Market Downturns Can Gold Mines for Angel Investors

The market slowdown is making angel investors wary. Why?

VCs have tightened their belts in anticipation of the impending downturn mixed with high inflation. This has culminated in investors focusing on quality versus quantity in terms of startup deals. Cheap capital won’t be as plentiful as they were nearly a year ago.

What does that mean?

According to PitchBook, the squeeze on venture capital has quickly translated to a more investor-friendly environment as entrepreneurs compete for a smaller aggregate pool of funds.

When the market is thriving....

During times of boom, hot capital balloons quickly. And the average quality of ventures also steeply drops as the number of optimistic (both capable and misguided) founders who presume they can build the next big unicorn increases.

VCs have pressure to quickly deploy the rounds of capital they raised from their own investors (limited partners). So they are less discriminant about what and who they invest in. A lot of FOMO (fear of missing out) investing practices happen, as VCs pour money into deals that are poorly vetted, often relying on shallow investment heuristics. Raising a few million even for a pre-seed round doesn’t seem that difficult if you just have a story (not even a prototype). That is why you see a massive increase in funding

But when times are tough....

But in lean times, only the most hardcore of entrepreneurs (especially those of early stage startups) are going to be booting up new ventures in this economic climate. In other words, the macroeconomic shift has created a natural screen that filters out less confident founders and shaky ideas. A lot of the hype and foam dies down, leaving behind only the most assertive, clear-minded, and focused founders.

The Gold Mine

There’s no room for wanna-be-preneurs now. And that’s a good thing angels, because they no longer have to contend with as many deals. With the natural economy serving as a filtering, angels can really focus on quality of investments. Sure, deal flow will become more constrained overall, but maybe that’s not a bad thing, because all else equal, we might likely see higher quality opportunities.

Quality founders and insanely good ideas are likely going to be knocking, and this could be the investment of a lifetime, if VCs really put their ears to the door of opportunity.

Amidst global macroeconomic slowdown when venture funding has slowed down, is it wise to continue investing as an angel investor?

Yes, definitely yes. Here’s why -

Macroeconomic slowdowns come and go every few years. Angel investors are the part of the foodchain when a startup is just spreading its wings.

This means angels come in way before VCs do. Macroeconomic slowdowns affect VCs the harshest because they need to become vary of who they’re putting their money in during a financial slowdown.

On the contrary, angel investors can become bullish during a slowdown because they’ll get the best startup deals at lower rates. This is their chance to grab the best deals when they haven’t caught the VC attention yet.

To remember: Angel investors must keep in mind the following factors when they are wary of investing during a financial slowdown -

  • The stage - angels come in at a very early stage
  • The amount - ticket sizes vary, you can get great opportunities for lesser during a slowdown
  • The returns - the deal you got at a low rate during the slowdown is likely to perform well when the market goes back to normal, maximising your returns