Angel and Seed Investing Outlook for Startups in 2016

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(Last Updated On: January 27, 2017)

The global public markets vent trough increased volatility in the first quarter of 2016 which had an effect on portfolio managers’ risk tolerance level. Because private and public markets are interconnected, the appetite for less risks spread all the way down like falling dominos to angel investors. If you are a startup founder, and looking to raise your first round, you should be aware of the dynamics in the financial market and how the changes affect your potential investors.

Public Markets

S&P Index from October 2015 till March 2016
S&P Index from October 2015 till March 2016

Global markets went entered a period of high volatility in December 2015 with a quick 10% drop. Overcorrection and overreaction spread trough the markets as every single macroeconomic indicator was scrutinized. Oil and the dollar tend to have an inverse relationship, with the dollar rising when oil falls and vice versa. Oil remains more than 60 per cent down, and the dollar more than 20 per cent up, from their levels of summer 2014 which is still a concern for USA energy sector. Chinese economy is always on everyone’s mind.

With global markets in a flux,Mark Suster, Venture Capital partner at Upfront Ventures and serial entrepreneur interviewed 73 Limited Partner firms about their financial outlook in January, 2016. The consensus was that everyone would take a break, watch and see what will happen to the market in general before making any investment moves. Over the last few years, a vast majority of venture capital funds have been poured into less risky later stage growth startups. Because of that, Mark predicted:

“Frankly, it’s really hard to write checks at later-stage valuations when you know you’ll have to exit into the public markets or sell to a public-market company one day and the stocks are declining precipitously.” — Mark Suster.

That was in January, 2106. Today it’s April, 2016. This three months gap gives an opportunity to view investment data and see what really happened.

Venture Capital Trends Q12016

The reality is that professional venture capital managers have continued to invest into later stage growth startups after taking a several months long pause. The amount of money raised has been steady, probably matching $37B raised in 2015, according to Pitchbook. Over the last several years, the number of startups that have received investment from angels has exploded because of proliferation of equity crowdfunding platforms and emergence of angel syndication. With that, professional money managers will have a healthy pool of startups to chose from going forward.

However, only the best startups will survive:

  • It takes more time to close a round; expect significant decrease in valuations.
  • Growth stage startups have to show stellar KPI
  • Frugal spending, operational efficiency and high profit margin are regaining importance
  • Angel investors are spooked; number of deals dropped by 30% in Q12016 reaching 2013 levels.
  • The number of early stage VC deals dropped 40% from 2014 peak.
  • It will be much harder to raise angel and seed round
U.S. angel/seed activity by quarter. Source: Pitchbook.com
U.S. angel/seed activity by quarter. Source: Pitchbook.com

 

 

3Q2016: Angel Investment Investment Trend in the US

As of 3Q2016, the investment in Seed stage startups continue to decrease, according to Pitchbook data report published on October 18th, 2016. Angel investors continue to be cautious, closing about 50% less deals compared to the peak in 2Q2015.

Angel & Seed activity in the US, 3Q2016
Angel & Seed activity in the US, 3Q2016

Angel Investment Round Crunch in 2016

Angel investors are busy individuals that invest their own money into startups they believe in. To ensure they will get their money worth one day, they always keep an eye on venture capital trends because that’s their exit strategy. However, closing on Series A or Series B taking more and more time even for the growth startups that have stellar KPIs and above average performance. For example, it took over six months of hard work to close Series D $30M for Invoca, an accomplished and successful startup that has developed a call analytics platform. At the time when investors are uncertain about 2016, leadership team of Invoca had to be make a decision to accept valuation that was less than they expected to be despite amazing business performance. The company grew the revenue by 51% in 2015 and was expecting the same in 2016; customer base grew by 20%, while overall profit margin improved significantly with a focus on lean spending.

Looking at professional investors, angel investors will use the same measurement metrics. Startups that can show above and beyond performance will always be able to attract investors. The problem that I frequently see working with startup founders is a lack of introspective. Early stage startup small teams rarely have time to keep an eye on competition and the current KPIs investors are looking for.

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Infographics: Global Q12016 Venture Capital Activity by Pitchbook
Infographics: Global Q12016 Venture Capital Activity by Pitchbook
About Dragana Mendel 85 Articles

Dragana Mendel is a President and Principal Consultant at ANAGARD, LLC. In her role, she provides management consulting services to small and medium size businesses on the best strategy to achieve their short and long term goals.