2020’s Impact on Angel Investing
How have the events of 2020 affected angel investing? Which sectors are doing well and which are not? What might we expect next year?
We set out to find answers to these questions, amid a tumultuous year, with the help of a variety of investors in The ONE WORLD network.
How correlated is angel investing to the broader economy?
Turns out, fairly strong. If we look at the past ~15 years of angel investment, there has been a pretty consistent rise, with a bit of a plateau since 2015. (The chart below is through Q2, 2020.) Makes sense in that for many angel investors, the view is that these types of investments are discretionary and in addition to core investment practices which may withstand financial ups and downs. There are also a number of investment platforms and networks helping angel investors deploy capital that have come into being in the past five years.
Source: Angels: Foundational Investors to VC, Pitchbook, September 1, 2020.
Yet 2020 is an outlier in many ways. With the health pandemic hitting fairly early in the year, and then social movements which appropriately shook society to its core in the spring and summer, many citizens- not just investors- revisited their fundamental assumptions on the world order, the role of government to provide essential services, and the place each person has in creating a just and sustainable society. All the while, the stock market has remained strong (spectacular for the NASDAQ), to the confusion of some investors given all the turmoil.
How have the events of 2020 affected angel investing?
According to Pitchbook’s September 1st research, “While our data shows angel investment has so far been relatively stable... overall activity by angel investors is likely to show signs of strain over the rest of 2020.”
In context of the broader Venture Capital industry, The Wall Street Journal is reporting that deal activity fell just 6% in 2020, compared to the same period in 2019.
When 2020 final numbers are published in Q1 of next year, they will likely show a drop off in Q4 compared to 2019, but generally a healthy year overall from a historical perspective.
Which sectors are doing well and which are not?
Certainly a few sectors, namely edTech and Digital Health, have been propelled into the spotlight with the pandemic, given society’s rapid adjustment to all things online.
According to Gwen Edwards, Chair- Angel Resource Institute, & Managing Director - Golden Seeds, “Both education and health are deeply embedded systems which are hard to change, but COVID has forced a change. I would love to see what education looks like in 20 years, much less 10. Suddenly investors are paying close attention to Telehealth companies, and believe health care delivery will never completely go back to the old way. These are exciting times, when we look at the silver linings.”
Tim Brady, longtime Partner at Y-Combinator which reviews thousands of start-ups each year also is bullish on these sectors. “In 2021, I expect the activity in EdTech and Digital Health to continue unabated. As the world snaps back to normal toward the second half of the year, we'll develop a better understanding of the ideal balance between in-person and online for both education and healthcare. Things we're calling "hybrid solutions" today will become the new normal.”
Some entrepreneurs that are tackling seeming longer-term problems (think climate change) have reported less investor interest given all the pressing problems with 2020. What’s perhaps more interesting is how the entrepreneurs are pivoting their businesses given all the chaos of 2020. According to Radhika Shah, CoPresident of Stanford Angels & Entrepreneurs, “I see tech entrepreneurs building or repurposing their transformative solutions to advance social missions, especially to help those impacted by COVID. One such example is Caspar.AI which is bringing the power of distributed AI and Robotics to help the elderly live comfortably at their own home.”
Cameron Turner of the Oxford Angel Fund agrees. “We are leaving an era of generalized innovation and steering toward directed innovation to solve these specific challenges. This is not led by the investment community but rather by entrepreneurs, often first time entrepreneurs, who can see the alignment between social impact and business opportunity.”
Yet for many entrepreneurs, finding impact investors can be challenging. And at the same time, research shows that investors believe there to be a limited opportunity set of suitable impact investments. Our desire at ONE WORLD to open up access to sustainable startups is part of why we created the Impact Directory, a free resource identifying both startups and investors.
What might we expect next year?
What is really exciting is that society may be at an important inflection point, wherein the investor community sees the synergy (not trade-offs) between financial investing and creating a social impact. From Pitchbook’s data below, we see that of the top 5 reasons investors are making sustainable investments, most relate to the financial performance of the company.
Source: Sustainable Investing Survey 2020, PitchBook, October 5, 2020.
This is further backed up by Mckinsey’s research showing that gender-diverse companies are 21% more likely to outperform their peers. And, the research goes on to prove that ethnically diverse companies outperform non-diverse companies by 35%.
And while a growing part of the Investor community is seemingly hungry to embrace sustainable investing, many such initiatives within the venture capital ecosystem are very early, having been launched within the last 3 years or less. It’s reasonable to expect those efforts to gain continued traction in 2021 and beyond.
Source: Sustainable Investing Survey 2020, PitchBook, October 5, 2020.
As Sustainable Investing is embraced by investors as a way to positively contribute to a social or environmental cause, while achieving market rate returns, it will draw in even more funding. In the public markets, this is already happening. For angel and early stage investing, all the ingredients for this to happen are in place.
Gwen Edwards captures it well: “The triple win is a company that is mission aligned, that delivers a much needed solution, and that makes a significant return for all of the company’s shareholders. No longer does ‘social impact’ have to mean lower returns. Just like in public companies. We now know that those public companies with higher ESG scores, and with more than three women on their boards, outperform those that don’t pay attention to diversity or care about their impact on others.”
