ELIAN D. ALVAREZ

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Angels going back to heaven

Dec
22

The global market is at its all times high and businesses are getting investments in abundance.

Angel investments have also stepped up their game. In the past few years, a number of deals took place where the investments from angel investors flooded in, for example, Reid Hoffman, who made an investment in Facebook and Flickr, whereas, Chris Sacca invested in Instagram and Twitter. You would find so many names behind the companies who made it big in a short period of time, such as Friendster, Yelp, Twitter, etc.

 

Business Cycles leading the Angel Cycle

Most of the startups in the tech-industry have been backed by contributions made by angel investors, but the question is:

How long will it last?

This question has been brewing for quite some time, and there is a reason behind it.

If you take a look at past three decades, you will find out that angel cycle followed the same pattern as a business cycle. With the boom and bust experienced by the business cycle, angels took exits and departed to safe haven from time to time. There has been a total of five distinct cycles over a period of the last thirty-one years, depicting the rise and fall of silicon valley’s angel investors.

The sine curve that keeps track of fluctuations in the angel cycle typically follows the sine curve that keeps track of ups and down in a wider business cycle. It shows that as angel investing begins to rise up, the remaining startup investment market would be going through a radical shift.

 

Rise of Angels in Past 5 Years

For the past six years, the size of an average investment made by angels grew almost sixty percent, and pre-money valuation has shown a growth of around twenty percent.

Angels have invested heavily in the valley, wherein, different groups of angels have infused a lot of cash as the rounds got bigger and bigger each time. For example, two years ago in 2014, an investment of more than $24 billion was made by angel investors.

As they were risky investments, they hardly took into account more than 10 percent of an angel’s portfolio. Most of these investment decisions were discretionary; this is the reason why appetite of these investors and available funds got exhausted due to uncertain market conditions.

 

If the Cycle is about to Mature?

As predicted by Bill Gurley, a venture capitalist in the Silicon Valley, the cycle is about to reach its maturity growth is given more value as compared to making profits. Regardless of whether it is happening, when it eventually happens, angel investors will become more cautious, wherein, some of them would wait for the market to go back to where it was prior to the fall, while others would simply pack up and leave.

 

History Repeats Itself

If you look back in the past, angel investors flee from the recession that occurred in the beginning of 1980s, only to enter the market again with the introduction of PCs and record high job opportunities coupled with the surge in the real estate market in San Francisco. Another downfall of angel cycle was observed with the economic recession of the 90s, as they made an even dramatic comeback later on with the growth of the dot – com bubble. Right after the bubble was burst in 2000, not only did they leave the tables once again, the investments turned out to be a failure as well.

They made another comeback after that, but escaped to safe havens when the real recession hit the market in 2007. Since then, the industry has experienced bullish trends, but no one knows when it will come to an end. However, the only certainty on the basis of past events is that it will come to an end.

 

If Time for Startups is Now?

If you have a startup company or planning to raise capital for funding your idea, it is better to raise capital now. Try to attract as much funds today as you can, while the market is experiencing a boom, because when the business cycle takes a shift, angels will take a step back. In times of good market conditions, business cycles are considered perpetual. What businesses tend to forget is, it is a cycle that goes through a series of surges and plunges. The global economy is not immune to the unavoidable macro events, as their occurrence gradually causes the shift in business cycles.

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