Are Individual Angel Investors Starting To Get Tapped Out?

I got the following question from a friend yesterday.

“I’ve had a few conversations recently about how individual seed investors are getting kind of tapped out – for a variety of reasons, but in general it’s not that easy to find people who are still actively investing. I don’t recall your having blogged about this – are you seeing it too? Lots of talk about Series A crunch but maybe there is a seed crunch too?” 

I blasted out a response by email, which follows. If you are an active angel, I’d love to hear what you think.

I’m not seeing much evidence of this – yet …

I have seen some of the more prolific angels start to slow down because capital is not recycling as fast as they are putting it out. That’s a pretty common phenomenon. But generally the pool of angel investors is increasing and the prolific ones who have a strategy (such as the angel strategy I advocate) seem to be keeping a steady pace.

There is also a huge amount of seed capital available from seed funds. Some angels are no longer competitive as they are overly price focused (e.g. if the valuation goes above $3m pre it’s too late for me). And the convertible note phenomenon hasn’t helped as many seed deals just keep raising small amounts of convertible debt.

The supply / demand imbalance is way off. While there is an increasing amount of seed capital / seed investors, the number of companies seeking seed investment has grown much faster in the last 24 months.

Also, I think some angels are just tired of the deal velocity. You have to work at it now more to stay in the flow because there’s just so much more of it, and that makes angels, especially semi-retired ones, tired.

If there is a big public market correction and angels feels (a) less wealthy and (b) less liquid (or not liquid), you’ll see a major pullback.

I feel like we are in a sloppy part of the cycle. Everyone is suddenly nervous. There are lots of uncomfortable macro signs, but it’s hard to get a feel for where things are really heading. And, at the same time, the cycle of innovation is intense – there is a huge amount of interesting stuff being created at all levels. And there is a massive amount of capital available that is seeking real returns, vs. low single digits.

  • Kensel Tracy

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  • Felix Dashevsky

    Brad, I identify the most with this paragraph: “…I think some angels are just tired of the deal velocity. You have to work at it now more to stay in the flow because there’s just so much more of it, and that makes angels […] tired.”

    While I joined in the initial excitement of AngelList clones, online investing, JOBS Act, syndicates, etc., it eventually overwhelmed me. I never made an investment in these forums other than FG Angels. It became too much to process for a part-time endeavor. I remain engaged with my “off-line,” traditionally sourced investments, but I noticed that I see less throughput in that path, as majority seems to be trying the “online” pathways.

    The rising valuations are not helping either, of course.

  • This is interesting. I think this discussion definitely needs to cover the role of syndicates, especially Angellist syndicates. Due to the (potential and emerging) power of syndicates, I forsee a day, not all that distant, when individual investors may be a quaint notion of the past, no longer practiced.

    • I disagree with that. If you work hard at it, an individual investor can have an outsize effect on the business at an early stage.

  • Well, I’ve done a little investing through the FG Angels syndicate. I’ve put in what I allocated now and I’m waiting for things to happen. I’m not so much tapped out as I am new to this and my strategy has been to put in a fixed amount and then see what happens to it. I’ve added pro rata to one and not to another.

  • josh

    good post brad

  • “And, at the same time, the cycle of innovation is intense – there is a huge amount of interesting stuff being created at all levels.”

    I am so fired up by the pace.

    This is one of those times (or THE time) when we are going to look back at a fundamental transformation of our existence. I’m certainly not the first to say this, but smart folks can go out today and use any number of machine learning platforms and start on concepts that will dramatically change how we live, communicate, and function throughout all components of society. I am more giddy now than I ever was in 98, 99, or 00 and that’s saying a lot for a 50 year old guy who started with a PET.

    • Wow Brad, I just read your Unicorpse post AFTER I submitted this comment:

      “I hope to live another 50 years as I think this is going to be the most interesting point in the history of our species up to this point.”

      Me too man.

    • Agree. I think the interesting thing is if you look at broad asset classes; real estate and private equity are dead. Want to buy the stock market here? very early stage VC is the best place to put money for growth.

  • Richard Ginsberg

    Brad, I think you hit the nail on the head. The deal velocity felt very high the last 18 months. Especially with startups having serial entrepreneurs (with proven exits), YC/Techstars graduates hitting ast or near 1m ARR and ex-Googlers and such with big ideas. I think a lot of angels who were pacing themselves with seed investments started firing on all cylinders. Given the likelihood of near term failures and 5-12 year exits for the winners, active Angels need a breather.

    Personally, im shifting towards mid to late stage now because I do feel that the economic cycle can change within the next 1-3 years (if it hasn’t already). If the rising tide goes away, there just won’t be enough runway for the great majority of the class of 2016-2018. Not to say there won’t be major disrupters conceived during the next down cycle (uber and airbnb being notable companies that had their genesis during the trough of the worst market conditions since the Great Depression).

