Angel Investing Isn't What It Used to Be --- The value of such deals in the U.S. fell 64% to $400 million in 2023 from 2015

"Angel investing, typically involving individuals making personal investments into nascent startups, has made for some of the most legendary startup bets in history -- think Peter Thiel's $500,000 check into the company then known as The Facebook in 2004.

But angel investing isn't what it used to be.

Just ask Ken Arnold, 73, who has lived through the changes. Arnold moved to San Francisco in 1995 and struck gold when four startups he had founded held initial public offerings or were acquired in the 1990s and 2010s. He used the proceeds to begin writing checks for startups in 2011.

At the time, people who were successful in the tech industry but weren't necessarily well-known figures could get into quality companies that hadn't yet attracted attention from investment firms, Arnold said. His investments included a $25,000 check and a subsequent $6,000 check he wrote a decade ago for semiconductor startup NextInput. The Mountain View, Calif.-based company was acquired by radio connectivity company Qorvo in 2021, which Arnold said allowed him to cash out his investment for several times what he put in.

But angel investing began to change about a decade ago, according to Arnold. Venture firms increasingly moved upstream to invest at the earliest stages, which elbowed out angels who had trouble keeping up with the larger round sizes. Tech giants' willingness to pump billions into young startups has further raised the ante.

In addition to having larger coffers than many angels, venture firms had another advantage: They could offer startups access to in-house company-building services such as consulting and sales introductions.

Arnold said he made his final new angel investments in 2019, though he occasionally writes follow-on checks for some of his existing portfolio companies.

"It became difficult to get access to the best deals, and I was only chasing second- and third-rate deals," Arnold said. "It's completely different -- angel investing became much less attractive."

The rules of the game have changed.

"VC has simply become more institutional," said Kyle Stanford, the lead U.S. venture-capital research analyst at analytics firm PitchBook Data. "Where direct dealmaking was easier in the past, the competitiveness in the early stages of VC is more than many angels are comfortable with."

New entrants to the asset class, such as hedge funds, have ratcheted up competition and valuations across all stages. More solo venture capitalists have raised money from institutional limited partners as opposed to investing their own money. Investors, wanting more bang for their buck, have started investing at venture's earliest stages. That has pushed some angels out of the game, Stanford said.

The value of angel dealmaking in the U.S. fell 64% from 2015 to $400 million last year and is on pace to drop by one-third this year, according to the latest report from PitchBook Data and trade group National Venture Capital Association.

Many angels have opted to become limited partners and invest in venture funds to diversify their bets, Stanford added.

Collecting data on angel deals is challenging given the informal and limited nature of many of the deals. But even if the data misses some deals, the long-term decline shows that the dynamics in the venture ecosystem have shifted.

To be sure, the well-connected tech elite can still get into today's hottest companies as angels. Venture capitalist Thiel helped get ChatGPT maker OpenAI off the ground with personal funding, and Facebook co-founder Dustin Moskovitz contributed early capital to AI company Anthropic.

Angel investor Dave Spector said he doesn't feel squeezed. The co-founder of biotech startup Nanotrace and a former partner at premier venture firm Sequoia Capital, he writes personal checks for startups, frequently between $25,000 and $50,000. While firms investing earlier may impact personal-check writers, he said he hasn't had trouble getting into elite startup rounds because of the operating experience he brings to the table.

"If you're a credible founder and prove to be value-add with your intros and ideas, most smart founders let these types in," Spector said.

Serial entrepreneur and investor Ali Partovi wrote angel checks for 20 years, including ones to vacation property rental company Airbnb, ride-hailing service Uber Technologies and online file-sharing company Dropbox, where a $50,000 investment he made with his brother in 2007 earned them $40 million roughly a decade later when the company held an IPO. He said the angel landscape has become a different ballgame.

The emergence of accelerator programs after the turn of the century helped introduce institutional capital, he said. These accelerators have since upped the amount they award participants, reducing their dependence on angels, Partovi said.

Above all, Partovi said, there is a premium on being a well-known entity with a platform.

"If somebody is just writing a check and doesn't bring any sort of name recognition or advice or network to the table, they might be less likely to get allocation," Partovi said. "Getting elbowed out is becoming more common for an angel investor, and for funds as well."" [1]

1. Angel Investing Isn't What It Used to Be --- The value of such deals in the U.S. fell 64% to $400 million in 2023 from 2015. Vartabedian, Marc.  Wall Street Journal, Eastern edition; New York, N.Y.. 22 Oct 2024: B.10.