One of the highlights of our anniversary celebrations back in April was the panel discussion about future trends in startup and angel investing together with leading angel investor groups and organisations.

As angel investing is becoming more accessible to people and is seen more as a developed and matured investment segment, those who can predict the trends accurately will have a significant advantage in building successful early-stage investment networks. During the webinar, we heard angel group managers share their thoughts on what challenges they face, how the members’ expectations and network managers’ roles evolve over time, and how the angel community can remain competitive in the changing ecosystem.

This very insightful session was moderated by Jan Debets (Head of Operations, Business Angels Europe) and we summarized the key points for this post. If you would like to see the full webinar recording please follow this link.

For a warm-up, we asked our panellists what trends do they see in angel investing and what does this mean for the ecosystem and angel group management in particular? Also, how do they feel about these latest trends and how does it impact them personally?

Kate Tomen - Vice President, Angel Investors Ontario (Canada): Our groups are moving towards the new technologies that are being applied, for example, in law or HR. We see a lot of healthcare and MedTech deals as well. At the same time, the groups are getting younger — more entrepreneurs make exits and join their local angel groups to give back. They want more transparency and to feel like part of the process. By adopting proper tools, Canadian investors now have greater access to deals across Canada and have more insight into what's going on in their groups.

Jeffrey Lang - Board Chairman, Desert Angels (USA): Our average member's age was 62, and now it is 40-45 years. Their energy and technical awareness give both opportunity and challenge for us as an angel organisation. These new members can provide value to the funnel management process, particularly where they can bring their subject matter expertise, which is much more current, to bear on the screening and diligence processes.

The challenge is that sometimes it takes younger members time to appreciate that they are no longer the king of the hill as they were within their successful businesses. Instead, they need to learn that they are among experienced peers and they have a role to play in the organisation.

Jacopo Losso - Director of Secretariat, EBAN: 2021, compared to pre-pandemic years, was a record year in the amount of investment by the VCs and private startup investors. This is more noticeable in specific continents such as Africa and Latin America, with lower pre-pandemic investment activity.

India had about 40 unicorns in the past year. I think that alone can show how quickly entrepreneurship is rising in many parts of the developing world. The VC industry in India is relatively new with mainly foreign investors and many exciting companies that can deliver growth. They have more than a billion citizens but only about 7000 angel investors — this is a small portion of the people that have the resources to start investing. The same is happening on the African continent.

In Europe and North America, 2021 was also a solid year for startups and investors compared to pre-pandemic. The established markets have a lot of seed-stage deal competition, and we expect it to grow. Angel investors are starting to compete with the VC industry, not to mention crowdfunding platforms or family offices that invest relatively early in the startup's lifecycle.

Reginald Vossen - General Manager, BAN Flanders (Belgium): We see more angels joining networks, but many people also like to invest directly through crowdfunding. The search for direct impact and return has resulted in people investing with more prominent tickets. The biggest challenge for entrepreneurs right now is to find real business angels.

Business angel networks have a growing role because they provide the necessary structure, social control, education, and personal guidance to entrepreneurs and business angels, helping angels and entrepreneurs to go from match to deal.

Networks need to propose themselves as the right place for individual business angels to learn more about investing and start doing this professionally, not to ruin the good name business angels have in Europe and North America. The role of a network is getting more critical, elaborating possibilities to bring new opportunities in syndication. We have to deploy all our possibilities to be sustainable and relevant in the future.

The Challenges

Let’s continue to dig deeper into the challenges that the changing world brings along. How can angel groups remain competitive and get the best deals and the best deal flow? What are their advantages against the competing capital?

Reginald: We need a clear definition of the business angel role. We have been building the business angels' image in Europe for over 20 years, which newcomers now challenge. It's easy to use a good brand to promote yourself. We need to crystallise what we can offer.

For me, an angel still comes with two wings. It's not only about money but also about the know-how and returns from capital gain. Newcomers have different stands in this — they are more like an investment boutique or act as consultants. We don't need to compete with the new players. Instead, we need to combine the best of both worlds, similarly to when crowdfunding platforms came to play.

Jeffrey: Friends and family who invest are usually unable to fund the following capital call. This is where angels most often enter the picture. However, in the startup investment space, the separation between where angels and where VCs enter is becoming much more cloudy. We have too much capital chasing too few genuinely qualified opportunities.

An angel investor represents sufficient capital at the right time; this capital can also come from micro VCs. But the most significant difference between angels and VCs is that the angel investor brings not only the ability to write the check, they also bring subject matter expertise together with capital contribution without additional cost. This is critical at the early stage because every dollar they don't have to spend on advice can go directly into making their MVP or their go-to-market strategy come to fruition.

