NOT JUST THE “NEW YORK” ANGELS
When I first started Angel Investing, the rule of thumb was that you only invested in local companies. “Local” being defined as a company that was close enough to cycle to. The “bicycle test”, as it became known, was to ensure that the investor was on top of the performance of the business, by being geographically close to the decision makers. Today, as we look at the investments made by New York Angels members over the past year, it is clear that the “bicycle test” may be firmly in the rear-view mirror.
As can be seen in the graphic below, New York City (and its surrounding area) that once accounted for nearly all of the group’s investment dollars, now represents less than one quarter of the total dollars invested. While other traditional innovation hubs still account for significant percentages (West Coast 22% and Boston 12%), more geographically diverse areas are clearly on the rise, and over 20% of all funds invested ending up outside of the USA. Which prompts the obvious question, “why is this happening?”
Get Off Your Bike
For decades, Silicon Valley stood as the unrivaled epicenter of innovation and entrepreneurial activity, attracting aspiring visionaries and deep-pocketed investors alike. The past two decades have seen the rise of rival tech hubs such as Cambridge, MA and New York City. The latter providing the impetus for the founding of the New York Angels by David Rose 20 years ago.
But, as the start-up landscape evolves and technology becomes more democratized, the allure of geographic proximity to traditional hubs has diminished. Founders no longer need to be chained to tech hubs, with expensive rentals and high wage bills, and angel investors are following them. In an attempt to diversify their portfolios, as well as invest in the hottest new companies, angel investors are spreading their wings. Consequently, start-ups presenting to the New York Angels today, are just as likely to come from Denver, CO, Austin, TX or even Montreal, Canada as they are from New York City. As demonstrated by the above chart, angels have become comfortable writing checks to founders whom they have never met in person, let alone ridden a bicycle to.
And Get Online
Along with the geographic diversification of angel investing, there has been a notable trend away from traditional in-person meetings toward online evaluation of investment opportunities. This has only been possible thanks to advances in virtual communications platforms (like Zoom, Teams etc.) and supported by digital platforms (such as Gust, Angel List etc.).
This trend was significantly accelerated by the pandemic and our inability to meet in person. Out of necessity, the way angel investors discover, evaluate, and engage with early-stage companies was transformed. Consequently, one unexpected consequence of COVID is the geographic diversification of many angels’ portfolios.
This move online has also fueled the growth of virtual angel investment groups (for example many alumni angel groups) who have members throughout the globe and never meet in person. This has caused groups like ours to reflect on what members are looking for from an investment group.
The shift toward virtual engagement has also democratized access to mentorship and expertise, enabling founders, wherever they are based, tap into a global network of seasoned professionals and domain experts. This has disproportionally helped underrepresented founders, who have traditionally struggled to find help, advice and funding. A minority founder, or entrepreneur from a disadvantaged economic background, can now connect with mentors and angels without the need to travel or meet in person, at least partially offsetting their financial difficulties.
Towards Globalization
The trend of investment dollars flowing out of New York, as described above, can be extrapolated to the point that there is a global market for funding early-stage companies. Any start-up company, based anywhere in the world, can apply for funding from a wide audience of angel investors, or groups, regardless of their physical location.
Clearly this concept is a way off, but looking back 10 years, the situation today where 78% of investment of our group is outside of New York would have seemed far-fetched. As an additional datapoint, last month represented the first month that overseas readers of our monthly Newsletter, passed 10% of the total. Maybe that day is closer than we think?
New York, New York
Traditionally, angel investing has revolved around face-to-face meetings, networking events, and pitch competitions held in key start-up hubs. As the world becomes increasingly interconnected, as demonstrated above, angel investing has embraced the digital frontier and investments are becoming geographically diverse. Post-pandemic it may be hard to but the zoom-genie back in its bottle, however, many angel investors still yearn for a sense of community. Consequently, as a group, New York Angels meets in-person twice per month, with many sub-groups meeting for diligence, education or socially, every week. This can only happen face-to-face
because of the proximity of our members. Even though founders and companies can be geographically diverse, there is still a desire amongst investors to build relationships, share experiences and collective wisdom (which is possibly why applications to join our group are at a record high).
Angel Investing = AI
Despite the technology enabled processes described above, the biggest and most disruptive technological innovation may still be to come. With decades of information on millions of early-stage companies, including their successes, failures and economic conditions, the data set seems ripe to be utilized as an AI training model. The organization that can successfully create a taxonomy of these businesses, profiles of their founders and prevailing market conditions, could then harness the power of machine learning. The resulting platform could recognize the patterns that contribute to the success of the very small number of these start-up enterprises. Angel investing would then become a race to analyze as many early-stage companies as possible, sourced from anywhere on the planet, without ever needing to meet the founders. Once profiled, the company would be subject to processing by the AI model, which would then give its view on the suitability for investment.
In this way, angel investing would be reduced to several clicks, and become truly location agnostic. All of which seems a very long way from getting on a bicycle to have coffee with a young entrepreneur, with an idea to change the world.
