Just What Are Angel-only Deals?

January 12 2010 No Commented

Just What Are Angel-only Deals?

In my last post, I described the trend among angel groups in the US to fund more angel-only deals, primarily because of the changing world of US venture capital.  I did so without really describing the characteristics of angel-only deals.

Perhaps I should start by describing angel deals.  Oh…I did that in the January 6th New Zealand Herald.  See What Start-ups Need to Know to Speak the Language of Angels. 

Angel-only deals are startups that can achieve positive cash flow and grow organically using capital raised from angels without any follow-on venture capital investment.  Since angels rarely invest more than $1 to $1.5 million in total in any deal, these are startup ventures that can achieve positive cash flow with less than, say $2 million, and usually less than $1 million in equity investment.

Are angel-only deals rare?  No!  Venture capitalists invest in less than 10% of US angel-funded startup ventures.  We see lots of angel-only deals in the US.  Personally, I have invested in over 50 deals and only a handful – five or so – of those companies ever raised venture capital.  And, among my three “home runs” (>30X ROI), only one of those was funded by venture capital.  So, we angels can do just fine, thank you, investing in angel-only deals!

What might a typical deal be, in today’s environment?  I think most software companies are interesting angel-only deals.  Software development costs have come down substantially, much less expensive than a decade ago.   And, most successful software companies exit at valuations of less than $40 million.  Sounds to me like a very interesting domain for angels!

Am I suggesting that angels should avoid deals that will require venture capital to be successful?  Absolutely not!  I believe that angels should pursue a broad portfolio including a good fraction of smaller deals that only require only angel capital. 

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

PS  In my next post, I will share why I believe the world of venture capital in the US is changing rapidly – and not for the better. 

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