The Diligent Observer Podcast

Episode 45: Breaking Down the 2025 Angel Funders Report | ACA Board Member John Harbison on Valuation Compression, Board Seat Decline, and Follow-On Performance

• Season 1 • Episode 45

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Today's episode explores three ideas that caught my attention:    

  1. Angel board representation dropped from 34% to 26% - Despite consistently seeing better returns WITH board representation, fewer angel groups are securing board seats.  
  2. Early-stage valuation compression - The gap between median pre-seed ($10M) and Series B ($19M) valuations has shrunk by 3x over the last few years.  
  3. Hybrid angel group models write bigger checks - Groups combining both “pure networks” and funds tend to invest larger amounts than pure models.  

I explore these ideas and more with John Harbison, ACA Board Member, Chairman Emeritus of TCA Venture Group, and co-author of the 2025 Angel Funders Report. As a current Angel Capital Association Board member, a contributing author for the comprehensive Angel Funders Report, and a repeat guest of the show, John offers a world-class perspective on angel investing trends and best practices.

During our conversation, John shares: 

  • A data-driven framework for understanding how follow-on investment rounds often deliver better returns than initial rounds - demonstrating how risk reduction and valuation timing can create superior portfolio outcomes for angel investors. 
  • Specific evidence that board representation increases company success by 8x - including actionable strategies for smaller angel groups to secure observer seats when full board positions aren't available. 
  • Practical insights on market cyclicality and capital efficiency during downturns - including strategies for angel investors to adapt their approach when "we're in one of those troughs" of the investing cycle. 

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All opinions are personal and may not reflect the views of The Diligent Observer. Not investment advice.

John Harbison: Ultimately this class is an exciting class. This is where the innovation comes from in our economy. This is where the growth in our economy comes from. The big companies go up and down, but don't net grow anywhere, and the new stuff all comes from this.

So it's really important that we get this right. Our society will benefit.

People will get the benefit of all these great ideas and innovations and so forth. The world will be a better place, diseases will be solved. People live longer. We won't die from pollution. Whatever the, the societal benefit is it all comes back to this class. And if this is not done efficiently and effectively, and this whole asset class withers and dies away, I really worry about where our society's gonna go because we'll stagnate and we'll get into a pretty lethargic, state and I don't wanna see that happen.

 

Andrew Kazlow: Welcome to the Diligent Observer, where we help Angel investors see what most miss. I'm [00:01:00] your host, Andrew, and every week we explore what works, what doesn't, and why through conversations with experienced startup investors and operators.

My guest today is John Harbison, Chairman Emeritus of TCA Venture Group, current Angel Capital Association board member, and a leading contributor to two of my favorite resources for Angel investors from the ACA, the Annual Angel Funders Report and Data Insights Monthly. John is also our very first returning guest, which should tell you something about the value his perspective brings to the Angel ecosystem.

In this episode, John shares some extremely helpful insights on the state of angel investing today as we break down his thoughts from the 2025 Angel Funders Report, including why follow-on rounds are now more common than initial investments, how the valuation compression between early and late stage companies is creating both risks and opportunities for Savvy Angels and why it's such a big deal that angel investor board representation has recently [00:02:00] cratered. I hope you enjoy learning from John as much as I did.

John, thank you for being with me again today.

John Harbison: Pleasure to be here. Thanks for including me.

Andrew Kazlow: You may not know this, but you are the very first guest of the show to be a returning guest. So, uh, Thrilled to have you back and look forward to jumping into our topic today.

John Harbison: We will see how the sequel does.

Andrew Kazlow: So today we are here to talk about something that's been a labor of love for you and many others, and that is the 2025 Angel Funders Report from the Angel Capital Association.

John, my first question for you, as you've spent a lot of time in the data, what are you feeling excited about from this latest analysis?

John Harbison: I should probably just say for the purpose of your viewers, what this is, what this report covers and what it doesn't cover. This is something that. Uh, Angel Capital Association has been [00:03:00] publishing for, I don't know, six or seven years now, and each year it's a snapshot of what's happening in this early stage investing class.

