Why 2023 is a Golden Year for Angels...

We all know that a recession is coming but all I can see is a world filled with exciting possibilities!

Why?

Because in every market, every industry and every business there are opportunities.??

Always.?

Furthermore, “timing” is one of the most important and yet poorly recognised drivers of value in business.

And the timing for Angel investing, in my opinion, has never been better.

But don't take my word for it, the Oracle of Omaha, Warren Buffett said…

“Observe the masses and

do the opposite”

Now personally, I wouldn't choose to drive the wrong way around the M25 in my Corvette Stingray, so I’d caution anyone against taking what Warren says too literally.?

But when it comes to investing in early stage business in a down-market, then I think Warren’s words make sense.

Why?

Because most people will not be thinking about Angel investing when the news is filled with its daily dose of doom!

There are many historical precedents, as well as three compelling reasons why NOW is the right time to invest in early stage companies.

But let's start with a quick story and then look at each of the reasons in turn...

Have you heard of Ian McGlinn?

No?

Well he turned ￡4,000 into ￡146 million!

Who was he?

He was the first Angel investor with Anita Roddick in The Body Shop.

He invested ￡4,000 pounds to help her get the second store up and running in Chichester.

And years later, that ￡4k turned into a cool ￡146 million!

Sadly Ian passed away in 2010 but I still see the 24 bedroom house he built in Sandbanks in Poole Harbour every time I take my boat out from Salterns marina with my friends and family. It's a regular reminder to me of the potential of Angel investing when you get it right.

Stories of exponential returns like this sound too good too be true, until you have some of your own.

For example, my partners and I invested into a business just two years ago on a pre-seed valuation of $5 million.

That business closed a Series A at $171m a year later.

And then another year later, it closed a Series B at $400m!

That's pre-dilution and pre-tax growth of 80X in just two years!

After more than 25 years investing and with over 500 business launches under my belt, these types of returns I've only ever been able to achieve through Angel investing.

So let's dig into the three core reasons why I think disproportionately high returns are going to become even more achievable in 2023 and beyond...

1. Some sectors and businesses thrive during a recession.?
2. Businesses need investment more than ever in a downward cycle.?
3. Investors are far more selective about their capital allocation strategies.??

Taking each in turn....

1. GROWTH SECTORS

Here are just a few sectors and/or types of businesses that I believe will experience substantial growth...

Low cost and money-saving

products and services.?

Why??

Because people still need “stuff” but they want or need to spend less to get it.

Mental health support.

Why??

Because economic challenges are a major cause of mental health issues and much more support is needed.? (The BBC reported that 418,000 suicide prevention calls went unanswered by the NHS in 2021 alone!)

Artificial Intelligence

Why?

Because the AI juggernaut has arrived at main-street station and will soon impact virtually every person, business and industry on the planet.?

Creator led brands

Why?

Because the attention economy is rapidly shifting from brands we like and trust, to people we like and trust. It’s much cheaper to reach billions of people organically through entertaining content, than it is to buy eyeballs through advertising.

Jimmy Donaldson (AKA Mr Beast) was recently offered 1 billion for his You Tube channel and chocolate and burger brands. Not bad for a 24 year old from Kansas who just loves making social media content!

Of course there will be other businesses and sectors that do well in a recession and many more that don't, but let's move onto my second point…

2. THE BUSINESS NEED FOR CAPITAL

In a downward market, more businesses need investment, but they will find it harder to get.??

Sadly for many entrepreneurs, it’s a double whammy….

Their growth will slow, stall or go into reverse and not only will this hinder their ability to raise capital but there is less capital looking for a home.?

So many businesses will fail, or have to make significant cost savings and accept the fact that the dreaded down-rounds, will be doing the rounds.?

Vulture Capital will become more prevalent, with opportunistic predators waiting in the wings to snap up an insolvent bargain, or save a company on terms that will make the founders weep.

The good guys will also be out in force - ethical angels that can provide capital, consultancy and connections to help great businesses and great teams achieve their mission and make money.

Half of all Fortune 500 companies were founded during recessionary times*

* Startupsmagazine.co.uk

And lastly, we move onto the access to capital...

3. SUBSTANTIAL CAPITAL CONTRACTION

2022 started to see a significant capital contraction in the venture space. Global VC funding was down a massive 69% from $70 billion to a paltry $22 billion in 2021.

This happened because the easy-money gravy-train from 2015 to 2021 came to an end.

At times, it seemed like anyone with a pulse and an idea for an app or D2C brand could secure funding. I was constantly amazed at how much money went into businesses that would clearly struggle if the economy down-shifted, which was an inevitability.

And don't get me started on SPACS - investment vehicles that managed to invert the Penny Stock to IPO path leading to massive losses, bankruptcies and a raft of forthcoming investigations by the SEC. The Wall Street Wizards manage to mess up again.

However, there is still money around but two things rule the day in 2023...

