US Trends in Startup Funding – Angel-only Deals

January 7 2010 No Commented

US Trends in Startup Funding – Angel-only Deals

Because the US is a large country with huge demographic variety, venture capital has thrived in a few regions and is virtually unavailable elsewhere.  Venture capitalists prefer not to travel to portfolio companies, investing instead close to home.  Consequently, while angel groups in a few regions do a high percentage of their deals with VCs, most angel groups seek and fund deals that will not require subsequent VC funding – “angel-only deals.”

The world of venture capital in the US is changing rapidly – and not for the better.  VCs are funding fewer deals with a higher fraction of later stage deals.   US VCs are investing larger sums in total in each venture (~$30 million in multiple rounds) and waiting longer, hoping for larger exits (nearly 8 years with the average exit valuation about $150 million).  The impacts on angels of these changes are substantial, as follows:

  • Since angels invest ahead of US VCs, angels must wait even longer for exits when both angels and VCs are in a deal.
  • Investing in companies that need lots of money and waiting longer for exits actually increases risk for angels – risk that capital cannot be raised and risk that companies may be blindsided by markets or competitors during the longer wait to grow to exit.
  • Raising larger numbers of rounds of investment over an extended period of time increases the likelihood of a down round (cram down), which have a devastating impact on early investors, such as angels.

Angels in regions of the US that seldom see VC investments have been doing angel-only deals for a long time.  After all, less than 10% of angel deals are successful in raising venture capital.  The new trend in the US is that angel groups in regions that enjoy frequent follow-on by VCs are now beginning to reevaluate their groups’ strategies in favor of more angel-only deals.

Some might suggest that investing in angel-only deals limits angels’ opportunities for “home runs” (huge exits).  I would suggest that this is not true.  We have no evidence that the amount of money raised by companies impacts the ROI of investors.  To me, investing $300K in a company at a $1 million valuation and later exiting at a $10-20 million selling price (with no subsequent investment), sound pretty good to me!  This deal would be totally uninteresting to most US VCs.

By applying this angel-only strategy on an increased fraction of an angel group’s portfolio, US angels are expecting even better returns and faster exits.  What a concept!

It’s a GREAT time to be an angel.  Find a group and jump in!

PS  You might ask (1) just what are “angel-only deals”? or (2) but why are VCs focusing on investing larger amounts of cash in later stage deals?  Stay tuned for our next posts.

Bill Payne is the 2010 BNZ University of Auckland Business School Entrepreneur In Residence.