And it's become the richest, most complete data set on what is happening both in the current year and as relates to trends over multiple years. 'Cause we've been doing this over multiple years and the basis is pretty broad. Uh, we have about 70 angel groups each year that contribute their data. It's kind of a pain in the neck to collect all this data.

Uh, But it's directly coming from the groups and the groups are collecting information from their deal leads and from their portfolio CEOs. So it's verified information so it's not, stuff scraped from the internet and so it has some validity that you don't get in a Crunchbase or a PitchBook or those kinds of places that don't necessarily, capture everything or capture everything exactly. This is all kind of verified [00:04:00] information. So that's what it is. And each year we collect information on about, you know, something like a thousand, companies that are funded that year across these 70 groups. The groups that participate include most of the large angel groups.

And, but there's also a lot of smaller groups, so it's, it ranges a lot. The deal sizes go anywhere from $25,000 to $10 million. So it covers the whole gamut there. Uh, the groups serve across the whole country with a few from Canada. The transactions are almost all North America.

There are few where those are making investments outside of North America, but it's mostly a North American kind of look at the world. And, as I said, we collect about 35 different, pieces of data on each of the transactions, and it's directly from those sources. Um, so for instance.

Uh, we capture information on things [00:05:00] like, um, obviously how big was the deal? Where was the company located? What was their industry sector? Uh, what's the stage of development of the company? What was the deal structure? What kind of, uh, was it done with notes or preferred equity and, all sorts of things like that.

Information on the CEO. What's the ethnicity of the CEO? Did they have previous experience? What male, female, those kinds of things. And then information on some things like, do you have a board seat? You know, were there other angel groups involved and things like that.

So it gives us a chance to cut and slice all that data in a number of ways. To try to get some insights on what's happening, how much it was on initial rounds versus fall on rounds and so forth. So it's a snapshot of what's happening in the trends for the initial investments. We also collect information on exits in the year and shutdowns in the year.

So we're able to talk about trends on those kinds of things. Um, with that as a [00:06:00] little preface, that's what it is.

Andrew Kazlow: And let me just react to all of that and highlight how much this has been a blessing personally as we built our business serving the angel space. Like this resource is without a doubt the single most comprehensive analysis of the angel ecosystem out there, like bar none. It is a must read. So anybody listening to this,

sit down, spend some time with this report because it's very thoughtfully put together. You can, just hear it from the way, John is talking about it, right? That there's quite a bit here and it's a lengthy read, but it's a worthwhile read.

John Harbison: Yeah, and some of the stuff. As I said, there are other sources that will capture basic information on the companies and maybe even who the investors are and maybe even the size of rounds. But they're not very good on capturing valuations. They're not very good at capturing any of the other dynamics

that we talked about there. This is an opportunity to kind of peel the onion back and get into [00:07:00] really more the nitty gritty of what's really happening and why it's happening. And, and then the narrative in the report. We have 80 or so exhibits in the report. And it's all available to be viewed online for free on the ACA website.

If you wanna download a copy, there's a modest fee. You can download a PDF version. You want want it that way. We have a narrative for all those charts, so you don't necessarily have to have John Harbison in there saying what this chart means. It's all written down.

And we have a team of, of about eight or so people who contribute to uh, writing the report. So it's kind of a group written a lot of thinking and a lot of challenging each other. So, there's a lot of cumulative, uh, experience that's applied to the, so what's associated with all this kinds of stuff.

So getting back to your question of kind of what do we hear, at the top line, the angel investing world has always been a cyclical activity, go through periods where everyone's really excited and putting lots of [00:08:00] dollars into ones where they're not so excited, putting less dollars.

And we're in one of those troughs now. We've been there for a couple years now. Um, Last year it declined 33% from 2022. The good news is it still declined, but it didn't decline as much. It went down 6%. So I think we're in a 24 wa... was an inflection point. I think we're starting to see 25 pick up again. Uh, some of that goes along with the general investing cycle.

