Hi Friends,
It's Laura here. Today's blog post is written by experienced investor Stephen Whyte to give you an insight on why Angel Investors don't invest...
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Bye bye angel investing
Following the sale of QADEX to Ideagen in January 2023 (1) I decided it was time for me to support the start-up ecosystem by becoming an angel investor. The angel bit excited me as did the investor bit.
Outside of angel investing I was enjoying myself taking time off to travel with family and building out the Ned Holdings team. Ned Holdings can best be described as a small “family office” investing in business to business (B2B) software special situations.
As I embarked on my journey I looked at hundreds of decks and this is what I found (2).
I could not get conviction in the majority of the business ideas presented to me having the ability to profitably scale.
Founders were very enthusiastic but lacked domain experience in the sector that they were looking to disrupt. For me this was very noticeable when I was presented ideas in domains that I understand, I could see fundamental flaws in the business plans due to lack of domain experience.
Decent ideas with good founding teams are generally overvalued.
One of the things that struck me initially when I started speaking to other angel investors and angel syndicates was that no one could provide statistics on the return that angels were making over time on well diversified portfolios of angel investments.
This seemed weird to me.
I always understood that angel investing was a high risk undertaking and the key was to take a portfolio approach, or borrowing from venture capital, to use the power law.
But I made another shocking discovery on my journey.
Where angel investors invest in a business that succeeds the business invariably needs to move up to the next level and bring venture capital (VC) on board to accelerate growth. All good, on paper. In reality the VCs are very sharp operators and usually introduce some new concepts to the startup which are designed to stack everything in their favour, to the disadvantage of everyone else such as angels and founders
Preference shares and liquidity preferences mean that in an Orwellian twist not all investors are the same, in fact the VCs with their preference shares are more equal than the ordinary shareholders who brought the business to where it is today.
To stack the odds further in the VC interests they often introduce “liquidity preferences”. What this means is that in a liquidity event such as a sale of the business the VC gets all of their money back before other investors such as founders or angel investors who hold ordinary shares. How unfair. This is not an issue in those rare cases where the business is a roaring success and becomes an illusive Unicorn. But these cases are very rare.
Assuming the business does not fail, a good outcome would be a trade sale, in most of these scenarios the liquidity preference means that the VCs cream off most of the value and founders and angel investors get nothing.
Therefore I have concluded that angel investing is not for me because:
As an exited bootstrapper I like value for money.
As an active investor in B2B software special situations I am able to generate sizable returns from cash deployed in this area.
As an active value investor in listed shares I enjoy reading company accounts and choosing which listed companies to buy shares in.
My belief as an angel investor was that I would invest in businesses which I could support on their journey.
I came across one great business where I was confident in the team, the product, their roadmap and valuation. This was the only investable business that I came across in my opinion.
So it has been a complete waste of my time. I am gutted.
Bye bye angel investing.
Hope you enjoyed this post!
P.S. If you want to submit an article, click here.
(1) QADEX, a provider of quality management software solutions, was indeed acquired by Ideagen in January 2023. Ideagen, a UK-based software company specializing in governance, risk management, and compliance (GRC) solutions, acquired QADEX as part of its strategic expansion efforts.
The acquisition aimed to strengthen Ideagen's position in the food and beverage industry, where QADEX had established itself as a key player in providing software solutions for quality and compliance management. By integrating QADEX's technology and expertise into its portfolio, Ideagen sought to enhance its offerings and provide comprehensive solutions to its customers in regulated industries.
The specifics of the acquisition, such as financial terms and future plans for integration, may vary and could be subject to announcements by Ideagen and QADEX or reports from reputable sources covering the deal.
(2) These are personal opinions and not a reflection on individual founders I engaged with.