The Future of Angel Investment: Identifying and Supporting Disruptive Startups in Emerging Industries

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Contents

-Angel Investment and its advantages.

-How has Angel Investment evolved?

-Some emerging industry sectors are likely to benefit from Angel Investment.

-How interested Angel investors identify, select and exit such startups.

-What kind of risks and returns can Angel investors expect from startup investments?

-How can Angels support disruptive startups in emerging industries?

Angel investment is an essential source of funding for startups in emerging industries. It has been in the news for the wrong reasons recently with the collapse of the Silicon Valley Bank. Angel investors play a significant role in unlocking the potential of disruptive startups in emerging industries, driving innovation and economic growth.

Compared to investments by financial institutions, angel investment offers unique advantages for startup founders. For business owners, partners of investment funds, and headhunters, finding promising startups in emerging industries is essential as it can help them identify qualified early-stage companies to invest in or acquire/acquihire.

As a business-oriented leader with over 30 years of experience, I had the opportunity to build and grow a portfolio of business units for Fortune 500 companies, invest my savings in several startups and mentor some of them to success. Over the years, I have observed the evolution of angel investment and its critical role in the success of emerging industries. In this article, I share a few insights into Angel investment, its advantages, how startups can challenge emerging industries today, and how angel investors support such startups beyond money.

Let’s begin with what angel investment is.

Angel investment refers to investing in startups or early-stage companies with high growth potential. Angel investors provide capital to these companies in exchange for equity, typically 5–25%. Angels are individuals or groups of investors who provide capital and Mentorship to startups. Unlike institutional investors, angel investors are usually high-net-worth individuals who invest their own money rather than manage funds from other investors.

Angel investment is carried out directly by individual investors or through angel networks, which bring together high-net-worth individuals to invest in startups. Angel networks provide a platform for startups to pitch their ideas to potential investors and facilitate the investment process, which includes negotiations, due diligence, contractual documentation, and compliance. Angel networks also support startups beyond the investment stage by offering Mentorship through their startup incubators, access to industry experts, networking opportunities and help pool domain expertise and share the risk.

What are the advantages and downsides of Angel Investment?

Startup founders benefit from angel investment in several ways. Founders receive the necessary capital from launching and growing their businesses. Angel investors also bring industry knowledge, expertise, and networks to the table, which can be invaluable in helping startups navigate the complex business landscape and raise follow on funding. Additionally, angel investors are more willing to take risks on unproven concepts than traditional funders, making them a valuable source of early-stage capital.

From the Startup founders’ perspective, Angel investment has several advantages compared to investments from Venture Capital funds, family offices, Financial institutions and corporates. These include:

• Flexibility: Angel investors are more flexible than institutional investors and are willing to invest smaller amounts of money at an earlier stage of the startup’s development.
• Expertise and Mentorship: Angel investors bring relevant experience and knowledge to the startup and can provide invaluable Mentorship and guidance to the founders.
• Network: Angel investors often have a vast network of contacts and can provide access to potential customers, partners, and investors.
• Speed: Angel investors can make investment decisions quickly without being bogged down by the bureaucratic processes institutional investors must follow.

Funds and corporates also benefit from angel investment in several ways, including:

• Access to early-stage startups: Angel investment provides funds and corporates access to promising startups that still need to be added to their radar.
• Diversification: Investing in a portfolio of startups through angel investment can provide funds and corporates with diversification and mitigate risk.
• Acquisitions: Angel investment can serve as a pipeline for future acquisitions for funds and corporates.

As a downside, many enthusiastic angel investors look at startup investment news like choosing a crowded restaurant, where potential clients speculate that the food must be tasty based on the crowd and rush to invest for fear of missing out (FOMO). This type of Angel investment, without adequate due diligence, could lead to a spike in the valuation of underserving startups and sometimes incentivizes the founders to delay the path to the profitability of their startups.

Furthermore, as a startup evolves through the three stages: capital scale and exit, angel investors sometimes lose their objectivity by taking over the role of the co-founder or interfering in the day-to-day management of the invested startup.

Angel investment contributes to a state or country’s economy and provides a source of early-stage capital to startups that can often not access traditional funding sources. By investing in startups, angel investors help to generate employment, stimulate innovation, and promote economic growth. According to a Center for American Entrepreneurship report, angel investment significantly impacts job creation, with angel-backed companies creating more jobs than non-angel-backed companies.

How has Angel Investment evolved?

Angel investment has come a long way since its inception, evolving over the decades. In its early stage, angel investors were typically wealthy individuals who invested in companies in their local communities. However, with the emergence of new technologies, changing investment landscapes, and evolving industry trends, angel investment has undergone significant changes.