It tends to, I've been following this for the last 25 years with Tech Coast Angels. And you can see that when the stock market goes through its funks and goes down, angels suddenly feel poor. You know, they typically sell stocks to go buy these, uh, early stage stocks. And so the company that they would've sold, just, they drop 30% and they don't feel as likely to, you know, liquidate.

'cause they wanna wait till it. So there's a whole bunch of reasons why it gets slow. [00:09:00] And we went through a period for about, five or six years where it was a very high level of activity. And when the market started to get volatile and things started to get down, it went down. So anyway, the overall thing is we're in one of those areas where it's a difficult thing to raise money these days. The investors have a little bit more say in what the terms and conditions are because of that, because there's less money going after the same amount of deals and the deals are out there. And, we don't find that suddenly in, during those cycles. Good investments only come during peak or bottom. They come all the time. That's where we are in the overall picture thing. Now there's some things affecting that. One of the things that I think has affected the last few years for this class has been that valuations got really heady for a while there.

And starting around 2022, it [00:10:00] dropped for the later stage and for the exit values were dropping considerably. You saw drops in the stock market, but you also saw these later stage private companies were all dropping very dramatically, and quite frankly, they weren't dropping for this early stage.

And there are a bunch of reasons for that. Part of it was the VCs, which were the ones that were lacking the discipline on what these companies were work were kinda working down into the early stage space and mucking around. And they were all chasing unicorns and they thought it didn't make much sense difference of whether you invested 5 million or 10 million or 15 million.

It was all, everything was gonna be a billion dollars going out. So just, you know, let's just go throw money at it. and so there was, There were some dynamics that were causing that, but quite frankly, there were a lot of investors that looked at that and said, you know, Hey, I need to see a path when I make the investment to get to some outcome that's gonna show me a decent return.

And I [00:11:00] can't say that I can't see my way to a 10 or 20 times return when the exit values have gone down by 70%. And the entries are the same, so, that's one of the things that slowed it down and, and when we collected the data for this year, I was hoping that we'd see a correction, but it actually, it's gone the other way.

The earliest stages, seed and pre-seeds have gone up actually in 24 relative to 23. The later ones are still going down. So we still got that compression problem. And so that's something I think of concern. And I think it should be a concern to, it's good news for an, an early stage CEO and I've been an early stage CEO, so I understand the whole dilution argument.

But if he gets started too high a value, it gets raising money later on very hard. And you get pressure to get into down rounds if you get ahead of yourself 'cause somebody gets in. So it actually kills a lot of [00:12:00] companies by starting off at too high valuation. So, valuation is one thing that is studied as there's a bunch of charts in there, talk about valuation and compares valuations across industries at different stages and things like that.

But that's kind of one of the top lines. 

Andrew Kazlow: So that was one of the ones that I found to be the most shocking. There is a chart, chart figure 17, uh, in the version I'm looking at. But it's this, it just shows this compression so clearly where if you look at 2021, I think it was average valuation.

John Harbison: They're all done on medians. You can't use averages. We, we, By the way, we report on averages and medians on a lot of the charts, but I generally find median is a better value. 'Cause you get really extreme things that muck up the averages and so you really wanna know where the center of all that is anyway.

But the chart you're referring to is a median chart. Yeah. 

Andrew Kazlow: So it's showing the median valuation for Series B angel investments compared to, pre-seed and seed [00:13:00] and in 2021 the pre-seed median was around 4 million pre-money valuation compared to a 32 million, Series B, which is you know, pretty significant gap about what you would expect. What's insane to me is comparing that with what we're seeing this year, and that is pre-seed has increased to a $10 million median valuation and Series B is reduced to a 19 million valuation, so that's a gap of 9 million between pre-seed deals and Series B. It's incredible, that's a three x reduction in that gap 

during that period. 

John Harbison: It's causing less money to go get company started, but it's gonna be a future issue, uh, for the companies and quite frankly, if there's a positive in that is if that's the general pattern that's happening, it used to be that the general wisdom was get in early when the valuation's low and ride the biggest [00:14:00] outcome. That when we've done the analysis and some groups have actually have the data to be able to do this analysis. Like for instance, Launchpad Ventures has data on every transaction that's ever made by each, every individual. 'Cause they track it all with Seraf, which is a tool that they developed, which is available commercially now.