All said, Angel Investing is likely to look quite different in 2021, which should translate into promising news for both our broader society and the angels backing the start-ups creating solutions.
PREDICTIONS FOR ANGEL INVESTING IN 2021
“Angel investing has been robust in Q4 and I suspect will continue to be so in 2021. It's being strongly supported by (1) incredibly low interest rates due to Covid means capital is cheap; (2) strong public and private markets are giving angels returns on prior investments; (3) innovation continues to exceed expectations. I am bullish for 2021!”
Ravi Belani, Managing Director, Alchemist Accelerator
“As the world looks to put Covid-19 behind us and move toward the post-Covid-19 world, investors will remain on the hunt for "new normal" opportunities. In the "new normal", people will be far more attentive to viruses, bacteria, etc. and the powerful, even devastating, impacts they can bring. Having a "Covid overlay" within a pitch deck is now a need, not a want, at this time.
Jeff Wallace, Investor, Co-Founder Silicon Valley In Your Pocket
“When it comes to early-stage companies, ESG provides an opportunity to attract talent and consumers, enhance regulatory compliance, and develop greater market access. The sooner companies start, the greater the ability to capture these opportunities and mitigate risk. In our view, it’s never too early for VCs to encourage young companies to engage in sustainable practices.”
Christine Tsai, CEO and Founding Partner, 500 Startups
(From Pitchbook’s Sustainable Investment Survey 2020, October 5, 2020.)
“In addition to private equity, I see increasing interest in private debt, revenue-based lending, and other innovative financing models that are more appropriate for the many start-up enterprises that do not fit the traditional venture capital model. It is exciting to see new opportunities arise for a broader spectrum of impact entrepreneurs.”
Janine Firpo, CEO, SEMBA & Board Chair, Zebras Unite Non-Profit
"In the cleantech sector, we're seeing several positive trends for angel investors: the COVID situation and general economic uncertainty is leading entrepreneurs to check their valuation expectations, while at the same time they're adapting and pivoting to make sure their technologies are more readily relevant to the market. Along with new investors entering the sector, there are good deals to be had while sharing and reducing funding risks."
Ken Hayes, Executive Director, Cleantech Open Accelerator
“As Angel investors, we make long term bets. 2020 gave us a taste of a future dominated by global challenges to human health, making HealthTech a predictable area of focus. Those who prefer a road less traveled would do well to look at "DisasterTech" like Perimeter.com - but do it soon before the road is washed away by another ‘once in a century’ flood.”
David Fox, Angel Investor
“One of the psychological impacts of the pandemic has been a realization that working for yourself may be more secure than a job. B2B sales is now highly accelerated as Zoom calls replace business travel. The cost of creating new MVP’s is the lowest it has ever been. Older Gen Z’ers are entering prime entrepreneurial years in a perfect storm of low-costs, massive displacement of traditional processes, and accelerating information flow. Piles of capital are being thrown at them and society is going to benefit.”
Darren Kelly, CFA, Founding Partner Southern Sun Angel Capital
“Angel Investment serves a very important role for startups between Friends and Family and VCs, so it is vital that it remained healthy in 2020 and looks to continue to grow in 2021. Fueling the interest in Angel Investing from a social standpoint is the total shake-up that the pandemic has brought, leading to awareness of new problems along with creativity and openness to new solutions. Additionally Covid has altered the criteria investors use to assess potential investments in physical product companies, increasing the importance of how founders handle supply chain and marketing challenges as well as entrepreneurs' emotional intelligence regarding their treatment of employees and customers.”
Madalyn Friedman, Astia Angels Member & Advisor, Consumer Products Consultant
"We expect 2021 to be a tremendous year for angel and seed stage investing. Innovation is being embraced at extraordinary rates across almost all sectors and especially in those that are receiving positive tailwinds from COVID-19. Companies in areas such as healthtech, fintech, ecommerce and on demand delivery/logistics have been doing very well and will continue to do so next year. In addition, there will be tremendous opportunities for companies that provide value propositions such as collaborative tools, software enabled workflow automation, API-enabled data efficiencies and AI. And there will also be meaningful opportunities to invest in companies that will cater to the re-opening of our economy post-vaccine."
Ullas Naik, Founder and General Partner, Streamlined Ventures
“It is far easier to predict the coming decade than the coming year. I see two big trends coming in the 2020s. The first is far more seed funds, especially revolving funds and online-run syndicates. The second is a wave of investor training, in a new form that feels like an accelerator, rather than the traditional learn-as-you-go we've seen at Angel groups for decades past. “
Luni Libes, Founder & Managing Director of Fledge
“Rolling funds and solo capitalists made a splash in 2020. We're also seeing more tools for founders to identify and meet investors digitally. All of this will continue to accelerate funding at the early stages."
Miles Lasater, Founding Partner, Purpose Built Ventures
“SPACs – special purpose acquisition companies – will provide a path for earlier liquidity to angels and VCs than presently available through bulge bracket investment bank IPOs. This faster liquidity will in turn encourage more angel investing.”
Alan Fisher, Investor, Sand Hill Angels