Insight from Angel Investment Associations Across Europe
Jacopo Losso, director of EBAN, the trade association representing business angels and other early stage investors in Europe, has been working from home since early March and expects to continue so for a while. Managing a network as broad as 150 associations from across Europe, he has a unique insight into the angel investment sentiment and trends. That is why we asked him to tell us a little bit more on the current & possible future status of angel investment and his view on venture capital trends.
As we write this, EBAN is finishing the 2019 investment statistics report for angel investing in Europe and according to Jacopo, last year was one of the strongest years ever. In 2020, the crisis hit everyone off-guard and the lockdown situation proved to be fatal to many startups – especially those in certain industries such as tourism, hospitality, events and retail. With supply chains as well as customers suffering the effects of the pandemic, doing business during lockdown for many startups was simply not an option.
“Startups have the advantage of being lean and flexible but when capital access is obstructed, these kinds of companies are put in a very clear disadvantage as they cannot rely on typical debt financing for liquidity. With the average cash runway estimated at 27 days (source: Crunchbase), temporary shutdowns of operations led to severe cash shortfalls for many startups. Until now, the crisis has lasted 100+ days, so imagine how many companies ran out of money over these past months.”
In this situation Jacopo observed how angel investors across Europe stepped up their game to help their own portfolio companies. “Many invested additional capital, so their startups could pivot or simply weather the storm. What must be mentioned and underlined though is that angels also gave valuable advice, mentoring and moral support to founders during these months. For many entrepreneurs, this lockdown was the first major external crisis they had to deal with. Having an angel involved in your company, someone who has experience in managing hazardous situations, is a big help.”
Despite the dire situation, several investors have even made new investments during these past months. It is however worthwhile mentioning that in many cases these “new” deals were the result of negotiations which began in late 2019. “Closing an investment round takes time, so this is normal”, says Jacopo. A smaller fraction of deals was crisis-born, where good teams were rewarded for products and services adapted to the new normal. Many other deals however got interrupted or postponed.
It's all about the exits
Jacopo reminded us about the 2008/2009 financial crisis, when historical data show investment activity by angels kept steady at the beginning of the downturn. “When the crisis first hit, similarly to today, angels prioritized their existing portfolios. In the immediate aftermath, business angels also started investing in promising new businesses, often at much more attractive valuations than before. Just think - this was the time when social media and fintech emerged. In those years several later stage investors stopped making new investments which meant that entrepreneurs had to turn to other available sources of finance like business angels. During the financial crisis, we did however also record a large drop in the angel investment activity. This actually happened a few years later in 2010-2011 as a result of differed exits and postponed returns on investments.”
How the venture capital sentiment will evolve this time around, once again depends on exit possibilities. Jacopo explained this very simply: “Exits are necessary, so investors can have available funds to reinvest in new deals. Angel investors typically exit through M&A transactions. However, during an economic downturn, corporations often slash their M&A budgets, which means it will become harder for startups to be acquired and in turn for angels to find an exit path. With private equity and venture capital funds there is a similar situation. These later stage investors are already postponing new investments until they can exit their current ones. For the funds with available “dry powder”, meaning funds not yet deployed, now is a particularly interesting time to invest, since there are lower valuations and new disruptive businesses emerging in various sectors.”
EBAN as an organisation carefully follows the trends, which are bi-annually discussed at events, held across Europe. The events got disrupted this year and parts of them were moved online. EBAN however still keeps a close eye on the trends. Every year they check how much angels invested in different sectors and this is how they measure excitement for a specific industry. “For example, health: back in 2015 only 4-5% of angel investments were made in this sector. Today it’s 11-12%, which means the amount more than doubled!”, says Jacopo.
“The most interesting thing to see in the current crisis will be its impact on consumer behaviour. Our lives will be impacted in many areas from office buildings to shopping. E-commerce is on the rise, online entertainment and remote team collaboration are thriving. Even remote medicine is suddenly getting accepted much faster than before.”
“Is it the end of the first wave or the beginning of the second? I don’t know. I only know that the more we feel threatened as humans, the more we will adapt and change our way of living to survive. With innovation often being driven by market demand, I am sure we will soon start seeing exciting new companies servicing our new needs across many different industries. I am also confident that the angels will be ready to invest again when these new opportunities arise.”
Jacopo likes to end on a positive note and his thoughts should be taken into consideration by entrepreneurs as well. Capital will switch its focus to the solutions which are most relevant in the “new normal”. Is your business model “new normal” ready?