They can actually track all these investments, uh, in a way that most angel groups, really can't track. But one of the questions that they looked at was, do you get the best returns on the initial rounds versus the follow-on rounds? And it showed that the initial round wasn't getting the highest return.

It was the second round and then the third and the fourth. And the reason what was happening is that there's a lot of risk in these ventures, and by the time you get to the second round, a bunch of risks have been taken off the table. But because you payed too much for the first round, the valuation didn't go up that much so that the second one was a [00:15:00] better deal.

So I think what's happening is as you'll probably see more follow, and we've also seen the dollars are moving from initial into follow-on, which was another interesting trend from last year's report to this report. You know, it's still about 50:50, but it went from like 45:55 to 55:45. It's shifting like that.

And so dollars are going into follow-on because people are starting to pay attention to this and they're, and even if they aren't gonna pay attention to all the analysis, they're saying, gee, you know, when I look at option A, which is this brand new company with a ton of risks on the table and this other one, which is option B, and it's only 10% more costly.

And I get all those risks off the table. I'll just wait and do the second round or the third round. I think it will, we'll have more investors in the angel community investing in those follow-on rounds for the ones that get off. The ground, but there's a risk of some of the ones not getting off the ground.

So that's where you start to get into how these place, [00:16:00] you know, as you talked about, is the compression and seeing those differences. But then you start to say, well, let's look at the follow-on and what, how is that relating back to that, and how do you then build these trends out? So, those were some things that are, you know, you can see the things as they evolve year to year.

And start to modify your behaviors. When I first. I started investing, and first joined TCA back in, 2003. I didn't know anything about this and so I was, you know, I glommed onto some people in the room who knew a lot more about it than me and I asked them, a ton of questions about that.

And the smartest guy in the room at the time was Luis Villalobos, who was the founder of Tech Coast Angels. And he always asked these really smart questions. You know, I said, okay, you're gonna be my mentor. And one of the questions I asked him, I said, so Luis, should we invest just in the first round or also on these following rounds?

And he said, no, you should just invest in the first one. 'cause that's gonna be the biggest appreciation. Luis, unfortunately passed away in 2008, [00:17:00] 2009, but if he were today and I showed him this analysis, he'd be the first to say, aha! That's really insightful and the reason. Is the thing that I talked about there.

And the reason the returns are pretty good for these follow-ons. One is that dimension that I talked about there. But the other reason is, is that the first ones, a higher percentage of those fail. Than the ones that are getting follow-on funding, a lower percentage fail. So they may not have the same multiple as those are.

It's true that the early stage one will get the highest multiple, but you'll have much higher percentage of them getting nothing. And so a portfolio of those versus the portfolio ones that have a better chance of getting to an exit. So as we kind of go through this, you'd start to see the interplay of, you know, valuation and follow-ons and initial and all this kind of stuff, and it helps you inform you and come up with a better idea of what is a good strategy, for how to go ahead, for each individual, 

Andrew Kazlow: [00:18:00] So maybe continuing that thought, given this compression and the optionality that angels have around these risk units, what's the so what for, for the angel investor of today on this.

John Harbison: Well, part of it is. There's some deals that we don't really have a lot of influence on the valuation because somebody else is writing the term sheet and they're negotiating that. And it's sort of a take it, or leave, leave it. And if we don't like it, we just leave it. But if we're at in the driver's seat, you really have an opportunity to have a collaborative conversation with

the entrepreneur to try to help them, position them for success. And that's one of the things a lot of people don't understand, most negotiation is not constant sum.

It's just how can we do things that make the pie much bigger rather than it's how we're gonna divide the pie up. And valuation's just one thing. But there's [00:19:00] a whole set of things when you set up a company that you wanna set up the company for success. So for instance, there are a lot of terms and conditions that give investors certain rights. They aren't just to give the investors a bigger piece of the pie. It's to help the company get to a point where there is a pie to divide. One of the things that we've learned over the years from our analysis is that, the best angel groups are the ones that are providing mentorship and counseling, not just money.