  • I am seeing more deals, but with a variety of quality, more as party angel deals than handpicked with few participants.
    One thing I noticed is Silicon Valley deals expect higher valuations for no particular reasons. Same startup quality on East coast goes for 4-6M pre. In SV, they want 7-10M.

  • Funny that you write this today. I stepped off the board of Hyde Park Angels ( formally yesterday, but remain an active angel. For angel orgs, it’s important to constantly recruit new members, and cycle out the people that angel investing doesn’t fit with. I made a very short little speech last night and it’s amazing that we have overflow rooms for all our meetings now. When we started I had to beg borrow and steal to get people in the seats. Cool thing is when we started Chicago was a wasteland when it came to startups. Now, #7 in the world according to one study.

    Am I tired? Sure, parts of it tire me out. Perhaps I should do a blog post as a compliment to this blog.

    Angels do a lot of things, but the most important thing they can do is write checks, and do it with relative speed.

    I remember when another angel org in Chicago was starting up and a reporter called me to see what I thought-was I afraid of competition? I told her I was really happy and the more angels the better. I am happy to help anyone set up an angel organization anywhere. I have counseled 2 others and they are operating here.

    The toughest part of angel investing is a point you touched on. You get your losers early, and it’s taking longer and longer to get a return on capital. When you think about behavioral economic theory (how losses hurt more than winners and spotlight effects etc), that makes angel investing psychology really hard.

    In my case, I have been self employed since 1986. No source of income other than what I bring in. I have never had a management fee to support me. Every Jan 1, my income starts at 0 and it’s just as easy to go negative as is it is to go positive. Ask my tax person. Liquidity becomes a huge issue because unless I am bringing it in, it makes it a lot harder for checks to go out because it’s a straight ding on my assets.

    The environment totally changed since I started investing too. I recall investing in companies where we thought the exit would be at a valuation between $40-$80M. Companies are staying private longer and raising money at those kinds of valuations. I remember when a series A round was $1M at a $5M valuation!

    I have all the vibrancy and energy that I used to have. I still love it. I like to make connections and see little companies grow. It’s totally fun to be around people that are totally committed to trying to build something. I do a lot of stuff for people and companies I have never invested in. For example, I heard a pitch from a Chicago Tech Stars company that I wasn’t mentoring-called a friend that was a potential customer and made the introduction. Now that company has a chance at a customer. Man is that FUN!

    But, I am a lot more choosy with where money goes. That’s a function of the length of time for exits. You can see all my investments at, and I hope you can become a customer of one of them or introduce them to a customer.

  • It feels this way in the Valley, from what I’ve seen, though there’s a newer crop emerging within new liquid networks within YC, Facebook, etc.

  • Adam Quinton

    Thanks for this Brad. It is obviously hard to generalize across the 300,000+ angels in the US BUT my sense is the “tapped out” observation has something behind it. I was chatting with another “active” angel in NYC recently and we agreed that a) it was hard to identify who the truly active angels are and b) there seem to be folks who say they are active, speak on panels about investing etc but who are not writing checks. So my guess is that a non trivial proportion of the increase in angel numbers you referred to aren’t actually coming with many $$ attached. (Making life very confusing for founders of course.)

    On the check point – an additional factor you didn’t mention wrt the lack of recycling (ie exits) is the impact of follow ons. As a personal example I have written nine checks this year, so one a month on average. I assume that qualifies me as active? BUT only two of those have been for NEW companies. Seven have been for existing investees. More generally I am guessing that the lack of exits doesn’t just have an impact through recycling but also, as per my case, as a result of continued follow ons sucking oxygen out of the system for new entrants too.

    • There are always going to be a lot of pretenders.

      • You beat me to the punch. Always have and always will be. There also will be a ton that get out after getting their teeth kicked in. Always have and always will be for all parts of the entrepreneurial ecosystem. Been doing this since 1992. I have seen the beginning and end of three cycles. The number of people that I see today that I saw back then are very few.

  • Thought I’d add this to show what the economic impact of angel investing can mean. This is what HPA has done since April 2007.

  • Frank Wood

    To me this is more akin to a kid asking for ice cream.

    If the kid is one you like (superior leadership behind concept/idea) or

    If the kid has a great personality (it s just a great product/idea) the ice cream purchase is easy.

    If not … Well then it’s not.

  • Tony Spurlin

    This is both enlightening and confusing for me as an entrepreneur.

