Average Round Size in Angel Deals
Posted by Bill Payne on January 26th, 2012
The Center for Venture Research at the University of New Hampshire has been publishing statistics on angel investing for decades. Over the past several years, the numbers of US companies funded by angel investors has increased from about 50,000 per year to over 60,000 annually. Mark Boslet of senior editor with Venture Capital Journal posted the following chart on peHUB, based on CVR reports. As you can see, in the past eight years, the average angel round has decreased from nearly $500,000 to under $350,000.
Why have we seen a drop in the size of angel rounds of investment? Several possibilities come to mind:
- The softness of financial markets has had a negative impact on the willingness of angels to fund larger rounds. Shallow pocketbooks have led to smaller rounds.
- The costs to startup companies, at least technology ventures, has decreased. Consequently, entrepreneurs need to raise less money
- Entrepreneurs have been willing to bootstrap companies (lower salaries, etc.), raising less money for early stage rounds, and enabling them to keep more ownership in their firms.
Two factors fly in the face of this trend:
1. The seed/startup marketplace is rather hot, especially in Boston, NYC and the Valley. Valuations of early stage deals are up significantly in these markets. I suspect the round size has increased as well.
2. Since 2007, Super Angels have really become active and, as a group, have been investing several hundred million dollars per year in early stage ventures. Their pockets are deep, with plenty of capital to invest at the seed/startup stage. My guess is that Super Angels are driving early stage round size up, not down.
In the sum, I see no definitive explanation for the decreasing average size of angel rounds. What do you think?
All opinions expressed are those of the author, and do not necessarily represent those of Gust.
Written by Bill Payne
Bill Payne
Angel Investor ,Frontier Angel Fund
Bill Payne has been actively involved in angel investing since 1980. He has funded over 50 companies and mentored over 100. He is a founding member of four angel organizations: Aztec Venture Network, Tech Coast Angels, Vegas Valley Angels, and Frontier Angel Fund.
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Bill, that is intriguing. It does sound counterintuitive, with all the media chatter about a “frothy” market and about ever-larger angel rounds closing in the past couple years. It would be interesting to see the full distribution of round sizes. If I had to guess, my hunch is that a small number of large angel deals (say $1MM+) are getting done, but they are still outliers, and for each of those there are ten $250K seed rounds.
Of course everyone’s anecdotal experience is unique; in my practice, working mostly with early stage consumer Web and mobile startups, the most common approach is initially to raise an angel seed round of $100K to $400K or so on convertible notes and stretch that funding far enough to develop a proof-of-concept/minimum viable product before going back to the well for a larger Series A priced equity round (or the equivalent). That would have been out of the question even a few years ago, but with cloud computing and storage platforms like Amazon AWS, open-source stacks, and other innovations, I agree with your second point in particular that founders can do more with less these days.
Nice post Bill, interesting data … I took it as an instant reflection of your middle bullet point suggestion, that the cost from zero to revenue on web-based companies especially, but also some other kinds of companies, has decreased enormously. What took a few million dollars in the late 90s takes a few hundred thousand now.
Good article! Forgive me if I’m missing something obvious, but my first question was if the number of start-ups has increased by 20% in a few years, has the capital pool been able to catch up? Has the number of active angels changed to match? That would be interesting to know because the drop closely matches the percentage difference in average funding. I would take it to mean there are more quality start-up opportunities available as well as investor interest in diversification in unstable financial markets.