The Funding Landscape: Insights from the Angel Market Outlook
Product Creation Studio supports product innovators of all stripes, working to refine their product development strategy, prove product viability, hit research milestones, gather clinical data, and transition their concepts to manufacturing. So we are keenly interested in the state of early-stage funding for entrepreneurs.
Earlier this month, Scott attended Keiretsu Forum’s Investor Capital Expo, where he heard Ron Weissman's talk on the Angel Market Outlook. Ron, a chairman of the Angel Capital Association, leads North America’s principal organization for professional Angel investors. He invests in AI, analytics, business software, and health IT systems.
During his session, Ron discussed the funding peak in 2020-2021 that led to the establishment of numerous new companies. However, many of these companies encountered obstacles in 2023, such as a challenging fundraising environment, higher interest rates, and economic uncertainty.
As we move into 2024, some uncertainty is expected to persist, but Angel investors have become more adept at navigating these challenges.
Here are key excerpts from his talk on what to expect from the VC and Angel investor landscape in 2024 and 2025.
The Venture Bubble
In 2021, the VC market reached a 10-year high. There were high valuations, record funding, and very little diligence. In fact, funding doubled between 2020 and 2021. It was a great time to be an entrepreneur.
And then 2022 hit—everything flipped, and the trends reversed.
VC fundraising slowed
IPOs were canceled
Valuations flipped by 50%.
The power shifted from entrepreneurs to investors.
Pitchbook’s Deal Climate Index illustrates this sharp reversal from a VC bubble to a VC winter. When the curve is going down, it’s entrepreneur-friendly. When it's going up, it's investor-friendly.
The Venture Winter
2023 was the rock bottom or what Ron calls the “Venture Winter.” Here are a few facts and numbers to paint the picture.
10-year low in exit value creation (record low)
Startups stopped buying other startups
20% of rounds were down rounds
Decade lows between rounds (Series B to C)
Corporate venture retreated (48% less dollars from corporate venture capital)
3,200 portfolio failures from venture-backed
However, it proved to be a “golden year” for the Angels, as they continued to perform well. Why? Because they patiently and strategically took risks.
A Return to Diligence
It’s about time the VCs and Angels returned to what we call ‘uncomfortable diligence.’ Asking questions, not hoping the answers are great, but to serve as a devil’s advocate. Things are not so great, and you must answer these hard questions before investing. Some of which may be negative.
Before the “Venture Winter,” VCs were banking on stories over proof. That is no longer the case. Now, VCs are examining the fundamentals, asking challenging questions, and seeking more proof, resulting in less funding and slower and fewer rounds. The leverage is moving from the CEO to the investor.
Here are a couple of headlines from this year that sum up the landscape:
2024 and 2025 Outlook
The good news is that things are stabilizing again. While growth is slow, the markets are recovering.
Inflation is currently at 3.2%, which is down from 9% in 2023
The volatility index is below 20% (low volatility environment)
AI continues to dominate, with $50 billion in investments and a massive increase in valuations. And while there are a lot of opportunities here, there are also reasons for concern.
Few exits in the last 6-8 years
Weak Q1 earnings
Companies are manipulating results
The public fears the impact of the job market (white collar segment)
AI is the target of the EU, Feds, and State regulators for reasons of bias, monopolization, intellectual property theft, and potential election interference
So, what are Angels looking to invest in as we head into 2025 and beyond?
Ron encourages, “If there is one space to invest in, it’s data.”
He mentions the Life Science and Healthcare industries as ones with robust data and favorable long-term impacts.
Intriguing background stories and new visions are no longer the key to funding. Angels and VCs are looking for quality teams, market science, and customers' willingness to invest in your product or technology.