7 Key Takeaways on Startup Funding from a Big Angel Group Report

Tech Coast Angels in an angel investment group based in Los Angeles. With 410 angel investors across 5 separate chapters, the group is one of the largest and most active angel investment groups in the country. I’ve been a member since 2010 and am on the executive committee of the LA chapter.

Thanks to the efforts of John Harbison, the group puts out an annual report with incredibly useful data that highlights the status of angel investment every year. The full report for 2022 is available here, but I’ve summarized the points most interesting to founders and investors.

TCA 2022 Investments

• In 2022, the group invested $15.4 million in 41 startups. Twenty of those investments were follow-on rounds in existing portfolio companies, and 21 were new investments.
• Of the $15.4 million in investment, $5.2 million came from group funds (4 chapters have member funds that pool investments) while $10.2M was from direct investments by members.

Takeaway for everyone: Despite the slowing economy and challenges for late-stage startup investing, 2022 was a record year for angel investments.

Takeaway for founders: When you’re pitching to angel groups, know who you’re pitching to. Is it a fund with pooled assets, is it a collection of individuals who make their own investments, or is it a hybrid of both? Even within TCA, the different chapters operate differently.

TCA-LA is a good example of the hybrid model. When you pitch to us, you’re pitching for investment both from our fund and individuals. We have a $3M fund pooling member investments that typically invests $300K in 10 startups over the year before opening the next fund. When you pitch to us, you’re pitching both for investment from the fund, and for investment from individuals in the group.

Investment Results

• The group had a record 13 exits in 2022, including 5 with multiples between 10x and 34x.
• Investor returns since inception averaged an impressive IRR of 25.2%
• Only 3 exits out of 526 investments accounted for 74% of returns (based on the previous year’s data).

Takeaway for investors: 2022 was a great year to be an angel investor, at least the first half of the year. This is likely to be a peak for a while.

Takeaway for both investors and founders: To get a good return from angel investing, you have to hit that homerun — the 1 investment out of 100 with a 100x return. So angel investors have to look for that needle in a haystack with huge upside potential rather than merely really great businesses.

Note: take the 25% IRR with a grain of salt. Funds with money in and out are easy to calculate IRR. Angel groups where individuals invest on their own without centralized reporting creates analysis problems. If you want to know what to expect as an investor, my personal portfolio analysis may be more indicative. My own IRR has been 7.2%.

Angel Investments by Sector

• Life sciences was the largest sector, accounting for 54% of the investments and 41% of the dollars invested.
• Software was second with 22% of investments and 37% of dollars.
• Everything else was 24% of investments and 22% of dollars invested.

Takeaway for founders: Software, which traditionally has been the largest sector for early-stage venture investment has been overtaken by life sciences.

Together, software and life sciences account for 75% of investment. If you’re in those sectors, great, angels are looking to invest. If not, you’ll have to work extra hard to convince angels that there is a big enough market, competitive moats, and high-multiple exits to provide the potential for a 100x return.

Angel Investment Time Horizons

• Of the total portfolio of 526 investments since 1997, there have been 106 exits, 141 shutdowns, and 279 companies still active. However, many of the exits have been at multiples of 1.0 or less, so not all exits are investment successes.
• Shutdowns typically come in years 2–5. Successful exits long. The most successful exits take 5–15 years.
• It takes 5 years to get your money back, 11 years for a 4x return, and 15 years to get to a 6x return.

Takeaway for investors: Angel investing can have great returns, but they take a long, long time. Be prepared to wait.

Geographic Mix

TCA was founded for angels in Los Angeles to invest in startups in the local ecosystem. Most regions have similar angel groups focused on their communities.

Pre-pandemic, screenings were in-person. Nearly all the investments were in local startups, with a small amount of syndication from other groups.

Now, most screenings are on zoom or hybrid, and we’re able to hear pitches from across the country, or occasionally across the world.

Last year, 57% of our investments were in startups outside our home territory.

Takeaway for founders: You used to have to start with your local angel group and ask for syndication. Now you can apply to angel groups anywhere. Still, be prepared to answer the question: why are you applying to us?

We’re not just investors. We want to be involved with the startups and in many cases, have one of our members on the board. It helps to have a good reason why you’re applying to a particular group. A referral from a member or a mentor is sufficient justification.

Startup Stage

• 45% of investments were in pre-revenue startups

Takeaway for founders: For all those pre-revenue startups looking for investment to build their products and get to market, this statistic is very encouraging.

Unfortunately, I think it’s also highly misleading. 54% of investments were in life science startups where the key milestones are around FDA approval rather than customer traction. I suspect almost all of those pre-revenue investments were in life sciences startups.

From my experience, if you’re not in life sciences, angels typically invest at the stage where there is initial customer revenue. Despite the myth, it’s tough to get angels looking for financial returns to invest pre-revenue.

Valuation Trends

• Median valuation increased from $4.5M in 2017 to $6M in 2018, to $8M in 2021 to $10M in 2022.
• The median valuation on new investments shot up to over $12M.

Takeaway for founders: angel groups have traditionally invested in early-stage companies with a valuation in the $6M — $8M range. The beginning of 2022 was something of a bubble.

2022 was a weird year. The first half of the year had absurd valuations in hot new startups. The second half of the year was dominated by follow-on investments in struggling portfolio companies at low valuations. So we ended up with the strange situation where new investments had higher valuations than follow-ons.

Author: DC Palter