So we call it smart money, not dumb money. And the best entrepreneurs are the ones that know how to take advantage of that and leverage that. And the groups, there have been some groups that have actually measured this dimension. So for instance, Central Texas Angel Network, which is one of the leading groups in the country, looked at the performance of their portfolio

when they [00:20:00] had a board member. And when they didn't have a board member, and it was, I forget the exact number, but it's like eight times higher when they had a board member, when they didn't. And that money goes to the entrepreneur too. It's not, that. They got it with a six times liquidity preference and they took all the money.

It's like the co everybody got wealthy on that. If you find the right group, and it's a group that puts somebody on who knows something about your industry and is, and can really give you substantive knowledge, you can do much better with that sort of thing. The board representation is something that it, one, does protect our interests, but more importantly, it gives the entrepreneur a chance to not make the same mistakes and make fewer mistakes and make some new mistakes. But if you've got people around giving you guidance and helping opening doors and get through that sort of process. That's really the power that we had. So getting back to the data. So there's one piece of [00:21:00] data that says, great, it's great to have board members involved. So what do you do with that? Now, if I go back to the a FR, one of the questions we ask is board representation. And one of the things that I found alarming was that, last year was 34% of the deals had board representation, which is pretty small when you just look at the numbers, you know, two thirds don't have the advantage of having that, have that guidance in the room.

And this year it dropped even further to 22%. Um, so that trend's going in the wrong way when we know that what we need to get to an exit is the other thing. So then the, you get to the, so what, well, why is that happening? One of the reasons it's happening is that the checks being written by angel groups are getting smaller. Not always, but the average check is getting smaller and as we get average checks getting smaller, our ability to get a board member goes down. You know, it used to be when we were writing very large checks, [00:22:00] we'd always get a board member, but when you get down to smaller checks, it gets down.

We're doing more syndication, which is good. It brings more capital to bear. And there's a lot of documentation of that in there where individual angel groups may be writing a little less, but they're more angel groups, writing, you know, so it's adding in and there's a bigger set of people to pool from in terms of their network and resources and stuff in there.

But the result is, is that it's a little harder to get the. the board seat when if somebody's raising a $3 million round and an angel group puts in $500,000, they're probably not gonna get a board seat. There's some lessons in there is one is, maybe you should you try to get more, be better at syndication. So collectively, you're a bigger portion of the total, and then you figure out how one of you would be on there. Or you start to pick your bets a little bit more to try to get those things up. And even if you don't, um, have the conversation with the company and says, okay, maybe it doesn't, we don't have enough to have a board seat.

We think we can [00:23:00] bring all this benefit to you. and show 'em the numbers of the multiples and so forth, and then say, you know, can we have an observer seat? My own opinion is it, matters a lot less whether the person in the room is an observer or a board member. Obviously if it gets to a tight situation and you wanna replace the CEO and things like, you know, some big decision, then it makes a difference whether, who's a voting member, who's not a member.

But all the boards I serve on that have both board members and observers. We all have equal influence in terms of steering and giving the strategic guides to the company. So, you know, one of the things I think we can advocate is, well, yeah, maybe we don't have enough of an investment in here to warrant having a board member thing, but why don't you try us out as an observer?

It's no obligation, but I think you'll be better off for that. We can mitigate that trend and start to reverse that trend in a way that it ultimately is, is manageable. And the other part of that is, is that when I [00:24:00] do the due diligence, you know, I talked to Star about talking about the constant sums.

When we put a term sheet together. It's never, you know, we wanna, it's not, you know, Donald Trump saying, I'm gonna give you a hundred percent tariff and I'm gonna settle over 20. That's not the way we negotiate terms. We say this is a fair deal. And it's fair for these reasons.

And it has these clauses in it for these reasons and explaining why they're in there. And they're there to protect not just investors that are protect you and you, you kind of build it together. So when they come in with a high valuation, you can say, well, you know, you're running this kind of a risk for that and maybe you wanna think about.

