Covid-19 and angel investing: what now and what next?

Having worked in the angel investment space for some years, here are some questions I posed recently to a group of Cambridge based angel investors:

How has the pandemic affected your appetite for/the decisions you make about new investments?

The answer on the whole has been that the focus and priority, for now at least, must be on supporting the existing portfolio companies, most likely in terms of both cash and time. Many investors are therefore not looking at new investment opportunities right now. Having said that, those deals that have already reached the lawyers, or where investors have a strategic or reputational reason for not withdrawing (perhaps letting down co-investors) are likely to still go ahead. Valuations may also be depressed given additional risk and reduced investment availability.

How is the pandemic affecting your decisions about follow-on investments?

Although the investors’ clear priority is to support their existing portfolio, and indeed some even feel morally obliged to do so, there is no guarantee right now that this support will always be forthcoming. The deal still has to make sense, and the same ‘triaging’ approach will be taken, with investors taking a close look at management teams’ ability to quickly grasp, plan and implement survival strategies.

Investors will want to identify those that prove themselves to be adaptable and resilient to sudden change; are they planning for the likely downturn and are they making best use of the resources available to them, such as government funding? Investors will not be able to support their entire portfolio and those companies simply turning to shareholders as the funders of first resort aren’t likely to get what they need.

How are you advising your portfolio companies as regards their priorities?

It seems that the advice for right now is, unless you already have a cash runway extending into 2021, extend that cash runway as much as possible without irreparably damaging the business.

Assume you are unlikely to get funding (and if you are, at much lower valuations), make a plan to extend the runway, and tell investors what you’ve done and what you need to get you to Q1/Q2 of 2021.

Revisit sales forecasts and budgets, investigate government support schemes and consider diversifying product applications. Some companies may even need to demonstrate a significant pivot. If you can afford to, invest in R&D and IP so that you will have advantages over competition in recovery and maintain dialogue and relationships with customers and prospects.

Meanwhile, stay well and keep your staff well.

Do you envisage the current situation bringing about any changes in the current angel investment process?

It could be that we see more use of online pitching, with more trust being built online rather than offline as is currently the case. We may also see more of a focus on socially beneficial investments.

We may see a shift away from founder teams made up of predominantly (if not solely) younger, less experienced, first time entrepreneurs, toward a prerequisite that teams are more inclusive of older, more experienced individuals who have experienced economic cycles.