The Value Of Angel Investment
Prior to becoming an investor, I was the founding member and VP of VCCEdge where we monitored and analyzed the evolving venture capital and private equity landscape. I was super fortunate to work alongside incredibly good people who were forward-thinking, collaborative and were equally obsessed with the state and future of VC/PE.
Having gone from a role of researching the investment ecosystem to now participating as a seed investor, a key trend I have seen emerge is the growth of angel investment. Often characterized as wealthy individuals with an entrepreneurial past, Angel investors have surpassed VCs and become the biggest financier of early-stage capital. Through early-stage funds and accelerators, smart and sophisticated investors are becoming more formalized, organized and playing a key role in providing strategic and operational expertise for new ventures.
More often than not when you are considering an angel investment, you are betting on the individual as much or even more than you are betting on the idea. Due to the inherent nature and ticket size of a typical angel investor, they are able to support a much wider range of innovation than VC firms. In terms of industry sectors and geography, angel investors have also been involved in companies that are not necessarily technology-enabled or high growth but in later stages of development.
Angel backing provides an early endorsement of quality for entrepreneurs that alleviates uncertainty around the initial stages of development. Motives for investing ranges from helping a new enterprise, adventure, profit or value addition (which usually is a large percentage). Post-investment involvement with ventures contributes significantly to value creation and an angel investment can add as much “value” from mentoring as it could in actual dollars.
As VC funds continue to grow bigger, the tendency is to make larger investments. To generate 10x to 30x returns, VCs have to wait longer before they realize an exit. Angel investors invest in ‘lean startups’ to support companies through an early exit (usually M&A) making 3x to 5x returns on their investment within a three to five-year timeframe. This typically translates to an exit for the entrepreneurs of about four to seven years.
Through early-stage funds and accelerators, smart and sophisticated investors are becoming more formalized, organized and playing a key role in providing strategic and operational expertise for new ventures.
Built to Flip:
Disruptive solutions have been transforming the industry and the real opportunity for angel investors lies in a) Series A Funding, and b) Corporate Acquisitions. Not only is there a sense of urgency in improving the customer experience in large organizations, there is a constant need to run a leaner, more efficient operation that uses teams’ skills in a smart way. To integrate some of the dynamism and energy of fast-moving startups, many corporations strategically invest, consider mergers and acquisitions, or set up partnerships with new and nimble players in the market. The value generated by corporate acquisitions are great for entrepreneurs and equally important for angel investors.
A lot has been written about the negatives of startups ‘Built to Flip’. The term has a negative connotation which should NOT be the case. It definitely does not suggest that entrepreneurs should build startups/companies with less quality or lasting value. On the contrary, it encourages the opposite. In order to succeed, investors should not only aspire to early exits but design that objective into their corporate structures and DNA.
Companies are being built fast and it’s going to get faster. The ones which are agile, angel-backed with a lasting value are likely to succeed.
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