2020 has been a challenging year as coronavirus has caused a sudden fall in economic activity in many parts of the world; output is falling, and jobs are being lost. What has happened to the angel investment market under such economic uncertainties? Without any doubt, an economic contraction affects all industries negatively, however, data from the survey conducted by UKBBA tells a slightly different story.
By SAM KEISNER, Partner at Go10x Ventures
Angel activity is one of the key drivers of the UK economy by supporting SMEs and backing innovative ideas, movements and concepts. Thankfully, only a quarter of the investment activities from angel syndicates, networks and clubs have decreased so far since the beginning of the pandemic. This is a positive signal, showing that investors across the UK are continuing to support and invest in early stage businesses, even though there has been a fall in the average values of investments of around 8%. In our opinion, one of the reasons for this slight drop is that angel investing is a long-term strategy, investments aren’t expected to see returns until at least after 5 years, and with the pandemic ever present, there are plenty new opportunities arising, in particular in EdTech and HealthTech.
Unsurprisingly, the number of investments made has decreased and the reasons for this are multiple. On one hand, because of the current volatile situation, entrepreneurs are reluctant to proceed in uncharted waters which then results in a slowdown in deal flow; on the other hand, the economic uncertainty has affected angel’s investments capacities, as 55% of them expressed in UKBAA’s survey. Another important factor is that the many angel investors are currently focusing on supporting and investing in their own portfolio business, thereby diverting their attention, resources and capital towards other endeavours such as new investments.
According to our interviews with investors, professional angels are still looking for high-quality deal flow while others may have temporarily quit the market. Overall, half of the investors expressed they had increased their engagement with their investee portfolio businesses. The reason for this is that, particularly in these more challenging times, investors are required to support their portfolio companies and act ‘smart’. They typically have gone through previously challenging moments, such as the dot com bubble and the financial crisis, from which they have gained valuable experience and insights.
We understand that the current valuation of businesses is relatively low because of economic uncertainty. We also can see that angel investors have become more ‘cautious’ in picking up their new investments. This can act as a threat and as an opportunity. Before the pandemic, the main sectors of interest were Health Care, Software as a Service and Fintech. The pandemic has had a different impact on various sectors with Leisure, Hospitality, Tourism and Entertainment being amongst the worst hit. Other sectors, however, such as Healthcare, MedTech, EdTech, E-commerce and Gaming start-ups have increased their value exponentially.
In particular, angel investors based in Oxford and Cambridge have experienced a rise in their portfolio evaluation compared to London which was the hardest-hit city by Covid-19. Even in these uncertain times, there are entrepreneurs with creative ideas who require investment and it is certainly not the time to be scaling back on innovation. Thus, there is still room for growth in many startups which have a disruptive solution to problems or with a ‘pandemic purpose’, even though it may be hard to show traction as sales and customer acquisition are likely to fall.
It is also important to note that it can be difficult to source opportunities, as the social distancing rules limit the networking events in which entrepreneurs obtain exposure to angel investors. However as smart working will become the future trend, the means of submitting pitching decks will change, giving investors easy access to a full range of opportunities in less time.
It is certainly a difficult period for all of us, however, the low-interest rate environment and UK government supporting schemes can help to make investments in startups more attractive and help to keep the start-up ecosystem moving forward! Investing early stage has always been very risky and the impact of COVID-19 and lockdowns have led to higher failure rates and lower liquidity in the market. Consequently, investors are more risk-averse at the moment and would rather have some savings. This is fully understandable but there are also many solutions to this available on the market.
For example, we at Go10x Ventures aim to de-risk angel investments by pushing investments through a startup machine, taking in startups at an ideation stage and delivering seed-funded businesses with validated products and customers four months later. This kind of innovation is where the startup sector tends to perform well in times like this – we only need to look back at the 2008 financial crisis for the birth of unicorns such as Airbnb, Uber and WhatsApp!
To conclude, there are still many opportunities for startups in this current climate and certainly angel investors seeking out the opportunity to support those entrepreneurs. It is important to be careful in your daily-to-day life in order to protect your own health, but continue grinding and striving to work on projects that you care about and believe in – great opportunities are still in the air, you just have to catch them!
Read more in our Angel investing series.