Key Takeaways for Entrepreneurs: ACA Angel Funder’s Report

The Angel Capital Association (ACA) is the largest angel investing professional development organization in the world and includes membership of over 250 angel groups and over 14,000 individual accredited investors. Over the past three years, they have been surveying their membership annually, aggregating the data, and publishing the key findings in the ACA Angel Funder’s Report.  The report provides a deep dive into angel investing trends and is a useful resource for both investors and entrepreneurs.

Why It Matters

Understanding the funding landscape and current investing trends helps entrepreneurs position their companies for successful capital raises. Viewing investors as customers of equity and understanding their perspective will put companies in a better position to discuss deal terms, leading to more fruitful negotiations. The Angel Funder’s Report is an amazing resource that provides transparency on critical topics like:

  • Company profiles and investment timing
  • Deal profiles
  • Company valuations
  • Exit strategies
  • Diversity trends

We aggregated some of the key findings from the 2021 ACA Angel Funder’s Report below and discuss what it could mean for NC entrepreneurs. You can access the full report and figures here.

Company Profile and Investment Timing

  • Angels prefer to invest in companies with revenue traction. Only 33% of companies were pre-revenue (up from 24% last year).
  • Despite a preference for companies with revenue, angels invest at an early-stage with only 30% of companies generating revenue over $500K.

What this means for entrepreneurs: Know what stage of company development your target investor typically invests in. For angels, revenue traction is important and validates the business model. Your industry, at least in part, dictates how critical revenue traction is. For example, companies with highly regulated products, like medical devices, may not have revenue traction when angels invest, but entrepreneurs should have accomplished significant de-risking milestones.

  • There is a misconception that investors only invest in serial entrepreneurs. Angels invest in companies with first-time CEOs 61% of the time and 75% of companies have five or fewer employees when angels invest.

What this means for entrepreneurs: Serial entrepreneurs have the benefit of previous successes (or failures), but new CEOs should feel confident in their ability to attract angel investment. Seek support from advisors that have raised capital to scale businesses before and be prepared for the fundraising process.

Deal Profile

  • Over 75% of angel group financings were a part of rounds over $1M.

What this means for entrepreneurs: When targeting any type of investor, it is important to know their typical deal size. Make sure the amount of capital being raised fits with the investor type.

  • Angels are investing in larger and later-stage deals. In the previous ACA Funder’s Report, angels funded seed stage deals more often than any other stage, but in the last year the largest percentage of funding was Series A at 43%. These trends are, in part, driven by venture capital firms investing further downstream and leaving a Series A funding gap for angels to fill.

What this means for entrepreneurs: This trend could signal challenges for companies seeking early-stage capital from angel investors. This underscores the importance of non-dilutive funding programs and friends & family financing strategies. At the same time, entrepreneurial ecosystem stakeholders need to foster and expand active angel investor communities.

  • Despite larger round sizes, angel groups are investing less capital per deal. This could be a result of angels diversifying their investment portfolios to reduce risk. It is also associated with increased syndication activity among investor groups.

What this means for entrepreneurs: Companies need to understand the role of a lead investor and have a syndication strategy. Remember that angel groups communicate and partner with each other so always be prepared for the initial engagement.

  • Angels have expectations about the structure of the transaction. The prevailing deal structures are preferred shares (49%) and convertible debt (39%).

What this means for entrepreneurs: Investors will be hesitant to invest in deal structures outside the norm. Be sure you have an attorney with securities law experience and understands norms for deal structure and terms in your region.

Company Valuation

  • Median company valuation continues to climb with later stage valuations climbing proportionally faster over the past year. The median pre-money valuation nationwide increased by $500K for seed-stage companies to $6.5M. Comparable deals are a major contributor to early-stage valuation and there is significant variability depending on geographic location.

What this means for entrepreneurs: Look to comparable deals in your region to understand normal valuations for companies at your stage raising similar amounts of capital. Seek a fair market valuation that works for the company and investors while leaving room for value creation, growth, and follow-on investment.

Exit Strategies

  • 89% of angel investment exits occurred via a merger or acquisition (M&A).
  • 6% of exits occurred via IPO and were mostly in the Medical and Biotech industries.

What this means for entrepreneurs: When pitching your exit strategy to angels, understand that most have seen more success with M&A vs. IPO. Stay focused on scaling and creating shareholder value and exit opportunities will come.

Diversity Trends

  • This year’s report demonstrated progress for gender and ethnic diversity.
  • Female-led companies raised 29% of all angel funds. This was up 10% from the previous year.
  • Black entrepreneurs raised 15% of the total angel dollars and the average amount of initial funding more than doubled from previous years.

What this means for entrepreneurs: Angel investors are paying close attention to the diversity of the businesses they are investing in. Companies should remain focused on creating diverse, equitable, and inclusive working environments.