Paul Holland
“The louder he talked of his honor, the faster we counted our spoons.” That’s how Ralph Waldo Emerson described his distrust of a certain type of “private adventurer.” I think of that whenever I hear that angel investors will do more and bigger deals next year than they did last year. Not because I don’t believe it, but precisely because I do.
It comes down to this: The more angels invest, the more I grow suspect.
In other words, at times during the business cycle when angel investing becomes especially robust, it tends to serve as a harbinger of market decline. That has been my experience over my 31 years — and five distinct cycles — observing the windfalls and downfalls of Silicon Valley’s private adventurers.
The present moment certainly has the appearance of an angel-inspired windfall. Since 2011, the size of the average angel round has grown 60 percent, and pre-money valuations have grown 20 percent. We’re seeing the broadest and deepest participation we’ve ever seen in Silicon Valley from angel investors, seed syndicates and other groups of individual investors infusing companies with larger and larger rounds.
In 2014, angels invested a total of $24.1 billion. These investments are, of course, risky — which is why they rarely account for more than 10 percent of an angel’s portfolio. They’re also something of a discretionary investment, so an angel’s appetite and available liquidity tends to evaporate in the heat of uncertain market conditions.
In some sense, the sine curve tracking the rise and fall of the angel cycle tends to follow behind the sine curve tracking the rise and fall of the broader business cycle. When angel investing begins to peak, it can be a sign that the rest of the startup investment market is undergoing a more fundamental shift.
Bill Gurley seems to believe that’s happening now. He tweeted, “we may be nearing the end of a cycle where growth is valued more than profitability.” Whether or not he’s right about the nature of the shift that’s underway, once it fully takes hold, angels are likely to become dramatically more cautious. Some will wait for the ground to solidify. Many will cut their losses and get out of the market entirely.
So if you’re an entrepreneur, know that the best day to raise angel funding is today. The next best day is tomorrow. And so on. Raise what you can now, because when the business cycle changes, the angels will return to heaven.
In good times, it’s easy to forget that the business cycle is, indeed, a cycle. There are ups and downs. We’re not immune. Nor are we immune to macro events, either.
In the early 1980s, while many other investor categories persevered through the famine of recession, the angels went back to heaven. Then the birth of the personal computer, and record high job and real estate markets in San Francisco, heralded their return.
Then came the recession in the early 1990s. Again, they left — for a time. After a few years, the “Band of Angels” with “Dollars from Heaven” came back faster and stronger. An entire angel ecosystem rapidly expanded as the dot-com bubble grew.
In 1999, I had been leading a $2 million investment alongside 15 fellow angels from my network. But after the bubble burst in 2000, not one of them was still in the game. I hardly need mention the investment failed.
Of course, as the market started to pick back up, some of my fellow angels and I came back down from heaven. And then in 2007, the real recession arrived.
Today, we’re nine years into a bull market. We can’t know how long it will stay, but we know from past experience that it’s not here to stay forever. And when it does go away, everything in my experience tells me that some angel investors will stick around and many will scatter.
Some say that won’t happen. After all, angels are better entrenched today than ever before. They’re getting better follow-on rates. They’re better organized — with hundreds of angel associations. With all that new structural support, this investor class just might be prepared to weather instability.
I’m skeptical. History tells a much different story. In every down cycle, we’ve seen angel investors all but disappear. And before every peak, we’ve seen them out in droves — just as we’re seeing today.
If soothsayers like Bill Gurley are right, the cycle is changing and heaven is about to get a bit more crowded. If you’re like me, you’ve already started counting your spoons.
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