The VCs can undoubtedly provide the capital but at a much higher equity ownership cost. The VCs will only affect business efforts, which the founders can find distracting or interfering with the direction they want to go.

The cooperation and integration of those multiple funding sources become critical to the long-term success of the startup as it moves to the next stage. Credibility is gained at each stage by the entity.

Jacopo: Both the pandemic and the Ukrainian war have been a big shock for investors. A lot of their wealth is probably going in a negative direction, which, for some investors, means pulling the handbrake. To quote a serial entrepreneur — crises are the alarm clocks of entrepreneurs, the moments where innovation happens and the companies of tomorrow are born.

Within a year, we start to see a lot of fundraising from new companies servicing the new world with a new approach. You always see a drop in the market followed by a pretty strong recovery in the following months. We saw it in 2021 and 2007-2009. When the big financial crisis started, it was followed by rapid growth in the VC and then the angel market in 2009.

Kate: I think it’s worth pointing out that there's lots of research and data to show that teams with female or minority background founders outperform their male or primarily white counterparts. That comes with confronting your own unconscious biases. Our angel groups are learning and seeing lots of interesting deals among female founders, black, or immigrant founders.

As the groups grow younger, they want to see more diverse founders. Also, there is the trend of doing social good while still making money. Some may still think it's a charity, but over the past two years, those companies have also made a good return for their investors.

The Future

The challenges always bring new opportunities. What are your thoughts on the direction angel investing is heading? Where should we be going and which routes should we avoid? What will the future look like in your mind, who will be the winners and who will lose?

Kate: We're working on programs to speed up the investment process. Collaboration and syndication tools become ever so important and add a wonderful layer of transparency for everyone. The group members can see what deals didn't move on to an investment meeting. If I'm an investor interested in cleantech, I can go into Dealum and see all the cleantech deals in Canada.

Jacopo: Speed of deal execution is also becoming increasingly more important and angel networks could improve this a lot. The founder will prefer the quicker investor. The endorsement here has to go to the Dealum, which makes the whole syndication process a lot more efficient! This can reduce funding time and make the entrepreneurs receive the money they need in a relatively quick timeframe.  

Also, maintaining modern approaches to finding and sharing deals and closing the investment efficiently will become one of the significant factors that set apart those who survive.

Jeffrey: As said earlier, an abundance of capital in the market is chasing too few well-qualified deals. This trend manifests itself in extensive pre-money valuations and as a result, it has the potential for three issues associated with it.

  1. The deal will never get off the ground because the cost is too high given the development stage of the offering business.
  2. The deal will either fail or not raise the next round, as they will not be able to justify an even higher next round valuation. Or worse, they may need to make an offering in a down round where the valuation has gone down, disappointing their original investors.
  3. They can also fail to produce a meaningful return on investment with the entry cost being priced subject to an excessive valuation.

To turn this around we need to restore the sensible valuations when we realise the failure. It may not help the business that started the angel round with a higher valuation, but it will adjust expectations in the future.

We're being much more assertive in declining when the pre-money valuation is too high. This allows us to gain traction for investment interest and advise the entrepreneur on how to achieve the valuation they are claiming. Angels bring the value of their mentorship and experience, allowing the company to grow to the point where it can justify a higher valuation.

Reginald: Many newcomers are small ticket investors who care less about return because some tax break regulation already incentivises them. The significant return is already done by investing. There is competition with players who agree on a lower valuation. We lose a lot of deals as we see this happening towards smaller ticket investors.

There will be a shift in the entrepreneurs' willingness to allow business angels to interfere with the management. We have to take care not to be seen as the greedy guys who want to grab positions in the companies.

Networks need to work on the speed of processes. We have platforms like Dealum, which can help us present the deal to investors in a structured way. When you put all the documents on the table, you can agree or not agree much faster.

Having good angels in your network supports cross-border investments within groups. If we want angels in our networks, we need to give them access to the best deals in their sector. The time when angels only invest locally or were sector agnostic is gone. Dealum brings entrepreneurs to angel groups interested in their sector, having relevant expertise, and getting cross-border investments done. We can differ from other investors by being able to deliver the follow-on rounds as well.

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Dealum is excited to see angel investing maturing and getting more mainstream with more angel investors from a variety of backgrounds. Although angel investing is facing competition from both crowd and venture capital, we strongly believe in the value angels can provide to the startup in addition to capital and aim to support the angel ecosystem with the best tools available. If you want to learn more, please head over to dealum.com for more information.