As we begin to open up the UK, it’s a time look forward, but perhaps you will allow me a few words on the past year and what it has taught the angel and other related private company investment markets. Reflection is useful because it would be surprising if we did not see a tidal wave of entrepreneurship coated in angel and VC investment money as the economy recovers. What has gone wrong, but perhaps more about what has gone right, will give clues to creating a better investment environment for investors and entrepreneurs alike in the future. And of course, how we can make better returns, faster.
What are the main lessons of Covid19 that will help angels make more successful investments henceforth?
1. Look in the right direction for new investment opportunities. The excitement of the opportunity for deep tech – whether it’s around drug development, solutions that really will save the planet or travelling into space, the last year has taught us that the easy wins of SaaS model software and platforms may not be the only place to hunt for unicorns.
2. Perhaps it’s timing that matters, as much as the management team. Opportunities emerge faster than ever now. Of course, we need to do more to make brilliant management teams (and not just founders), but even more important is to be able to sprint at a moment’s notice and grasp the opportunity so that you can beat the competition to market dominance. Angels need to be able to fund fast if they are to catch the wind.
3. Investment due diligence should be much more efficient. Zoom has not just helped us keep business working but has also revealed that hours and weeks of due diligence can be synthesised. Every lawyer I speak to is working on angel deals. They can move fast too if required and, as more and more AI is introduced to the market, I see the learnings from Covid19 including a sense of impatience to get the deal and the growth done.
4. There is still no better way to invest as an angel than by hanging out with other angels BEFORE you invest. The solidarity of a cohesive investor group underpins successful investing – it’s what has enabled so many angel investments to be made in the last year, but perhaps we all need to think about how we will help new angels who are not yet connected into our ecosystem.
5. Suffering and seemingly insurmountable challenges bring out the best in entrepreneurs. Whilst wise advice and kind words help, sometimes being more generous with investment is the wisest contribution investors can really make.
6. The world is only a Zoom call away. For investee companies this means widening horizons to find more cost effective solutions to the problems they are addressing; for investors this means raising ones chin and increasing our field of vision so we can spot those more distant, but for that reason, more enticing opportunities.
And what will 2021/2 bring to the angel world.
1. The risk that the bubble grows before it bursts, continuing to tempt us into deals at far too high valuations. Whist the 2020 vintage may produce excellent returns, for the companies raising at higher valuations than their stage of development might merit, there is a real risk that positive returns will never be achieved when that all important M&A opportunity arises. We need to bear in mind that the majority of businesses will sell for £20m or lower, so toppy valuations which defy the fundamentals must be challenged. At the very least head for a convertible loan note structure if you can.
2. That wall of money which has been pushed by HM Government into the economy will create competition for investors. The VC market is awash with cash, crowdfunding will benefit from cash rich smaller investors and I would be surprised if our Government did not do something else to direct capital from its own or other multi £bn coffers towards the very companies angels most want to back (and where previously they were the only game in town). This sellers’ market could be around for a long time.
3. Saving the planet has become an essential consideration. Even if the deal is not “in” the environmental space, we will all feel increasing pressure to encourage (force?) all companies to be Net Zero friendly. In the environmental space solutions that can deliver scale solutions to Net Zero objectives will be attractive.
4. Some sub-sectors may suddenly run out of steam, so the clever angels will be backing core new technologies – mRNA tech rather than Covid vaccines for example. In healthcare, in particular, as AI and mRNA vaccines start to cure the previously incurable, the focus will shift from medicine to healthy ageing. As people need people, of whatever age, the money will be made in helping this theme rather than tech replacing people.
5. The population is growing; everyone needs lifelong education. I’m supporting EdTech.
6. The customer is smart. Costs are ever more visible. Egregious business models will fall out of fashion or get taxed!
7. A new investment structure will emerge. CLNs and SAFEs are now well understood. My money is on the re-emergence of “token-based” investment structures out of the crypto world (I don’t mean crypto currencies by the way). This will revolutionise investment as entrepreneurs and investors alike realign around this new choice in funding.
8. Investors will start to clamour for secondaries. This will force entrepreneurs to deliver value smarter and sooner so that sellers can make a return, whilst still leaving something on the plate for the buyers. Investor relations will become increasingly relevant if the founders want to hold onto control of not just the story, but also their business.
9. Angel investors will start to value their time better and possibly put a price on it. Founders take note!
Stay safe and see you soon. Are you coming along to any of our webinars as I would love to say hello. You might like to join us on 27 May at 5.30pm at Where Ed meets Tech for a catch up.
PS we are carrying more and more investment advertisements at www.fundingforentrepreneurs.co.uk. Maybe there is an opportunity you might be interested in?