COVID-19 rattled the financial markets and made investors skittish.
While the markets have come back somewhat, raising capital through angel investors — aka high-net worth individuals — will be challenging.
In fact, the negative impact on angel investing could be similar to the post-2000 dot com decline and the 2008-09 recession, according to the Center for Venture Research at the University of New Hampshire.
“These people are high-net worth individuals and they have money undoubtedly in the public equity markets and probably lost 20% to 30% of their net worth like everyone else when COVID hit,” says center director Jeffrey Sohl.
While they have made some of that back, they will likely still be skittish, he says.
Looking back historically, during the Great Recession of 2008-09, the angel market experienced a two-year decline in total dollars invested with the steepest decline, more than 26%, from 2007 to 2008, according to an analysis by the center.
It’s not clear how long COVID-19’s impact will last, but even before COVID-19 the angel investment market had been showing signs of an adjustment, says Sohl, pointing to key metrics like angel yield rate (the percentage of investment opportunities brought to the attention of investors that result in an investment).
In 2019, the angel yield rate was 30.7% vs. 17.2% the first half of 2018. While a high yield rate is encouraging for entrepreneurs, historically yield rates above 25% haven’t been sustainable over the longer term, says Sohl. Also valuations in 2019 rose to $4 million, a 38% increase from 2018.
Still, 2019 saw total angel investments nationally reach $23.9 billion, an increase of 3.2% over 2018. But the number of investments decreased roughly by the same amount (3.6%) resulting in a larger deal size, says Sohl.
While 2020 will prove more challenging, locally, the coronavirus may actually spur new innovations that could be attractive to angels, says Michael Faltischek, a founding partner at Ruskin Moscou Faltischek PC in Uniondale and past board chairman of the Long Island Angel Network (LIAN).
Long Island has a history of innovation and those that may become unemployed from the virus may come up with new businesses and technologies, he says.
Undoubtedly, angels will be cautious, but are still looking for attractive investments, says Faltischek, noting LIAN members made an $8-million investment in a tech-oriented HVAC company last year and “we’re still meeting and seeing new opportunities.”
Neil Kaufman, managing partner at Kaufman & Associates LLC in Hauppauge and chairman emeritus of the Long Island Capital Alliance (LICA), which holds quarterly investor forums and educational events, agrees noting, “its going to be more difficult, but not impossible.”
Some companies will be impacted much less than others depending upon their industry, says Bob Brill, an angel investor and LIAN board member.
He personally is going to be “relatively conservative" and support existing investments in his portfolio rather than take on new ones.
Brill’s also an investor, co-founder and chairman of Qunnect, a quantum communications device company spun off from Professor Eden Figueroa’s quantum physics lab at Stony Brook University.
The firm raised $800K in angel financing late last year along with other funding including a $1.5-million U.S. Department of Energy grant and looks to raise a “modest amount” of funding this year, says Brill, noting he is “cautiously optimistic.”
Michael Lane, LICA chairman and chief executive of Huntington-based SteriLux Systems, a health care technology company that has developed sterilization devices for use in multiple industries, is hopeful about obtaining a second round of funding for SteriLux.
The firm raised seed money from angels last summer, which enabled it to build prototypes. Pilot programs utilizing the firm’s technologies are scheduled with a New York City hospital and a Long Island hospital in the fall.
SteriLux started looking for an additional round of funding when COVID first hit, which put efforts temporarily on hold, but since then has “seen a lot more interest from investors,” Lane said.
He said 2019 on Long Island was a vibrant investment market with 23 companies that showcased at LICA’s investor forums receiving just over $2.8-million.
LICA expects to have virtual educational forums in fall and winter.
And overall “there’s still some deals getting done,” says Kaufman, adding, “it’s taking longer and it’s more difficult” and there are obstacles in the way of investors doing due diligence.
For example, they may be wary because of the coronavirus of going on-site to review financials and operations so he suggests companies scan pertinent documents and put them in an online data room.
It also pays to address how your business will operate in this new world.
If your technology doesn’t address COVID-type situations then it must be “revolutionary or a cost-saver,” says Faltischek.
The average angel deal size in 2019 was $374,225, an increase of 7% from 2018.
Source: Center for Venture Research at the University of New Hampshire