Keiretsu Sponsor, Christopher Ezold, Discusses Trends in Angel Investment/Private Equity to Watch for 2020
Written by Christopher Ezold, Partner Wisler Pearlstein LLC.
Keiretsu Forum Mid-Atlantic is well-positioned as an angel investment group; we get to see many of the best deals in our space. I’ve done a survey of angel investing trends for 2020 and have been gratified to see that these trends are reflected in the deals we review each month. The trends I have found are:
- Use of artificial intelligence and machine learning in health care. As advanced as our science may be, some of our overall methods of testing and applying new therapies are still old-fashioned trial and error. AI and machine learning have the capability to transform this paradigm, reduce product development, diagnosis and treatment times, and save lives.
- Distributed work platforms. The concept of ‘work from home’ has expanded to distributed teams and methodologies. This leads to reduced overhead, more flexible teams and greater potential for emerging growth companies. Further, development of these products is a growing area within our space.
- Increasing professionalization of angel investors. What and who are ‘venture capital,’ ‘private equity’ and ‘angel investors’ has had a vague and shifting description since the early years of angel investment. From the days of wealthy individuals dominating the space, we have come to crowdfunding. Angel investors such as those in Keiretsu have begun to be more professionalized, to expect a higher standard from themselves, their colleagues and from emerging growth companies. This has developed into a crucible where companies emerging from friends and family rounds are more quickly forged into more capable business-oriented organizations.
- Women-lead emerging growth companies. Clear data has shown that emerging growth companies lead by women have greater stability and return on investment. The reasons behind this data are not yet clear to me; however, the trend is very clear. I think it is likely that we’ll see this trend lead to an emergence of women as investors as well.
- Acceptance of crowdfunding. Crowdfunding, in its infancy, had a reputation as a tool of companies that could not make it in the shark tank of the angel world. This has changed; especially in tech-heavy areas of the angel world, some investment groups are coming to see crowdfunding as a normal early step in a companies’ growth. Whether managing a large and less sophisticated investor tranche through to exit will prove to be a regularly workable solution remains to be seen.
- Better platforms, smaller investors. A counterpoint to crowdfunding is the emerging ability of smaller investors to be part of the angel ecosystem. The tools used by distributed teams have allowed angel groups to locate, vet and invest in deals more efficiently and with (some) less risk. These tools and processes have allowed angels with less money to be a part of the ecosystem. Harnessing these smaller (but still not at the level of crowdfunding) investors will increase the capital available to emerging growth businesses, and ‘heat up’ the angel economy. Whether and to what extent this increase will compete with larger, well-capitalized investment groups remains to be seen.
- Corporate venture growth funds increase competition. A second counterpoint to crowdfunding is the emergence of venture capital from large corporations. Many industries, especially pharmaceuticals, have effectively outsourced R&D to the emerging growth ecosystem – licensing out technology to entrepreneurs or just providing assistance, and then purchasing promising products and their respective companies. Large corporations have begun creating funds, accelerator programs and other initiatives to encourage, support and invest in their emerging growth R&D sector. This will provide competition to the emerging small angel investors, crowdfunders, etc., and may silo some of the best teams and products away from our pool of available deals.
- Seed funding is developing as a separate investment class. Seed funders appear to be putting more funding into fewer deals, while larger investors are shying away from seed funding (according to Crunchbase).
These trends may grow or change as we enter the predicted 2020 recession, and in reaction to the upcoming national election and other developments. I think it is clear, however, that (a) we will see increasing competition from above and below the angel ecosystem for good deals; (b) the tools available to entrepreneurs and the increasing professionalism of both entrepreneurs and investors will increase the quality of emerging growth companies, and (c) stratification of deals at the $500k-$5mm level will increase.