Invested Investor Thoughts: The transatlantic divide

Alan and I have just returned from my annual visit to the Angel Capital Association conference (ACA, which is an angel trade body equivalent to EBAN within Europe or the UKBAA), and I want to explain some of the differences between the UK and the USA.  The event moves around the US and this time was in Chicago, where 20°C sunshine on Friday was replaced with 10 cm of snow on Saturday.  Alan recorded three new podcasts, which you will hear soon.

Early-stage investments in the USA are around $25bn compared with $6-8bn in Europe, and around $2.5bn in the UK. 

ACA analysed about 1200 deals in 900 companies by a total of 68 angel groups, averaging about $200K per deal, which is probably somewhat lower than the UK but US angel groups share deals in a structured and noncompetitive way (around 65% of all deals). 

Often, the lead angel group allocates a sum to other groups within whom they have a relationship.  There is much variation but the $200K is on average leveraged by another $1M of capital (i.e. 5 to 1).  In 2018 the Cambridge Angels (one of the more active smaller groups in Europe) was leveraged by a ratio of about 3 to 1, although our sums were higher with (in dollars) $500K per deal provided by angels.

In the US, valuations have increased again with half of the pre-seed rounds being at a valuation/convertible cap of $2.5M to $4.5M, and of seed from $4.5M to $8.5M.  As with Europe, the definition of a pre-seed and seed round has been subject to considerable inflation over the last decade.

A significant difference in the US is that 44% of rounds are preference shares and another 44% are convertible loans, whereas UK EIS tax reliefs almost always fully align angels with founders by requiring both parties to have ordinary shares.

Employee numbers and revenues on investment are very similar to the UK, as is diversity with 23% of founders being female.  11% are not white, which I suspect is higher than in the UK.

The average total angel investment without a board seat is $160K, rising to $400K with a seat.   As regular readers will know, I never invest unless there is angel representation on the board and that appears to also have an effect in the USA.

Serial entrepreneurs are twice as likely to have a positive exit, whereby 2% of exits created 74% of returns.  This is based on 179 exits/failures, of which 3 exits were >30X. This clearly shows the importance of a decent number of investments in an angel portfolio (and/or luck!).  Patience is also needed, as those >30X exits took on average 12 years with an annual IRR of around 120%

If given an early exit option (perhaps a secondary sale) the average return was 2.3X, whilst if one waits for 4.9X is the average.

Some quotes from the conference:

1. Great founders teach teams how to fail so that they learn to disrupt and innovate

2. A good CEO can pivot, a great CEO pivots in a capital efficient manner

3. Exits are made, they don’t occur by accident

4. Lean start-ups are good, anorexic ones are not

5. Human capital from investors is more valuable than cash

So, what were my takeaways from the trip?

This is my fifth visit and I have built up many friendly and interesting contacts. Showing that, like Europe, the number of angels who want to learn from events (600+ attendees) is relatively small. 

The Americans I meet show realism and humility about their investments, enjoy spending time with and helping (usually) younger entrepreneurs, and those with a decade or more of experience have generally already made a good positive return.

Investing outside their home state is much more common than in the UK and Europe, possibly as it takes time to build trust between angels and angel groups and the Americans have been more active for longer.

Research shows that, until China catches up, there are circa twice as many exits to US companies (many of which are intra-nation) at 2.5 times higher average value than in Europe.  Hence, for pure financial return, it may be better to angel invest in the US.  This is not my modus operandi as I like to be local to my investments in order to help them.

However, investing on both sides of the Atlantic shares the common theme that angels invest in people and that people (whether entrepreneurial or not) are fickle and unpredictable and, of course, human.  Which results in both fun and frustration for all of us.


Peter Cowley

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