1. Only great ideas, in growth sectors, led by great people with great executional ability will secure funding.
2. VC's will look for earlier stage businesses to invest into, or they will look to deepen partnerships with Angel feeder funds in the hunt to do more with less.

So what's to do?

Well every person, fund and situation is different, so all I can share with you is what we at Bolt Angels are doing.

Our strategy consists of three core components...

1. 20X MISSION LED MINIMUM IN THE RIGHT SECTORS...

We will only invest into businesses and teams that are truly mission-led and have a minimum 20X return potential.

The further up the growth curve and value-chain a business goes the lower the potential multiple is on the return, which is why we choose to get in early.

We also focus on sectors that have huge growth potential in a recession. Some of these are listed above. In future newsletters I will write more on these sectors and opportunities.

2. EXTREME RISK MITIGATION

There are three main reasons why the big boys and girls (VC's, PE, banks, advisors, etc) choose to avoid the Angel stage and hop on the bus further down the line...

• The risk profile is higher, unless you are willing and able to roll your sleeves up and help a business identify and overcome as many risks as possible. Easier said than done. This is not for the faint hearted - it's a heck of a lot of work, takes real skill and takes a lot of time. At Bolt, we not only have a digital marketing agency that has worked with more than 100 brands but we purposefully chose to acquire and scale our own in-house brand, so that our team have the day to day experience of running a company, alongside the Angel investments that we make. This real-world day-in day-out experience is invaluable.
• To be able to successfully invest at the Angel stage and provide both risk mitigations and strategic and tactical growth support, you have to have hands-on, real-world experience of starting, scaling and selling companies. One research study showed than 93% of VC's have never started a business. That doesn't mean they don't know what they're doing, nor does it mean they can't bring immense value to the table. But what it does mean is that they probably don't understand and know how to overcome many of the pitfalls that an early stage business is likely to encounter. And this is one of the reasons that they don't play this game (although more are starting to try it out.) The team at Bolt Angels have started and scaled more than 500 successful start-ups over the last 25+ years in a variety of sectors. We've also had a few failures and, as the old saying goes, "you learn as much from your losers as you do from your winners!" This deep experience not only means that the best entrepreneurs and businesses are more likely to find their way to us, but it also means we are highly respected and valued by the entrepreneurs we partner with. This is because we can genuinely help and, importantly, empathise and practically support them, through both good and bad times.
• The quantum of fees that can be generated are far lower because the amount of money being invested by Angels is typically in what is known as the "missing middle" - that's usually between ￡200k - ￡2m of funding. For example, a 2% annual management fee to a VC that invests say ￡50m in one year is a cool ￡1 million in fees alone. Whereas a 2% fee on a paltry ￡1m. on a single Angel round is just ￡20,000 in annual fees! Angels simply cannot afford to suck on the management fee teat, so they have to rely on exponential gains from the performance fees on successful exits. The great thing about this is that it perfectly aligns the interests of the Angel fund, their Limited Partners (investors) and the entrepreneurs running the businesses day to day.

In addition to the above, Bolt Angels also integrate very sophisticated approaches to protecting against downside risks and these go far beyond EIS and other legal tax saving schemes.

We differ to most other angel funds that use a 'shotgun' approach. This is where they make scores of investments each year, in the hope that one of them will hit the big-time. They expect a 90% failure rate and their IRR models reflect this.

At Bolt, we use a "sniper strategy." This is where we are very selective about who, what, when, where, why and how we invest. We tend to be very hands on, providing capital, consultancy and connections and in many cases we will introduce high-value talent, help build world-class advisory boards. By way of example in a 2022 investment, we introduced the following:

Former CEO of Comic & Sport Relief to act as a Social Impact Advisor

Mo Gawdat as an investor and joining the Board - former head of Google X

CTO with a proven track record of starting and scaling a very successful tech platform.

3. CREATING LIQUIDITY

Most Angel investors and Angel funds have their capital tied up for many many years.

At Bolt we aim to create liquidity for our investments by creating a secondary market. When achieved, this gives our fund and our investors early exit potential - EG in a Series A, B or later rounds but prior to the eventual trade sale or IPO.

IN CONCLUSION

So that concludes my mini thesis on why I believe sophisticated Angel investing presents incredible opportunities over the coming months and probably, the next two to three years.

As the old saying goes...

"strategy trumps tactics"

But the reality is that you need both a sound strategy and awesome tactical execution.

I will leave you with this clip and the subject of my next Newsletter - how AI will change the investment world forever.

This is Sam Altman, the CEO of Open AI, the company behind Chat GPT. Sam shares his views on the Golden Years that are coming for AI now that is has hit the mainstream.

Thanks for making it this far. I hope it has been a worthy investment of your time.

I'd love to know what you think.

If you have any questions please let me know and I will aim to feed them into future Bolt News articles.

Yours sincerley,

Steve Bolton

PS If you would like a free copy of my online video course entitled "Be An Angel" drop me a comment or DM with your email address and Natalie Windsor will get it to you. The video series covers "The 7 Biggest Mistakes Made by Angel Investors and How to Avoid Them."