Revising that now and you try to coax them into something that is, I've, I've been on ones for instance, that, you know, at one of the, the dimensions we measure is what kind of instrument and most angels prefer a preferred equity investment. And it's been roughly about half of the investments are in preferred equity, but it used to be more than 50%.

It's gotten down to [00:25:00] about 50%. When I see a convertible note, I say there's a problem with the convertible notes. We've done the analysis say returns for convertible notes are less than con returns for preferred equity, largely because by the time the note converts, there's a lot that stuff that's been taken off the table, but it doesn't end up.

It converts at a valuation that, you didn't lock in the valuation of what it was actually worth when all those risks were there. So I try to convince and in some of the deals where we've been in the lead, the investors said, I'm doing a convertible note. And we said, okay, you can do that.

And if you do that, this is what I think you can raise from our group if you did it as a preferred equity. I think we can do 50% more than that because a lot of people won't invest in em. You give them the sensitivity analysis of whatever decisions you make. you know, it's like selling a product, I, I say a price and what features and functions in there that determines my demand and [00:26:00] says, if you look at the instrument and the company, if you position the company to do these things, if you change this part of your strategy, if you change these kinds of terms.

These are the things that could get more people to sign up to become investors. And if you don't wanna do that, fine, you'll just raise less money. It's your choice. And so I basically try to guess what the demand curve is. And so I say, okay, so you, you say you want a $7 million valuation. I think with $7 million, based on my conversations, was it, we can raise probably about $300,000.

If you knock that to 5 million, I think we could raise probably 600,000. Which do you want? You know, you just, you give them some choices and ultimately they say, well gee, I'm more interested in getting 600,000 'cause I gotta get this thing off the ground. And I kind of hear you, what to say of it. If I have momentum in the following rounds with continuing going up, I can kind of deal with that and if you move it from an [00:27:00] adversarial negotiation to a, a, a collaborative negotiation and you start the joining journey that way, um, you can help, get to some of those other kinds of things. So, 

Andrew Kazlow: So John, that is a very sophisticated conversation that connects to one of the other observations from the report. One of the things that I see angel groups, particularly smaller angel groups struggle with is understanding their membership to the degree to be able to have those conversations and then connected, growing their membership member growth is a huge concern from all the angle group operators that I'm talking to and. The report talked quite a lot about kind of the comparison of the different models in the angel ecosystem, right? The, the pure play investor network versus, fund only versus kind of a hybrid. And there was an observation that I found really interesting, which was that there more mature groups tend to develop these funds, or perhaps you can correct me, [00:28:00] that groups with these funds tend to invest larger checks as well as be more mature. And so I wonder if you could talk a little bit about maybe to the smaller angel community that's listening to this about kinda how to grow, in some ways that you've seen through the report or otherwise communities kind of evolve into writing these bigger checks, being able to have more sophisticated conversations with entrepreneurs coming to the table.

John Harbison: Yeah, it's, well first of all we, we have those three buckets. It's the pure network, which is basically each individual angel makes, decides which companies they invest in, and they write a check the funds, which are in pure funds, which are, everyone gives the fund a certain amount of money and then the fund invests in it.

And then what we call the hybrids, which have elements of both of them. Most of the hybrids are ones that started out as a network and then they added a fund or funds and they kind of got to that. And that was the journey that TCA venture group went through, [00:29:00] over the years. And the observation is the hybrid ones.

They invest a bigger amount of money than the ones that are pure networks or pure funds. They tend to write larger ones for each deal as well. And one of the things I've just observed in our own kind of journey is when we started putting out funds, we did it initially to provide a diversification option for our members.

'Cause there's a real problem that if you're investing in this class, you shouldn't put all your eggs in this basket. You shouldn't be putting like more than 15% of your investible assets in this kind of crazy, you know, shoot the moon, uh, activity. If you say, well, I'm gonna go for shooting the moon, I'm gonna put a hundred percent of my assets, and that you may end up being stuffing, uh, bags in Walmart in your waiting for those exits to occur.

