Near double-digit inflation, rising interest rates, economic uncertainty, and hyper-volatile markets have made 2022 a challenging year for many investors.
In this environment, many people are looking for opportunities beyond large-cap stocks and bonds. A growing number want to get in on the ground floor of helping promising startup companies develop the next generation of high-tech, consumer, medical and pharmaceutical products.
One of the most personally and financially rewarding ways for people to add exposure to these private companies is by becoming angel investors. And some of the most exciting opportunities are with women-led companies.
Take Little Passports, for example. It’s hard now to imagine why anyone would pass on the opportunity to invest in the beloved edutainment brand. But in the early days of the business, venture capitalists didn’t understand the value of a subscription box designed to spark cultural curiosity in children. These funding obstacles are unfortunately commonplace for women entrepreneurs. Female-founded companies still today receive significantly less funding than male-led startups, especially when they are in a sector not well known in the venture community. As a result, many women-led companies learn to be cash efficient–a skill set many more startups needed this year.
At Golden Seeds, we immediately recognized the potential opportunity Little Passports presented and we invested. The company’s ability to achieve organic growth through a very efficient use of cash and resources was admirable. They were among the first successful users of a subscription model in the toy industry. But the most investable aspect of the business was its vision to help raise a generation of citizens who are knowledgeable and compassionate about cultures and people around the world. There was, and is today, a real need for its product and the co-founders uniquely understood their customer and the marketplace. That vision and innovation paid off. Last December, Little Passports was sold to BEGiN, a global provider of digital, physical, and experiential learning solutions. Golden Seeds investors received returns of up to 24 times the amount of capital originally invested.
Why Early Stage Companies are Surviving—and Thriving
One advantage of angel investing is that funding levels tend not to drop significantly during periods of economic uncertainty. That’s because innovation—and the desire to fund innovation—don’t disappear in bear markets.
At Golden Seeds, we know this from experience.
Even during the Great Recession of 2007-2009 and the pandemic lockdown of 2020, our investors continued to support the companies that were well-managed and had the highest promise of emerging later in a strong position to deliver on their plans.
In fact, we’ve found that bear markets often inspire higher levels of boldness, creativity, and invention among startup entrepreneurs.
The same scenario appears to be true this year.
While there have been many headlines in the news this year about huge markdowns in the portfolios of later-stage venture capital funds, less attention has been paid to the resiliency of seed investing.
According to Pitchbook, during the first half of 2022, the median pre-money valuation for early-stage startups funded by seed investing reached $12 million, up 33 percent from 2021’s full-year median valuation of $9 million. (Pre-money valuations don’t include the value of external funding or investments.)
In contrast, median pre-money valuations for late-stage startups were $110 million during the first half of 2022, a 10 percent increase above the 2021 full-year median of $100 million.
Yet, even with the increase in valuations this year, pricing for seed-funded startups hasn’t risen to “irrational” levels. According to CB Insights, pre-money valuations for late-stage startups rose by around 500 percent from 2019 through 2021. Over this same period, similar valuations for seed-funded startups rose by only 25 percent, according to the Halo Report.
In terms of attracting funding, seed-funded firms have also weathered this year’s economic and market headwinds better than later-stage firms. According to data from Crunchbase, later-stage funding dropped by 65 percent year-over-year as of August 2022. By comparison, seed funding fell by “only” 19 percent year-over-year during the same period.
It’s this relative affordability, combined with stronger resistance to economic and market headwinds, that supports our belief that seed-funded, early-stage startups offer an attractive combination of realistic starting prices and upside potential for investors willing to take on the risk of adding privately funded companies to their portfolios.
And it’s why Golden Seeds continues to focus most of its initial investments in this private market segment. This year, members of our network have provided seed funding of more than $10.8 million for 27 early-stage startups, and we expect more deals to close by year-end.
How Do Investors Find Funding-Worthy Startups?
Identifying viable angel investment opportunities can be challenging. Private companies don’t have to file quarterly or annual reports with the SEC. They may not have an online presence. If they haven’t brought a product to market, they may have no customers or revenue.
Without hard financial data, investors have to rely on more qualitative evaluations of a firm and its potential.
It’s difficult for most individuals to conduct this research on their own, which is why many join angel investor networks whose members share similar values and priorities. According to the American Capital Association (ACA), there are more than 250 such networks in the U.S. Interested investors can search for many of them at the ACA website.
When evaluating networks, it’s important for investors to understand that factors other than potential return on investment may play a significant role in these networks’ decision-making process.
Some networks only invest in companies in particular industries or regions. Others apply ESG or other socially responsible criteria in their selection process.
For example, at Golden Seeds, the startups we invest in cut across consumer, enterprise, and healthcare sectors, but all of these companies have one thing in common: they were founded or co-founded by women entrepreneurs or have at least one woman in a C-level executive role.
This is not a coincidence. Golden Seeds was founded in 2005 with a mission to identify promising women entrepreneurs and invest in their firms’ growth and success. When we started, only 5 percent of angel investors were women and only 3 percent of startups that received funding were led by women. Fast forward to 2021 and women represented 34 percent of all angel investors and 23 percent of angel-funded companies in the U.S. were women-led. This growth has contributed to greater wealth for both investors and entrepreneurs.
We believe that our approach has stood the test of time. Over the past 18 years, members of our network and our funds have invested more than $170 million in 236 mostly early-stage women-led startups that have gone on to raise more than $1.5 billion. And since the beginning of 2021, 11 of our companies had positive exits and IPOs with attractive returns to investors.
Here’s a recent example. In June of this year Gummicube, a California-based startup that helps companies optimize their performance in the app stores on Apple and Google, was sold to Airship, an Oregon-based provider of marketing and digital experience services. The sale value was 22 times what Golden Seeds’ members paid in 2014, delivering a total internal rate of return of 47 percent for investors.
Advice for Investors and Entrepreneurs
Regardless of market conditions, if investors want to invest in startups, it’s critical to conduct a thorough due diligence process designed to answer qualifying questions such as:
- Does the firm have a capable management team with expertise in its domain?
- Do they have a scalable business model?
- Do they have limited capital expenditure requirements?
- Is the size of their target market at least $500 million?
- And do they have a realistic 5-8 year exit strategy?
Likewise, entrepreneurs who want to fundraise next year will need to evaluate how their business plans may be impacted by a downturn. How much progress they’ll need to make to increase or at least maintain their firm’s valuation and can they meet their current milestones if the economy deteriorates.
Most especially, when conditions are tight, all early-stage entrepreneurs need to frequently reach out to investors, communicating progress and setbacks, and learnings and adjustments. Those that do will build strong trust with investors, who will be more likely to consider providing additional capital and support. And it’s this potential for establishing closer bonds between investors and entrepreneurs that makes angel investing so attractive for both parties.
A Direct Impact Opportunity
There is very little that individual investors can do today to change the trajectory of the economy or the markets. But if they have the capital, angel investing can enable them to invest their money, experience, and skills to make a direct and positive impact on the next generation of industry-changing startups.
Jo Ann Corkran and Loretta McCarthy are co-CEOs and Managing Partners of Golden Seeds, one of the largest and most active angel investment networks in the U.S. and by far the largest that invests exclusively in women-led companies. Learn more here.