• In the 1970s — 1980s, Angel investment was primarily local and limited to high net-worth individuals. For example, Apple Computer received funding from angel investor Mike Markkula in 1977.
• In the 1990s — 2000s, Angel investment became more organized and professionalized. For example, Angel groups like Tech Coast Angels and Band of Angels were formed and emerged to provide more structured investments. Tech platforms like CB Insights, launched in 2009, supported startups and made angel investment more accessible.
• Since the 2010s, Angel investment has become more global and diversified. For example, AngelList, a global platform connecting startups with angel investors, was launched in 2010. The emergence of new technologies and venues has made it easier for startups to access funding. Crowdfunding platforms like Kickstarter and Indiegogo have made it easier for startups to raise early-stage capital from a large pool of investors. Similarly, global platforms like AngelList and Seedrs have made it easier for startups to connect with angel investors worldwide. Angel investment is spreading to tier-2 and tier-3 cities in countries like India.

With the increasing professionalization of the industry, Angel networks and groups are now providing more structured investment opportunities and mentorship and networking opportunities in addition to capital. Professional societies like the Angel Capital Association have come up which provide resources and best practices for angel investors.

Looking to the future, as more investors look to diversify their portfolios and support innovative startups, we expect the demand for angel investment to continue to grow. Additionally, emerging industries and technologies like blockchain and artificial intelligence will likely create new opportunities for angel investors to support disruptive startups.

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Which emerging industry sectors will likely benefit more from Angel Investment?

We generally refer to proliferating industries and expect them to significantly impact the global economy in the coming years as emerging industries. These industries often comprise disruptive technologies, changing consumer behaviours, and new business models brought in by startups.

Startups can disrupt emerging industries by identifying and capitalizing on market inefficiencies, using innovative technology, and implementing unique business models. Disruptive startups challenge the status quo and offer faster, cheaper, and more convenient solutions than existing options. For example, Uber could disrupt the taxi industry by providing a more convenient and affordable alternative to traditional taxis. Similarly, Airbnb disrupted the hotel industry by offering a more cost-effective, personalized accommodation option.

Startups can use artificial intelligence and machine learning to streamline processes, offer new products and services, and improve customer experiences. They can also use blockchain technology to create new business models that eliminate intermediaries and increase transparency.

Here are some of the many emerging industries in the world today:

Clean Energy or Renewable energy is generated from replenished natural resources, like wind, solar, hydro, and geothermal. Renewable energy sources produce little or no carbon emissions, and government support for clean energy creates investor opportunities. We can expect the renewable energy sector to continue to grow significantly despite the economic impact of the COVID-19 pandemic.

Healthcare Technology or Health tech is the use of technology to improve health outcomes and deliver healthcare services cost-effectively. It includes Telemedicine, Wearables, Big Data Analytics, Robotics etc. The healthcare industry is ready for disruption by innovative technologies, which have the potential to improve the quality and accessibility of healthcare. Several health tech companies are already using AI to provide medical consultations, improve drug discovery, improve data mining, provide predictive analytics etc.

Food Technology or Food tech is the use of technology to improve food production, distribution, and consumption. Food tech can enhance the sustainability and efficiency of the food system. Companies like Impossible Foods are using plant-based ingredients to create meat substitutes.

Cybersecurity or Secure tech protects computer systems and networks from theft, damage, or unauthorized access. As geo-economic competition accelerates and more companies rely on digital systems, Cybersecurity is becoming increasingly important. Companies like Crowdstrike and Fortinet have joined the ranks of established companies like Cisco, McAfee and Paulo Alto Networks in providing a range of Cybersecurity solutions to clients.

Space Technology or Space tech is the development and use of technology for space exploration and commercial applications in space. It includes designing, manufacturing and launching Satellites, Space Tourism, Asteroid Mining etc. Space technology is also emerging as a new frontier for investment, with private companies developing new technologies for space exploration and commercial applications in space.

E-commerce, or the online retail and distribution of goods and services, is increasing. Many of us have used the likes of Amazon, Alibaba, Etsy, Statista etc., for our business or personal requirements. E-commerce is an emerging industry that has multiplied in recent years, partly driven by the pandemic and the shift to online shopping. We have all experienced how the pandemic has accelerated the growth of e-commerce.

Artificial Intelligence or AI uses computer algorithms to perform tasks that traditionally require human intelligence. AI can transform virtually every industry, from finance to manufacturing to transportation. It includes Machine Learning, Natural Language Processing, Robotics etc., and we can expect the AI industry to grow beyond USD 1.3 Trillion by 2029. ChatGPT by OpenAI helped me research this article.

Each industry is relatively new and growing rapidly, potentially disrupting established industries and creating innovative solutions and new opportunities for investors and entrepreneurs.

Furthermore, Startups continue disrupting traditional industries. We have seen how Uber disrupted the taxi industry, Airbnb disrupted the hospitality industry, Zoom disrupted video communications, and well-subsidized startups like SpaceX, Blue Origin, and Virgin Galactic are disrupting the space industry.

