During the COVID-19 pandemic, many experience angel investors advised business founders to keep a strict eye on their revenue pipeline, scrutinize their costs, hiring plans and other business plans. Over the past year, some seasoned investors have actively worked with investment groups to make investing a habit. While they are aware of concerns over the pandemic, they are taking the opportunity to enhance their portfolios as beginner investors sit on the sidelines.
While some angel investors may be wary of pouring their investments into companies, angel investing is sure to make a comeback with some changes as the pandemic winds down. Some angel investors, like Matthew Stafford, are continuing to invest as expected, funding one company for the third time and has completed due diligence on another.
But many entrepreneurs continue to seek angel investors. The Kauffman Foundation reported that a study led by William Kerr and Josh Lerner of Harvard and Antoinette Schoar from MIT, finds that angel investing significantly increased a startups’ chances of success. After receiving angel investments, these startups were 20 to 25% more likely to survive after four years and 16-19% were more likely to have grown to 75 employees.
However, despite last year’s funding ecosystem, large-scale foundational changes have begun to sweep the angel investing sector as a whole.
The Changing Landscape of Angel Investing
Data from Pitchbook shows that although systemic changes are taking place in angel investing, companies operated by women earned only 2.7% of the total capital invested in U.S. startups in 2019. As a result, nearly 97% of the capital went to men. However, McKinsey research finds that gender-diverse companies are 21% more likely to outperform their peers. Additionally, more research found that ethnically diverse companies outperform non-diverse companies by 35%.
As a result, a new trend in angel investing is to diversify their funds by investing in a wide variety of companies and directly investing in business owners with diverse silos. These silos are reflected in technology, green energy, real estate, life sciences and more. While traditional angels have previously focused more on one silo, the Angel Capital Association recently determined that the most successful angel portfolios are the ones that have investments in multiple silos and a wide range of territories, which then disperse funds across diverse founders.
As the world focuses more on diverse founders, investors should take advantage of this progress. Large angel investment groups like Keiretsu Forum, a global angel investor network with over 3,000 accredited members throughout 53 chapters on four continents, invested in over a dozen silos across the globe. The company is now leading the way for angels who are looking to invest in diverse startups.
Both traditional and new angel investors are now seeking to expand their portfolios across a wide range of sectors to support women and minority-owned startups.
Data also indicates that these investments amongst diverse founders can have a significant ROI. Willamette University research commissioned by The Angel Capital Association found that an angel portfolio of over 20 vetted deals has the strongest probability of optimal ROIs at over 2.5 times the return.
The New Wave in Angel Investment
As angel investing starts to change, more women are entering the industry as founders and investors; 22% of angel funders are now women and it continues to grow. Female-led startups are proving to be successful, too — even more so than traditionally funded ones. As female investors are expanding into the industry, they provide more opportunities for female entrepreneurs looking to build a start-up. Recent data shows that in 2018 women angels represented 29.5% of the sector, increasing from 19.5% the previous year.
Another study from Women’s Business Enterprise National Council shows that women of color made up 47% of all women-owned businesses in the country and further employed 2.2 million people and generated $386.6 billion. Altogether, companies backed by women of color grew by 163% between 2007 and 2018.
There is also a dedicated focus on bringing more diverse businesses and investors together. Social Capital Markets (SOCAP) hosts an annual conference that brings together male and female founders and investors from across the globe. The organization offers female social entrepreneurs, founders and investors with a platform for sharing and gaining experience while connecting with female investors and entrepreneurs.
As the angel investment community grows, entrepreneurs in diverse industries will see opportunities while also providing better success rates for investors. It’s a win-win for anyone starting a company and higher returns mean more access to money. As these changes take hold, the makeup of angel investors will become more diverse, which will result in more support for minority founders and businesses. Additionally, a diverse range of angel investors can help find ways to meet diverse investment needs. As angel investment focuses more on diversity, it will also seek growth in innovation.
While finding the right angel investor may still be a challenging process for some founders, with more investors looking for diverse ideas and talent, the hardest part of the process might just be finding the right investor for your company. Now, more investors and founders have a chance of succeeding and launching their startups as the angel investment industry expands.