Danish growth equity firm Nordic Alpha Partners (NAP) is tapping a new approach to lock in some of its greentech deal flow, inviting business angels to commit investments in developing opportunities, investment partner Rasmus Lund told Unquote.
NAP is looking to invite active business angels to take part in maturing some of the best leads in its pipeline that do not meet the criteria for its flagship fund, meaning they are yet to reach the point of representative traction for NAP to invest.
These companies and their angel investors will benefit from NAP’s value creation toolbox and funding until they reach the growth phase where NAP can invest, Lund said.
NAP aims to form a select group of 20-30 business angels with entrepreneurial and management experience, presenting them an early entry opportunity to invest DKK 1m-DKK 15m (EUR 340,000-EUR 1.35m) at DKK 25m-DKK 75m (EUR 3m-EUR 10m) pre-money valuations, on the basis that the angels work closely with NAP throughout.
NAP aims to present its business angels with four opportunities per month. In
comparison, the GP will make deals of EUR 10m-EUR 25m, typically EUR 5m-EUR 15m when entering the first investment round, at DKK 200m-DKK 300m (EUR 26.9m-EUR 40.3m) pre-money valuations. This way, driven business angels get access to a unique set of deals, as well as NAP’s SWAT team services and access to NAP’s operational value creation model, according to Lund. This comes at a very low risk as NAP has already identified the high growth potential and indicated its intention to invest at a later stage, he added.
Since NAP’s inception in 2017, the firm has identified more than 800 businesses in the European greentech space. It has thoroughly screened 400 and has, so far, invested in 10. Of the 400 companies screened, the GP has identified around 200 leads close to reaching representative traction, and it will be the best leads from this pool that the GP will present to the selected business angels.
The businesses that NAP has identified have huge potential but still need a push; a small cash injection and 12-18 months to gain the necessary traction, Lund said. Once that point is reached, NAP will offer to come in and deploy its full value creation model. The angel is also encouraged to stay onboard.
In return, NAP will pay a substantial markup to the angel’s initial investment, Lund said, adding that this is a way for NAP to deploy its hyper-growth-enabling value creation model early while locking in “winning technologies” that are still too young for full-scale deployment into its portfolio.
“This is a more formalised way of getting some of these businesses into the growth segment in a way that can save us a lot of work down the line,’ Lund says. “While some of the businesses we look at will go straight into our fund, we would like to work with angels to get some of the businesses that aren’t quite there yet, taken through a value creation journey early on, so that we may enter at a later stage and keep building the relationship.”
Structurally, the “nesting” fund will not be a separate vehicle. Instead, the business angels will become “a special group of closely associated investors’, according to Lund, adding that they will not have special rights with the GP, except the invitation to the nesting group.
Business angels interested in committing to the vehicle should have operational experience with high-growth businesses, preferably as entrepreneurs in the Nordics or in Germany. They would need to commit EUR 1m-EUR 5m in order to access the nesting group, where they will be invited to invest in target companies, typically with ticket sizes of EUR 200,000-EUR 2m.
The novel approach is symptomatic of the current fundraising environment, where the risk-off atmosphere seems to clash with the record levels of dry powder ready for deployment. Risk mitigation, lead qualification, and LP reassurance are key challenges for GPs looking to raise capital against this backdrop.
Sourcing capital from retail investors and high networth individuals is one approach that many sponsors have already adopted, or are considering. Tapping into the segment of business angels hungry for good opportunities to put their capital to work, thereby taking on board investors with sector-specific experience, could be an efficient way of solving the issues GPs are currently facing.
Gustav Hoejmark-Jensen – 02 September 2022
Original article by unquote: