Angel investing in Silicon Valley

silicon valley mapAs part of Edinburgh University’s continuing Silicon Valley Speaker Series, supported and organised by Informatics Ventures and the Entrepreneur Club, Jim Papp gave a talk tonight entitled “Angel Investing in Silicon Valley today”. This followed on nicely from last week’s talk by Sean Ellis on how to gauge whether you have product/market fit. Assuming you do then you need to get some angel money to get things moving!

Jim Papp is the CEO of Podaddies, an angel funded online video advertising company, and he is an active angel investor in high tech companies. He is a member of the Band of Angels where he has served on the deal screening committee and has made about a half dozen investments in start-ups in the past several years with a focus on software and internet services, medical devices, and wireless technologies.

Jim started by giving a brief history of Silicon Valley, mentioning that although HP was founded in 1937 in a garage in Palo Alto it wasn’t until 1956 the first “silicon” business started in the valley. In 1968 Intel was founded, and in 1976, the same year I was born, so too was Apple in Steve Jobs’ garage in Los Altos.

The first angel group, the Band of Angels, was formed in 1994. Since then Angel groups have flourished world-wide, including Scotland. Of all the angel groups operating in the USA, 82% of them report making investments into software companies and 48% into telecoms companies. However, they do invest in a range of different industries but the failure rate is consistent, it doesn’t vary from industry-to-industry. More detailed facts and statistics available here.

ROI

  • 52% of angel deals return nothing, or less than the initial amount invested
  • 32% return between 1 and 5 times the original amount invested
  • 15% Return greater than 5 times the amount invested

It’s for that reason that angels and VCs look for outsize returns, usually a minimum of 10 times amount invested; simply put, there are a lot of duds that need to be paid for.

The record year for investments by VCs was, unsurprisingly 2000, when an enormous $100Bn was invested. In a telling sign of that overheated period the average amount invested per deal increased significantly. In most years before or after 2000 the average amount invested has been between $20 or $30Bn. Sadly, 2009 has been significantly lower than this amount and shows there is still some way to go before confidence and level of investment returns to normality.

I asked Jim to explain why Silicon Valley still has an advantage for technology startups and he replied by quoting the famous crook who, when asked, “Why do you rob banks?”, sensibly responded, “Because that’s where the money is”. Out of all the VC money invested in the US, 38% is invested into Silicon Valley. As angels and VCs the world over tend to stick to their local area for investing, mainly out of practicality, startups continue to arrive. The odds are stacked against you though. Out of perhaps 70 pitches a month submitted to the Band of Angels, only 3 will get in front of the entire angel group, and only one of these will get funded.

The talk concluded with a summary of what investors look for in their investees:

  • Something that solves a big or complex problem
  • Something unique; a competitive advantage
  • Large and growing market for your product or service
  • Great team
  • Capital efficient and scalable
  • Exit strategy


Find out about the upcoming events in the Silicon Valley Speaker Series, including Alexis Ohanian, founder, Reddit. (I saw Alexis speaking a few weeks ago at MIT and I can definitely recommend attending to hear him!)

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4 Responses to Angel investing in Silicon Valley

  1. ASI report says:

    I really try hard to invest in Technology field but when I remind Buffett speach “Buy company you trust even though the stock market have 10 year shut down”.

    IT company is never come close.

    • I would have thought companies like Google, Microsoft and Apple would all pass the ten year test? This is a massive generalisation but generally the strong get stronger – and all these three have superb brands, loyal users and great products.

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