So if you do that and then you say, well, everyone's got a different financial situation and they start out with different amount of investible assets. If they've got [00:30:00] $30 million to invest, they can make a lot of $25,000 checks and still end up with a pretty robust portfolio. But if they have a million dollars to invest, and they're only gonna put 15% of that in this class, so I got $150,000 so I can write six of those checks, that's not enough diversification 'cause you gotta invest in enough to catch through these home runs. So we did it for a diversification to give people a chance to do that. But one of the things we contemplated initially was this, was this going to bring more money or less money to these companies?

If we provide that as an option, are people just gonna stop doing the direct writing and do the funds instead? And was interesting is that. In some cases people shifted just into the funds and some people said, no, I'm just gonna pick my own companies here. I'm better smarter than everybody else. And other people like myself do a little bit of both. Um, so if I'm really excited about a company, then I write the thing, but [00:31:00] then the other ones, I'm happy to have these other, you know, long shots in a portfolio and maybe some of them end up, becoming there. So what happened was we saw that the amount. That was per member was going up as we added a fund component, that it wasn't just cannibalizing, it was like, oh, this is something new and different and I'm gonna go do that.

One of the things that. Some of the syndication things that are happening are helping companies, helping angel groups in their membership recruitment and retention, because you can give your members more options to invest if you're a small group and every year you invest in four or five deals.

Well, that may not be to people's liking and they, can't really build a portfolio. But if you give access through syndication into a broader set of deals, then suddenly they have more options. And if your group is part of a syndication network to do that, then you have more reason to stay as part of your group to participate in that broader group.

[00:32:00] So for instance, we back in 2016, started a thing at TCA called Angel Syndication Network, which initially was a half a dozen other groups. And initially it was a call, but eventually by, 2018 or something, we were starting to do monthly calls, or presentations.

And the members could, of all those groups could, participate, you know, virtually in a presentation. And what comes out of that is they do three a month and they do 11 a year. So there are 33 new companies that have all been vetted by groups and done due diligence. You can see the due diligence and you can more quickly get to writing and checks.

But if you present that to your members, suddenly if I only had five, now I have 38.

And so. Gee, I'm glad I'm part of this group 'cause it gives me access to that bigger group. All these things kind of can come together. And so when you go back to your question about the members, one of the things that was [00:33:00] interesting this year was that last year, the growth was greater in the smaller groups. This year, I mean, there's a wide range in all this thing, but when you look at the growth rates by the size of the group in terms of members, the bigger groups actually were doing a little bit better than the smaller groups in terms of their percent growth. And if you looked at it in terms of age, the younger ones were doing better.

Now the older ones are doing a little bit better, and so the AFR goes into those kinds of dynamics and trends, offers in some cases, hypotheses on why these things are happening. In some cases, they're, you know, more strong observations. Sometimes they're very speculative. We try to differentiate, which we're doing as we go through it.

But in presenting the charts, we try to have this informed conversation based on half a dozen people who, uh, have been doing this for decades. And have some, be able to bring the [00:34:00] connection in between these various kinds of things. So, I think that's one thing that's, kind of new in these most recent AFR we've been talking about those kinds of things.

Now I'm very excited that ACA has just launched a new survey, which just went out in July. That's for member groups to give. Information on their activities in terms of their deal flow, how many deals they do a year, how many members they have, if their members are growing or declining, all those kinds of things.

Stuff about their governance process, how they make decisions, all this kind of stuff, which is some sort of best practices. And then we can start to correlate that back with the information on the investments and give meaningful. Information back to groups about what kinds of things seem to be working well, what terms of things they're not working well.

So we'll have in another dimension, because we're asking a whole set of new questions that weren't covered [00:35:00] in the AFR questions that are more at a group level, not as a, at a transaction level. It should build on it. And that's cause we really view ACA views itself as kind of the steward of this asset class. And so we need to be able to answer those kinds of questions about, how many investors are out there, what kinds of things are they doing, what things are going and declining. We're paying a lot more attention to the life cycle of angel groups. And we're providing, you know, services, we're thinking about our products and services and how they relate to angel groups at different points. Like one of the things in the life cycle of an angel group, we don't like to see angel groups decline. No longer any company doesn't like their customers to see them go through a period decline.

