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OUTLOOK SERIES QUESTION #2: Quality of deals and size of “asks”

(EDITOR’S NOTE: We continue our multi-part series sharing the thoughts on the past year and the outlook for 2022 from seven angel or venture investors based in the region.)

TODAY’S QUESTION: How would you characterize the deals that you are seeing these days? Is the volume higher, lower or about the same as in the past? Are the opportunities of a higher quality, about the same or lower quality? How do the “asks” compare with the past and how do those who are seeking funding from you compare to those from five years ago?

  • Derren Burrell, President and Founder of Veteran Ventures Capital. Deal flow has remained steady throughout the year, but we’re seeing a much higher quality than we did in previous years. The “asks” have increased in size and scope over this same period. While some of this may be attributed to our firm maturing, I think we’ve seen an increased uptick in the alternative capital space and even within the veteran-focused funding space. More money in the system has had a direct impact in more opportunities in the space.
  • Eric Dobson, Chief Executive Officer, Sheltowee Angel Network. The volume is returning to pre-COVID levels. The quality of the companies seeking capital appears to be maintaining the strength we saw during COVID. In general, we are seeing larger capital requests. And the shocking part is that valuations did not drop during COVID and do not appear to be correcting themselves in 2022. Valuations across the companies seeking capital were high during COVID and are continuing into the new year. They are significantly higher than five years ago.
  • Scott Ewing, Co-Founder and Principal Business Analyst, Appalachian Investors Alliance (AIA). AIA has become involved in entrepreneurial education in Kentucky, Ohio, Tennessee, Virginia, and West Virginia, and we’ve just been engaged to coach entrepreneurs of color in New Jersey. We’re helping to train entrepreneurs at the direction of our investors, because finding entrepreneurs who understand and can deliver on imperatives to investors is a perennial challenge. Our investors believe we can raise up more and better entrepreneurs – more fundable ventures – if we take an active part in training entrepreneurs on what it is, in detail, that investors are looking for when making angel and early stage venture investments. So, our hands-on involvement in educating, coaching, teaching entrepreneurs is a signal that whatever number of deals we see, we aren’t satisfied that we’re finding a superabundance of quality opportunities. As far as the “ask” is concerned, industry data shows that deals are getting larger at the seed and angel stage.  Irrespective of the size of the “ask,” our individual funds are positioned to make angel-sized investments from $50,000 to $150,000 per deal. Member investors can – and often do – make personal investments alongside their fund’s investment. These we call “sidecars,” and often we’ll see another $100,000 to $150,000 come in from our members on a local deal. If the deal generates interest from several funds in our Alliance, we manage our own syndication that can take down $400,000 to $500,000 of an offering, on average. These amounts have been consistent for the past several years.
  • Tony Lettich, Managing Director, The Angel Roundtable. We are seeing a greater number of deal opportunities including increasing numbers of high-quality opportunities. Valuations have increased. However, such increases are also clearly a function of the improved quality of deal flow in our pipeline. The ecosystems in the Southeast and Tennessee have gotten stronger and quality accelerator programs such as “Zero to 510” and “Techstars” are growing and broadening their impacts on start-ups across the region. We believe the “Techstars” cohort being organized for Knoxville this winter/spring supports this continued acceleration and improvement in quality we are seeing and which we expect to continue to see in 2022.
  • Grady Vanderhoofven, President and Chief Executive Officer, Three Roots Capital. Volume of deals is as high as, or possibly higher than, in the past, and deal quality has continued to increase over time. Relative to five years ago, I think the entrepreneurs and management teams generally are more sophisticated and capable, the investment opportunities generally are better, and the companies are asking for relatively more capital.
  • Ken Woody, President of Innova Memphis. We’re seeing more deals now than ever. It’s more challenging to vet many of these deals because the sectors have started to blur the lines more, e.g., AgTech/FinTech, med device and diagnostics/services. We’re finding it harder to truly understand what these companies do and what makes them truly unique. We have worked hard to ensure we know our sectors well and have further refined where we can add value with an investment as we review new opportunities. We spend much more time now reviewing deals that come from trusted partners than ever before.
  • David Adair, Managing Partner and Co-Founder of Solas BioVentures. Deal flow and quality remain at an all-time high. This is due to abundance of cash, highlights of biotech importance, and emergence into a commonplace conversation (i.e., Moderna, Pfizer, etc. discussions in non-bio circles). The quality has been surprisingly robust, perhaps greater than 35 percent of the introductions. The poor or substandard deals (think anything COVID like anti-COVID toothpaste, crazy testing schemes, etc.) also increased during the “gold rush,” but largely were one and done; definitely not platform. The “asks” observations are interesting. The size seems to be appropriate for stage and substantiated. The disconnect is in the pre-money valuations. Angel groups have grown and as such have influenced (perhaps distorted pre-money value expectations) founder/management discussions to where we may have an impasse due solely to pre-money. This is one consistent trend we have observed.

Previous Articles in the Series:

  • Part 1A – A review of the past two years as well as a look into the future.
  • Part 1B – A review of the past two years as well as a look into the future.

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