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How the angel equity market is adapting and reacting to the current COVID-19 situation

As part of our angel focus week, Benjamin Storey, Funding Solutions and Business Insight Lead at Barclays Ventures, tells us about the angel equity market and how it’s adapting and reacting in the response to the coronavirus pandemic.

The ongoing coronavirus pandemic has impacted the equity capital markets over the last few months. While many deals which were close to completing in early spring may have now completed, many industry assessors are identifying a decrease in new equity investments. This probably comes as no surprise given Europe entered into lockdown in March and businesses had to pivot to continue – you can understand why investors may wish to bide their time to understand some of the unknowns and variables before committing their finite resource of capital.

In addition to this, if you consider that an angel takes on average around 20 weeks to complete an investment from first meeting to handing the money over, and the March lockdown happened around 15 weeks ago, you can understand how deals which were in transit were halted, and new deals would not have had the time or market conditions to progress.

On top of that, almost all economists have predicted a recession of varying lengths in the short-term. Recessions bring increased risk of business default, which often results in a tightening of spending. This applies as much to angel investors as it does to the companies and individuals that founders are trying to sell their products or services to.

What to look for

As well as the equity investment, founders seeking an angel’s support also often rely on the angel’s experience. Founders should seek an angel they can trust, work well with and should expect the angel to be involved for several years. An angel making a series of high-risk ‘bets’ while there are so many unknowns about markets and how they will look in the ‘new normal’ would be a red flag to founders seeking investment.

While other equity investors like VCs were able to benefit from the Future Fund to sure up their existing investments portfolio or dilute their risk on new investments, the government did not allow S/EIS investments through the Future Fund. This has meant that angels, if they need to reinvest in their portfolio businesses to keep them afloat, have to do so using their own capital. As a result, angels are likely to focus on ensuring their existing investments do no go bad before seeking new risky opportunities. It’s too early to tell what ramifications this will have on the earlier-stage businesses failure rate.
 

Investment rates have decreased but not stopped

So, are angels investing? The simple answer is yes. While investment rates have decreased, they are still indicative of traction in the investment market. I feel the next question shouldn’t be how much have rates declined, but why have they declined. Angels - like other equity investors - take high-risk investments and they often take plenty of them to diversify their risk. The generic profile of an equity investor is opportunistic and I am assured that investors are as keen today as they were before to see innovative, quality, scalable businesses. I therefore do not think that any decrease in investments is down to a change of attitude from the investors.

There are some obvious key physical limitations, which may have hindered the progression of investments. For context, angel investors invest their own hard-earned money and they invest in businesses when it is at its riskiest stage. Understandably, before investing, they want to be assured that the business exists, the product is as described, they want to meet and get to know and trust the management team. Due to the lockdown and social distancing, opportunities to do this have been limited. While some of these limitations have slowed the process, ingenuity has allowed angels to find ways to source deals using video conferencing. This has not only meant that founders seeking angels can start the process and start to ‘warm-up’ the route to investment, but it also allows investors to easily access founders much further afield than they are used to. What founders must do is be inventive in how they can provide and deliver their key business messaging and their pitch online rather than face-to-face.
 

Good opportunities are still there

The key take away messages are that angels are still investing and looking for good opportunities, founders need to adapt to use online communication to their advantage when demonstrating why angels should invest in their business, and finally founders need to be honest and realistic about their market prospects. Run the scenario analysis and triple check the predictions and numbers. No-one knows what the ‘new normal’ will look like and no-one knows if we go will go into a recession or how long it may last. If you are asking angels to part with their own hard-earned cash and take a risk on your idea, respect that they will not accept the pre-coronavirus and pre-recession business plans drawn up six months ago.

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