10 Reasons Angels Get Tired

Brad Feld penned a post about angels being tapped out.  Others are seeing angel activity slow down, especially in Silicon Valley where the majority of it is.  I left a comment at Brad’s blog and thought his topic would make good fodder for a post.

The answer is angels do get tired, and in some cases they might be tapped out.

There are some reasons for it.

1.  Constraints on cash.  Few have an endless stream of cash to put into deals.  Even the hyper wealthy will only put a certain percentage into riskier deals.  The bulk of their money is usually in liquid products like stocks and bonds.  No one puts it all on red.
2. Liquidity, liquidity, liquidity.  Angel investing is not liquid.  Neither is private equity or real estate.  At least in real estate you can sell the asset to someone for some price.  In times of financial stress, everyone wants liquidity.  Fred Wilson blogged that their portfolio company Circle Up is starting a secondary market for equity.   It’s a good idea and an interesting one.  Second Market has had markets for more mature companies for a while.
3. Fear.  We are in very uncertain economic times.  In the past year there has been a lot of talk about bubbles in tech companies.  When people get scared, they sit on their hands.
4. Companies that used to go public aren’t.  That means cash is tied up longer.  Companies I invested in are raising new rounds at higher valuations.  Many at levels I thought they would sell at when I initially invested.  At very high billion plus valuations, angels usually can get out.  Sometimes they can sell equity to venture investors in Series C rounds, but that’s rare.  I wonder, do you really want to sell if the company is going gangbusters?  In this business it pays to press your winners and cut your losers.
5. Being an angel and doing it well requires commitment.  It’s a job.  Most angels look at it as a hobby.  You have to work for deal flow.  You have to mentor.  You have to stay in contact with the companies you invest in and help them.
6. Virtual funding through online platforms makes it easy to invest.  It also means people can take really small bites at the apple.  But, the money they invest in any one company probably isn’t enough to hold their interest.   I remember talking to a guy about trading.  I was doing well and wanted to increase my volume.  He said, “It has to be big enough to hold your interest where it materially matters.  But, not too big so if you fail you go broke.”  Angel investing and the discipline around it is similar.
7. Our world is increasingly virtual but that might not work for true angels.  I still think physical presence is a big deal.  Having a modicum of a personal relationship with the entrepreneur you invest in keeps angels committed.  Hey, I put my money where my mouth is.  Check out Dabble, Kapow, Deskpass and Nextspace.  Those companies are about physical presence.  Online investing platforms don’t have physical presence
8. Many angels invest to help their local community.  The angel organization I had a very large role in starting has raised $185M, generated $45M in sales, and created over 680 jobs here in Chicago.  Virtual platforms are Silicon Valley focused.
9. Their group isn’t big enough.  Angels do best in packs.  Being in a group that can write a meaningful check to a company makes a difference.  If your group’s capacity is only $100k or less, you need to actively recruit new people to your group so your average check size gets over $200k. At Hyde Park Angels, our average check size is $250k-$750k; and we have done over a million.
10. Angels career/life path changes.  Maybe they find a new opportunity, leave angel investing to pursue it.  Maybe their health changes.  Maybe they just decide to hang it up and retire.
11. They didn’t make money.  Maybe the most important reason why angels quit.

I don’t think there is any one reason anyone can point to as to why angels get tired, hang it up or quit.  I am not sure about the Valley, but funding activity in Chicago is relatively steady.  Ironically, if one were to look at asset classes Real Estate and Stocks are close to their peaks.  Governments are in trouble and raising taxes.  Why would you allocate a chunk of risk capital there?  Private Equity can’t afford to buy companies because they are too expensive.  The Fed looks like it will raise interest rates.  The only place to put risk capital to work and grow your net worth is by sourcing early stage seed investments.  It’s where the smart money is going.