Two Big Changes in Angel Investing

Two big changes are happening in startup investing. One, demographic changes are shifting the areas of funding interest. Two, the unfavorable treatment of large venture funds toward angel investors discourages angels from investing in capital-intensive companies. These two changes combine to shift what kinds of startups get investment.

Demographic changes in angel investing are fueling different types of innovation because angel investors use their own personal capital to invest in startups. Angel investing trends reflect the demographics and diversity of the pool of angel investors. We see the following trends:

Large groups of young investors are influencing innovation. Many of these young investors made their wealth from their own entrepreneurial ventures, thus fueling a cycle of innovation within their network. This isn’t necessarily a new trend, but the unprecedented number of young, wealthy entrepreneurs makes this group an influential block.

Socially conscious investors want to do well while doing good, thus creating social impact investment opportunities. The umbrella of “social impact” has gotten so large that it encompasses huge parts of the startup economy even if not explicitly identified as such. Social impact is part of a substantial percentage of startups now. And, it doesn’t mean sacrificing profits for social good. In fact, most social impact companies have strong revenue models in place, In contrast to lots of traditional tech companies that have a build it now, monetize it later attitude.

Women are, of course, becoming a bigger force in angel investing. There’s a multiplier effect happening for women, though. Massive intergenerational transfers of wealth have given women more wealth than ever. A generation of women who grew up not being allowed to have their own bank accounts and credit cards are now transferring massive wealth to their children, many of whom are women. They also want those women to be financial savvy. Funds like Portfolia have attracted mother/daughter investing pairs as one way to connect generations.

The second major trend is one which has not been discussed much, but it is more widespread. There is increasing reluctance among angels to fund startups that will ultimately need large amounts of capital - which comes from large venture funds. Angel investors have been burned many times by venture funds. The term that often gets used is “crammed” because big venture capital comes in and sets its own terms with its own class of stock. So, angels don’t see as much upside when investing in these future unicorns as you’d think.

As a result, these new groups of angel investors are seeking capital efficient startups serving their areas of interest. This is why we’ve seen investments in consumer products, medical devices and SaaS which are appealing to these new investors and are structured in highly capital-efficient ways.

Barbara Clarke