    We have a B2C SaaS ( terms I didn’t even know existed a year ago because I’m old school, I guess) startup we have bootstrapped to this point and have enough capital left to get it to market. Our plan has always been to get it in the hands of the customer, get revenue and profit, pouring it all back in the business to grow it organically from there (done that a few times before with mixed results). This would be qualified as a “lifestyle” business (another new term for me) because we have not considered our “exit strategy” to give any investors their ROI. Although our plan has been to earn enough profits and cash to actually give a return on the investment BEFORE it’s sold (old-school again, I know). Incidentally, we would not turn down an offer to buy the company at any point in the future, provided it had a significant multiple of our profits.

    Because I’m not a “tech” guy, we have had to get some sage advice from those that are in the industry (outside SV, as I’m in Las Vegas). This advice has included many who have told us we should raise a bunch of money (to accelerate our growth and cement our place in the market) , which I am finding to be more difficult that building the actual business, for many of the reasons described here. That’s the enlightening part – to know I’m not crazy and it is difficult for everyone, except the lucky few with connections or pedigree.

    The confusing part is our business model is a proven one, but we have been all about revenue and cash-flow, not hyper growth at the expense of profit and cash-flow (old-school, remember). I listened to Gimlet’s “Startup” podcast where Chris Sacca was disappointed that they reached cash-flow positive earlier that expected. His reasoning was that if you are cash-positive, you are not growing fast enough.

    Yet I see posts here exposing a problem that investors are being squeezed because there may not be enough good, solid businesses that have been invested in that are generating cash to give a return to the early stage investor, prior to an exit. However, Brad’s last sentence in this post is “And there is a massive amount of capital available that is seeking real returns, vs. low single digits.”

    My question for this group is: Should we adjust our model to include a bigger seed/angel raise to spend lots of money to get hyper growth (BTW, we would not need an additional round unless we forced more growth ILO profits and cash), or stick to our original plan and be a bit more conservative to make some real money more quickly? Which is best to get the attention of the right investor for us,? Either way, we stand a better chance of success with some investment.

    Any advice from this distinguished group is greatly appreciated!

    • Without really knowing your business any answer is suspect.

      In general BtoC is hard to get profitable because consumers don’t like paying with the exception of games.

      But remember this you will pay the money back in spades so if more money doesn’t equal more growth, you are screwed. If you spend a dollar and you can’t get that back in gross margin in a year or two you are screwed. If you can spend a dollar and get it back in gross margin in six months you should back up the truck.

      The easiest way to explain this is geographical, but there are other cases. Let’s say you proved your concept in Las Vegas, you know what it takes to launch and get to at least breakeven. Well you could go slow and go to LA, then Seattle, then NYC one at a time through profits. Or you could raise a ton of money and do ten at one time, then show traction and do the fifty biggest MSA’s.

      Another example would be advertising.

      If you don’t somebody can do it first.

      But first figure that out, and know that you can scale it not just hope it, or think well everybody else is raising money I should.

      Read Mark Suster’s Both Sides of the table post.

      And don’t kid yourself if you are new to this raising money is tough.

  • kevrmoore

    For me personally, the answer is yes. I think a liquidity chart mapping deal velocity to illiquidity duration would quantitatively support this hypothesis. I believe it was CB Insight’s research that illustrated that the average tech IPO takes +11 years since the first Internet bubble burst. And, the volume of IPOs is way down too – thanks Dodd-Frank. Meanwhile, we have entered the exponential curve of tech innovation. This is the greatest gold rush in history as virtually every industry is being disrupted by mobile, cloud, open source, and social media. Software is eating the world. The blue chip brands of tomorrow are startups today.

    I am not tapped out, but I am WAY over-allocated to venture relative to my initial angel budget. Yet, even in my nuclear scenario, I project a 6x return. I tell myself that it is time to slow down, but world-changing, once-in-a-lifetime opportunities keep presenting themselves. How do I stop?

    So, yes, I do believe that many active angels of this current boom are reaching saturation levels. However, I have seen an increase in Asian angels filling the gaps. And, if we see an increase in liquidity events or a few massive ones, like Uber or AirBnB, then there will be a flood of new capital. Think about all of those late-stage unicorns – over 100 of them – and how much illiquid angel capital is tied up in those companies. Participating in follow-on rounds requires Big Checks! In prior bull markets, that capital liquified much more quickly.

    Too illiquid to maintain pace vs too much generational opportunity to pass up! Angel conundrum indeed. Great topic, Brad.

