 2020, reaching a peak of around 21.5K deals in 2018.

Source: Global VC Report 2020, Crunchbase

Much of this growth was driven by investment in the technology sector, particularly in 2020 when the global pandemic forced most industries to move online.

Diversity growing among Founders and Funders

Another recent trend across the VC sector generally is diversity, both in the startups, and in the funds who are investing. For example, in the US, funding for female (co)-founded companies doubled from $23.3bn in 2019 to $46.2 bn in 2020. And the number of deals made by female (co)-founded VC funds has been growing steadily since 2008. This is proven to make good business sense. According to a 2018 McKinsey report, companies in the top quartile for gender diversity on their executive teams were 21% more likely to experience above-average profitability than companies in the fourth quartile.

Angel investment is following suit, with more business angels looking to invest in increasingly diverse portfolios. That is, across a variety of industries – including green tech – and also geographies, offering the opportunity for more diversity in the founders of the startups. And among investors themselves, gender diversity is increasing. According to Forbes, female business angels represented 29.5% of the angel market in 2018, compared to 19.5% in 2017. And as the angel investment community continues to grow, it’s likely that diversity will also increase.

Angel investment in Luxembourg follows the global trend

As with the global trend, angel investment has grown over the last decade, holding steady over the last three years at around €6-7m per year. The median ticket size in 2020 was €350K. That’s according to the Luxembourg Business Angel Network (LBAN) – the only business angel network in the country. They represent over one hundred high-net-worth individuals looking to invest in companies, not just in Luxembourg but anywhere in the world.

In 2020, LBAN members reported collectively investing around €6.5 million. Of this, approximately one third was invested in local startups, whilst two thirds was invested internationally, mainly in Europe. However, as this figure only reflects the reported investments, the real amount is likely to be higher as some members opt to keep their investments confidential.

In terms of total euros invested, this puts Luxembourg quite low in the European rankings, when it comes to angel investment.

Source: EBAN Statistics Compendium. European Early Stage Market Statistics 2019

However, when you compare this to the angel investment per GDP ratio, Luxembourg ranks higher – just behind the UK – demonstrating the highly active angel investment scene.

Source: EBAN Statistics Compendium. European Early Stage Market Statistics 2019

When it comes to the demographics of Luxembourg business angels, the majority are still men making up 90% of the membership. This aligns with the rest of Western Europe, however, according to LBAN’s Manager, Teona Khubutia, the group is looking to grow this number. They are actively seeking out female entrepreneurs and those active in the industry to join. The average age of LBAN’s members is between 45 and 55. Again, this aligns with trends across most neighbouring regions – Benelux and DACH – except France where the average age of investors is over 60. Interestingly, Khubutia noted that 2021 has seen more younger investors join LBAN. This increasing diversity when it comes to age and gender is reflected in the nationalities that make up LBAN membership. To date, members represent twenty-six different nationalities.

Luxembourg startup scene attracts diverse investment

And part of the reason for the growth of angel investment in Luxembourg is the increase in quality startups. Whilst only one third of angel investment in 2020 stayed within Luxembourg, this is more reflective of the size of the country, rather than the lack of opportunities. According to LBAN Board Director, VP and Secretary, Diane Tea, this ratio is quite impressive. The number of opportunities usually increases with the size of the country. With that in mind, it’s hard to compare Luxembourg with its close neighbours when it comes to the volume of investment opportunities.

Having said that, Tea, who has been active in the Luxembourg startup scene since 2017, thinks ‘things have evolved in the right direction.’ Over the last four years, she has seen Luxembourg become more vibrant and more attractive to startups, not just locally but those from abroad who are looking to set up a European base. They see the benefits of having a branch in Luxembourg.

As Tea points out, ‘Luxembourg is a good test bed for startups. There are lots of opportunities, it’s easy to take action and access to other people and places is a lot easier than in bigger countries.’ She credits this to the cosmopolitan nature of the country, which leads to a concentration of like-minded people, and mentors, who all have an interest in technology, innovation and business.

The financial support for small businesses in Luxembourg is also a benefit. Since the introduction of the SARL-S in 2015, starting a business as an entrepreneur is much easier, both financially and from an administration perspective. The minimum share capital required to form an SARL-S is €1, and the company can be formed by private deed, without the need for a notary.

The ease of setting up in Luxembourg has enabled a wide variety of startups to launch here. Whilst fintech still makes up the core of new businesses, diversity across industries is growing, with successful local startups, such as Salonkee (beauty and wellness), Talkwalker (saas) and Food4All (foodtech), breaking out of the country and seeing success internationally. As Tea points out, the success of these startups has made Luxembourg more attractive from an investment point of view.

And local startups can testify to the positive impact angel investment has had towards their success. According to Nigel Bergstra, co-founder of local wellness app, No Big Deal, “Closing your first big round can be tough, there is so much uncertainty; the key is continuing to push commercial priorities and ensuring the right people are seeing that. In the end, capital will find its way to value, and this is what happened when we connected with our angel investors in Luxembourg.”

Covid-19 has changed angel investment strategy

The need for diverse investment was emphasised during the pandemic. Not just in Luxembourg, but globally. Whilst the pandemic caused some business angels to pause their investments, on the whole, the sector did not suffer too much. This is demonstrated by the fact that the total amount invested by LBAN members in 2020 was not significantly different to previous years. What the pandemic did do however, was weed out the weaker startups. It accelerated the collapse of those that would likely have failed anyway.

It also forced business angels to be more focused and selective in their investments. As the world went into lockdown and more industries were forced online, solutions that supported the digitalisation of traditional services and operations became more attractive. This is reflected in the investments made by LBAN in 2020: Marketing/Advertising, Internet/Web Services and Digital Marketing all featured in the top five sectors where members invested.

Source: LBAN Investment Statistics 2020

As Tea states, ‘Technology is the key to everything we do now.’ How this is integrated and used by businesses is an indication of the future success of a company, and it’s something that is being considered more and more by investors.

The future looks bright for Luxembourg

Despite the hit many industries took during the pandemic, the future looks bright for angel investment in Luxembourg. Tea’s perspective based on her experience in the startup space is that ‘things are booming in Luxembourg, and they’re continuing to evolve in the right direction.’ The increased diversity across industry, the financial benefits for small businesses, and the international success that some local startups are now having will only benefit the country in the long term. Not only by attracting other innovative startups to see Luxembourg as a base to launch, but also in attracting investment from business angels, both locally and internationally.

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