The angel capital industry is a very rational business in almost every way. We have filled the void left by the venture capital companies since 2007, assuming their former role in diligence and post-investment curation. We are now the feeder system from the accelerator networks to the venture capitalists. And, it is a role we have adapted to well. The key difference is the fact that angel groups and funds are made up of…well, angels, not limited partners. Angel groups and funds are typically member driven organizations and depend substantially on volunteer labor. This all means they are subject to cycles of operation based on the big picture lives and lifestyles of the members.
The angel capital market’s cycles are subject to different forcing factors than venture capital. And, it is critical for entrepreneurs to understand these cycles. The timing of your approach to an angel group governs when, and sometimes if, you will get capital. Remember, it can take up to six months to close an investment from most angel groups or funds. We have perfected a 60-day cycle of investment, which requires a regimented process to complete. We are not unique, but we are also not typical in this respect.
First, there is the January Rush of companies looking for capital in January. The new year typically sees a wave of great companies all looking for capital in the new funding year. There are normally so many strong options, that we can’t fill them all. And, companies that might otherwise have gotten attention, do not, simply because this is the most competitive time of the year coupled with the greatest need for entrepreneurs who have weathered the off-season in the fourth quarter. A market where lots of highly competitive companies are financially desperate is rarely good for the companies seeking capital. Desperation is rarely a effective sales tool. However, it can be good for the investors as it becomes a buyer’s market.
In fact, the entire first quarter of the year is filled, often to overflow, with the required activities of filtering through and performing diligence on the stampede of opportunities released in early January. Following the first quarter wave is the Spring Trough, which extends through the second quarter. The companies that got capital have gone off to work. Those who could not get funding have either focused on organic growth, or closed shop. We still see strong companies looking for capital in the second quarter, but few if any accelerator programs graduate cohorts in the spring. So, the second quarter typically enjoys a slower pace of operations. In other words, this is a very good time to be seeking capital.
As we enter the summer and the third quarter, we see a continuation of the quarter two pace, until late July. By this time, everyone is focused on vacations, going back to school, and the transition to fall. So, nothing gets done in August. This is the Summer Slump. It happens with predictability every year, and yet entrepreneurs still seem shocked.
As we enter the end of the third quarter, we see the uptick into the Fall Push. So, September and October are busy months where most angel groups are finalizing their investing year at the same time Accelerators are graduating cohorts. So, it again becomes a very competitive time to seek capital. The challenge with the Fall Push is the angel investment market will definitively close with a Hard Stop in mid-November (October is the last pitch window!) when everyone begins to focus on Thanksgiving, the holidays, and tax season. So, if you are not in the market for capital by August, you essentially have to wait until January. Thus, we see why there is a wave in January. The majority of companies graduating from accelerators in the summer are already in need of capital and often have to wait until January for capital and fight through the stampede.
What should you take away from this discussion? Easy:
- The first quarter is the most competitive time to be seeking angel capital.
- Starting in the middle of summer, the market takes a vacation.
- The early fall time frame sees a flood of deals from Accelerators and a push to finish the year.
- There is a hard stop in November for the rest of the year.
You should seek capital in the second quarter through early summer when the competition is not as high and investors have more time to devote to deals.
The irony of the situation is Global Entrepreneurship Week is typically in mid-November, when the investment markets are closed, investors are not even looking for new deals, and their focus is on the holidays and time with family. You will always lose if you compete with family! Then, the whole market resets in January with the inevitable rush. Many people wonder why it is so difficult to raise early stage capital. I believe it is, in part, a lack of understanding of the market cycles for angel investing.
Some companies are not fundable at any point in the year. But, if you are seeking capital, make sure you understand how the market cycles can affect your ability to compete for capital. Don’t be frustrated when you realize you missed the window for funding your company. It is not the investor’s fault if you approach at the wrong time. There are always exceptions to these “rules of thumb” if you have a top .01% company. In other words, the very most compelling deals will always get done. But, for the vast majority of companies, you are better off to bet the odds. Having said that, it is important to note that we value entrepreneurs and the hard work they do. You are the bedrock of our economy. We would not have a business without you. Don’t stop working, just understand the world we live in and how it applies to our ability to help you capture resources.
Copyright Eric L. Dobson, 2016