Tech Coast Angels in an angel funding group based mostly in Los Angeles. With 410 angel traders throughout 5 separate chapters, the group is among the largest and most energetic angel funding teams within the nation. I’ve been a member since 2010 and am on the chief committee of the LA chapter.

Because of the efforts of John Harbison, the group places out an annual report with extremely helpful knowledge that highlights the standing of angel funding yearly. The total report for 2022 is accessible right here, however I’ve summarized the factors most attention-grabbing to founders and traders.

TCA 2022 Investments

• In 2022, the group invested $15.4 million in 41 startups. Twenty of these investments have been follow-on rounds in current portfolio corporations, and 21 have been new investments.
• Of the $15.4 million in funding, $5.2 million got here from group funds (4 chapters have member funds that pool investments) whereas $10.2M was from direct investments by members.

Takeaway for everybody: Regardless of the slowing economic system and challenges for late-stage startup investing, 2022 was a report yr for angel investments.

Takeaway for founders: While you’re pitching to angel teams, know who you’re pitching to. Is it a fund with pooled belongings, is it a group of people who make their very own investments, or is it a hybrid of each? Even inside TCA, the totally different chapters function in a different way.

TCA-LA is an efficient instance of the hybrid mannequin. While you pitch to us, you’re pitching for funding each from our fund and people. We now have a $3M fund pooling member investments that usually invests $300K in 10 startups over the yr earlier than opening the following fund. While you pitch to us, you’re pitching each for funding from the fund, and for funding from people within the group.

Funding Outcomes

• The group had a report 13 exits in 2022, together with 5 with multiples between 10x and 34x.
• Investor returns since inception averaged a formidable IRR of 25.2%
• Solely 3 exits out of 526 investments accounted for 74% of returns (based mostly on the earlier yr’s knowledge).

Takeaway for traders: 2022 was an awesome yr to be an angel investor, a minimum of the primary half of the yr. That is more likely to be a peak for some time.

Takeaway for each traders and founders: To get a superb return from angel investing, you must hit that homerun — the 1 funding out of 100 with a 100x return. So angel traders need to search for that needle in a haystack with enormous upside potential reasonably than merely actually nice companies.

Observe: take the 25% IRR with a grain of salt. Funds with cash out and in are straightforward to calculate IRR. Angel teams the place people make investments on their very own with out centralized reporting creates evaluation issues. If you wish to know what to anticipate as an investor, my private portfolio evaluation could also be extra indicative. My very own IRR has been 7.2%.

Angel Investments by Sector

• Life sciences was the biggest sector, accounting for 54% of the investments and 41% of the {dollars} invested.
• Software program was second with 22% of investments and 37% of {dollars}.
• Every little thing else was 24% of investments and 22% of {dollars} invested.

Takeaway for founders: Software program, which historically has been the biggest sector for early-stage enterprise funding has been overtaken by life sciences.

Collectively, software program and life sciences account for 75% of funding. Should you’re in these sectors, nice, angels want to make investments. If not, you’ll need to work further onerous to persuade angels that there’s a large enough market, aggressive moats, and high-multiple exits to supply the potential for a 100x return.

Angel Funding Time Horizons

• Of the full portfolio of 526 investments since 1997, there have been 106 exits, 141 shutdowns, and 279 corporations nonetheless energetic. Nevertheless, lots of the exits have been at multiples of 1.0 or much less, so not all exits are funding successes.
• Shutdowns usually are available years 2–5. Profitable exits lengthy. Probably the most profitable exits take 5–15 years.
• It takes 5 years to get your a refund, 11 years for a 4x return, and 15 years to get to a 6x return.

Takeaway for traders: Angel investing can have nice returns, however they take an extended, very long time. Be ready to attend.

Geographic Combine

TCA was based for angels in Los Angeles to spend money on startups within the native ecosystem. Most areas have related angel teams centered on their communities.

Pre-pandemic, screenings have been in-person. Almost all of the investments have been in native startups, with a small quantity of syndication from different teams.

Now, most screenings are on zoom or hybrid, and we’re capable of hear pitches from throughout the nation, or sometimes the world over.

Final yr, 57% of our investments have been in startups exterior our house territory.

Takeaway for founders: You used to have to start out together with your native angel group and ask for syndication. Now you’ll be able to apply to angel teams anyplace. Nonetheless, be ready to reply the query: why are you making use of to us?

We’re not simply traders. We need to be concerned with the startups and in lots of instances, have considered one of our members on the board. It helps to have a superb cause why you’re making use of to a specific group. A referral from a member or a mentor is adequate justification.

Startup Stage

• 45% of investments have been in pre-revenue startups

Takeaway for founders: For all these pre-revenue startups in search of funding to construct their merchandise and get to market, this statistic could be very encouraging.

Sadly, I believe it’s additionally extremely deceptive. 54% of investments have been in life science startups the place the important thing milestones are round FDA approval reasonably than buyer traction. I believe nearly all of these pre-revenue investments have been in life sciences startups.

From my expertise, in case you’re not in life sciences, angels usually make investments on the stage the place there may be preliminary buyer income. Regardless of the parable, it’s powerful to get angels in search of monetary returns to speculate pre-revenue.

Valuation Tendencies

• Median valuation elevated from $4.5M in 2017 to $6M in 2018, to $8M in 2021 to $10M in 2022.
• The median valuation on new investments shot as much as over $12M.

Takeaway for founders: angel teams have historically invested in early-stage corporations with a valuation within the $6M — $8M vary. The start of 2022 was one thing of a bubble.

2022 was a bizarre yr. The primary half of the yr had absurd valuations in scorching new startups. The second half of the yr was dominated by follow-on investments in struggling portfolio corporations at low valuations. So we ended up with the unusual scenario the place new investments had larger valuations than follow-ons.

I anticipate 2023 to return to valuations nearer to the place we have been pre-pandemic.