The future of angel investment looks promising because:

• Emerging technologies and industries are creating new opportunities for startups, leading to a surge in demand for early-stage funding.
• The increasing availability of data and sophisticated analytics tools enables investors to make more informed decisions and accurately identify promising startups.
• The rise of angel investor networks and online platforms is making it easier for startups to connect with potential investors and vice versa, thereby increasing the overall efficiency of the angel investment process.
• The growing trend of impact investing and socially responsible investing leads to more angel investors seeking to support startups that positively impact society and the environment.

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How do interested Angel investors identify, select and exit such startups?

• Angel investors identify such startups by paying attention to industry news and trends, attending industry conferences and events, looking for companies that offer unique solutions, and leveraging professional networks to connect with entrepreneurs and startups.
• We can also work with venture capitalists and other angel investors with a strong track record of investing in disruptive startups.
• We can also use platforms like Crunchbase, AngelList, and LinkedIn to discover and connect with innovative startups.
• While funds and financial institutions have their detailed checklist used during the business, financial and compliance-related due diligence for identifying and selecting identified startups, Angel investors have their criteria for quick assessments. Here is the first version of the checklist I developed for my quick initial assessments of startups and projects.

On the other hand, there is an industry tale that early investment is for friends, family and fools. So, Angel investors need to see existing traction and scalability expectations in the startup business before investing to avoid incorrect incentivization of the startup through a valuation spike.

Speaking of exits, Angel investors typically exit their investments through Acquisition, Initial Public Offering(IPO) or the Secondary Market.

• Acquisition: When a larger company acquires a startup, Angel investors can sell their stake to the acquirer.
• Initial public offering: Angel investors can sell their shares in the stock market when a company goes public.
• Secondary market: Some Angel investors may sell their shares in a secondary market, such as a private equity fund or a specialized marketplace for startup investments.

The timing of an exit can vary widely for Angel investors, depending on the stage of the company and the overall market conditions. Some Angels may be able to exit their investment within a few years, while others may need to hold on to their shares for much longer.

What kind of risks and returns can Angel investors expect from startup investments?

While Angel Investments can be lucrative and exciting as an opportunity, it comes with their risks. Some of the Downsides for Indian investors include the following:

• High risk: Startup investing is risky. Most startups will fail; even successful ones can take years to generate meaningful returns.
• Illiquidity: Angel investments are primarily for the long term. Angel investors may need help selling their stakes in the startup they invest in.
• Lack of control: Angel investors usually have minimal control over the startups’ decisions as Angel investors are not traditionally involved in day to day business of the startup.
• Dilution: As the startup grows and takes on additional funding from venture capitalists and institutional investors, the percentage of ownership held by the early-stage investors can get diluted, Which can often reduce the value of the initial investment.
• Regulatory risk: Angel investing is usually subject to several regulations, which vary over time depending on the startup’s and the angel’s jurisdiction.

Angel investors can earn high returns if the startups they invest in are successful in their business and can raise follow-on funding rounds. According to one research by Dr Robert Wiltbank of Willamette University, the average Angel investor realized a return of 2.5 times their investments over four years.

However, returns can also be very much variable depending on the startup industry’s evolution stage and the overall market conditions.

Interestingly, several leading Angel investors have secured over 50 successful exits from their portfolios with significant multiples on their investments.

How can Angels support disruptive startups in emerging industries?

Angel investors can help emerging industries by identifying and supporting disruptive startups, providing them Mentorship, and funding beyond financial capital Angels support startups by providing:

• Strategic guidance: Angels can offer startups strategic advice on fundraising, marketing, and product development. They can help startups refine their business models and identify growth opportunities.
• Mentorship: Angels can serve as mentors to startup founders, providing them with guidance and advice based on their own experiences.
• Industry connections: Angels can leverage their networks to help startups connect with potential partners, customers, and investors and help them secure follow-on funding.
• Branding and marketing support: Angels can provide startups with branding and marketing support to help them build their brand to serve their target audience.
• Operational support: Angels can offer startups active support, such as assistance with recruitment, legal, and accounting services
• Performance Monitoring: Angels can help startups define objectives and key results (OKRs), success milestones, key performance indicators(KPIs), and expertise to help startups scale and achieve their business goals.

In conclusion, as new technologies and platforms make it easier for startups and investors to connect, the emergence of new industries, such as clean energy and health tech, presents exciting opportunities for disruptive startups to make their mark. Startups can disrupt these industries through innovative products, business models, and approaches that challenge established players. While Angel investment, like any other form of investment, has its risks, depending on the industry and the stage of evolution of the startup, it can generate significant returns over time and provide opportunities for investors and entrepreneurs to come together and shape the future of emerging industries.

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I write on a wide variety of topics, from Leadership and Geopolitics to Technology and Startups, and share insights to help business owners and corporate executives in transition achieve more clarity.

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