  • Kiki Tidwell

    Good question. After many years of angel investing, and after having gone through the Kauffman
    Fellows training program of venture capital best practices, I found myself investing more in venture funds than direct angel investments. It is interesting that my venture fund investments have returned capital so much faster than my direct equity investments. It could be that vcs invest in companies that have more traction than at an angel stage, or that they get better deal flow, or that they are more focused on investing in companies that have a clear exit plan as their fund clock is ticking.
    But as I became more educated in private equity investing, it became clear to me that there is a basic problem with angel investing; an angel generally has few levers post-investment to protect one’s investment or to influence outcomes. Those who have the gold make the rules. Unless an angel only invests in ‘early exits’ companies with no venture capital money needed, generally there is a lot of gold pouring into a company in later rounds. An angel could have negotiated a great term sheet with carefully crafted protective rights and liquidation preferences, but all of those terms could be wiped out in a new round of financing, either through a pay to play, a recapitalization, or a simple renegotiation in order to secure the new money. An angel does not have large dollars for future rounds to dangle as a carrot in front of a company like a vc does. An angel may not have developed relationships with vcs to syndicate future rounds with. An angel generally does not get a board seat, or gets replaced on the board during subsequent rounds.

    This is why I am so excited by a new fund offering by Element8 Angels- it brilliantly resolves these issues for an angel by pooling angel money in a venture fund, with larger per-round investment dollars for a company, subsequent follow-on financings, and board seat representation. What is different however, is that the angels actively participate in selecting which companies to invest in. Fund investors who are members of the Element8 angel group will see the deal pitches, participate in the due diligence along with seasoned fund managers who are experienced vcs and angels, and vote as to which companies will be invested in. Through active participation, angels can actually earn carry from the fund as well.

    When I was on the board of Northwest Energy Angels for two years, I interviewed our members as to the reasons why they were in the group. Different angels have different motivations for angel investing; some angels are seriously looking for financial returns, others may just be observing for a bit in retirement years
    to see what this is all about, some may have community investment or other bigger picture double bottom line motivations (in our case, carbon reduction). An individual may not have much time to devote to vetting investments , or may not be all that experienced, and may appreciate a fund that aggregates collective wisdom and effort and gives them a chance for a diversified portfolio of investments, but also engages them in the original deal pitches at least. For those angels who really want to put effort in to influence outcomes (yes, Rob Wiltbank, I want to be one of those angels making mid 20’s IRRs by doing my due diligence and helping my portfolio companies reach their next milestones), this gives them a vehicle in which they
    have a greater chance of success beyond a one-off $25,000 angel investment.

    I am very motivated now to find the best deal flow to present at Element8 Angels (any clean tech deals, please send our way.) It helps me as an angel to have more of a structured deal flow process to receive and review company pitches rather than to meet with companies individually. For anyone who reaches out to me on Linked In, I refer them to submit to Element8 Angels.

    Although I have pulled back to one or two angel investments per year now, I have invested then in the first close of the Element8 Angel Fund. I am not one of the fund managers of the Element8 fund, but have invested alongside of the fund managers for many years (7 years a member of Northwest Energy
    Angels now Element8, investor in Susan Preston’s CalCEF Angel Fund) and respect their knowledge and experience, and know that they will provide professional oversight as these companies progress. Getting
    into these investments is the easy part. Staying on top of these companies and helping them get to exits is the challenging part. Maybe this is what a lot of angels have realized as well, and so have reduced their angel investing. This is a cleantech only fund, but maybe more angel groups will look to this model to re-engage their angels back into more angel investments.

    Finally, I have found the Seraf Investor angel portfolio management software to be invaluable.
    Beyond finally organizing all my investment data, conversions, options,and documents, the dashboard look at current value of my investments (updated by subsequent round pricing ) has been really interesting. Most of my companies have survived and increased in value (and 2 positive exits). There may be longer times to exit for my angel investments, but the overall portfolio is progressing. If I were a vc, I could be talking about portfolio returns to date. As an angel, I never counted chickens before exits. But this look at my portfolio is
    reinforcing to me and may be helpful for other angels as well.

  • Charlie Jackson

    I did a dozen angel deals in the past, but stopped making angel investments because of what the C round investors would do sometimes to the founders and seed investors.

    I was one of two seed investors in Wired magazine. There is a whole book written about that saga (Wired, A Romance by Gary Wolf) where we had to threaten to sue the C investors because of what they were trying to do.

    In another company, I was the sole seed investor and I mentored the founder (chair of the Board) through years of lean times. Later he raised money when it became possible. The first VC investor was great and we had a terrific board. The C round investor was crazy.

    He jettisoned the part of the business with paying subscribers, kicked out the founder (and I left). I told my wife that day, this company will fail, sorry, we’re going to lose our investment. Later, they did a pay-to-play cram down on us (I had never heard of it before), raised more money, burned $75M and finally had to file for bankruptcy.

    There are some very good VCs (and I know who they are), but there are too many bad actors and I will never again put myself in a position to be screwed over by them.