Monday, July 16, 2012

Angel Groups Panning for Gold

ProfessorVC just returned from an Alaskan vacation and was mortified to realize it was almost six months since the last blog post. One of our stops was in Skagway, which became the biggest city in Alaska during the Klondike Gold Rush.  Most of the prospectors came up empty and of those who did strike gold, most lost their new found wealth through bad investments or dealings with swindlers. This got me thinking about the "suckers bet" of angel investing and how most don't strike gold for a variety of reasons.  Interesting enough, it was an entrepreneur (John Nordstrom) who was able to get out of town with his gold and opened a little shoe store in Seattle.
Earlier this year, I left Sand Hill Angels, the angel group I was actively involved with since 2005.  I've been meaning to share my thoughts about angel groups and will do so in an upcoming post.  In the meantime, I ran across the recent Halo Report on angel group investing prepared by Silicon Valley Bank.

 Some of the nuggets from the report are summarized in the infographic below.

A few of my takeaways:

  • Interesting that 81% of deals completed outside of California.  This compares with less than 50% of venture deals being outside of California.  I would guess that overall angel investments are greater than 50% in California, which means that angel groups are active in areas where VCs and individual angels are not.  With deal velocity so great in Silicon Valley along with the large numbers of experienced entrepreneurs and investors, there is little need to associate with an angel group.
  • Median pre-money valuation of $2.5 million also indicates a majority of deals being done outside of California, where I would guess the median is closer to $3.5M.  There are a number of reasons for the premium, not the least is the cost of engineering talent.
  • Internet dominates total deals while Healthcare received the largest share of funding.  If you add mobile, ratio is greater than 2:1 on deal basis and a little higher on funding.  With the low cost of creating these companies, they are a good fit for angel groups that can move quickly, make a number of bets and have the ability to follow-on.  Healthcare (primarily medical device companies) are very well suited for angel investments.  At Sand Hill Angels, we invested in a number of these medical device companies that had serial entrepreneurs, patents filed, low valuations, and clear paths to exit.  The investment thesis made sense from both sides as funding could get to (or though FDA) and requirement for further funding was low.