And so as they move, Yeah, as they go through leadership transitions, for instance, we wanna understand that and provide the right kind of services in the leadership transition so that whoever the new leaders [00:36:00] are, they get armed with, whatever the best practices that the previous leader. Before they checked out new, but now you're sort of new to this and how do I get up to speed?

So we're trying to help people who are new to the job and that new groups, how do you get established? How do you build up? But then some of the mature groups, how do you get through the transitions as you go through those kind of leadership transitions? Some groups are started by a very strong founder and that founder stays

doing it for a long period of time, and then that founder, decides to go on or they shuffle off this mortal coil and are no more, and you see groups collapse at that point. So by talking about these models and, creating transitions and, and how you can do that kind of stuff, you people can maybe get ahead of those kinds of things and build for those transitions so that they'll get to the the next plateau. At TCA venture group, we've always been in the philosophy that everybody has can [00:37:00] make a contribution. But after you make the contribution, you need to get outta the way for other people to get it, get in there. Um, so we've, we've had, we've been around for 25 years, but nobody's been chairman more than two years because we replace the chairman every two years.

Not because the last chairman didn't do a good job, but because we wanna bring other people in to then bring a new set of initiatives. And one of the reasons why we've. I think are perceived as having generated a lot of new things is because we don't have the same person and, you know, we all do it and get outta the way and somebody else jumps in.

So we've got a lot of chair emeritus bubbling around and TCA, we didn't all give up. We're still there. We're providing council advice to the current, current chairs. We have a process to, to, to do that. And, it's so far it's, worked pretty well. But so we're trying to capture those kinds of practices that will help groups continue to grow 'cause we wanna help more groups get established. So we're trying to, we [00:38:00] have a thing called Angel in a box now at ACA,

which is a bunch of forms. It's a bunch of forms to help you get started. So you don't have to invent everything from a blank Excel spreadsheet. So we're trying to solve those kinds of problems, but, ultimately this class is an exciting class. This is where the innovation comes from in our economy. This is where the growth in our economy comes from. The big companies go up and down, but don't net grow anywhere, and the new stuff all comes from this.

So it's really important that we get this right. And so part of our job in doing this is to make this a much more efficient process. Make sure the best companies do get funded, make sure the best companies get the adequate access to capital and get the right kind of guidance to get more of them through to successful companies.

And we're always gonna have failures 'cause by taking risk, you know, there's a lot of things you don't know when you make these investments, but if we can get a higher [00:39:00] percentage them through to success and exits and onto the next stage. Uh, we'll all be better for it. Uh, there'll be some people who make some money along the way, but more importantly, I think, our society will benefit.

People will get the benefit of all these great ideas and innovations and so forth. The world will be a better place diseases will be solved. People live longer. We won't die from pollution. Whatever the, the societal benefit is it all comes back to this class. And if this is not done efficiently and effectively, and this whole asset class withers and dies away, I really worry about where our society's gonna go because we'll stagnate and we'll get into a pretty lethargic state and I don't wanna see that happen.

Andrew Kazlow: So John, one question that I've just been curious about, this is more of a thought exercise for you. I've noticed every year, you know, we have somewhere between 65, 80-ish angel groups that actually report and contribute to this. [00:40:00] What do you think would change about this report if we had participation from every angel group in the country? I'm assuming that that would include and add in a lot of really small groups that just, you know, aren't putting the resources to even complete the report. But I know the ACA tracks a lot of groups and then there's a lot of groups that are even outside of the ACAs purview.

So what are maybe one to three things you think would change or look a little different if we had a hundred percent reporting rate into this report?

John Harbison: Yeah, well, we actually, so I think there's about 180 or 200 groups that are currently part of ACA. So, you know, half of them aren't participating, but we look at the participation rate of what, is that group different from the group that is reporting? Because one of the things we report is we try to extrapolate what the whole group is doing.

The good news is the large groups, a higher percentage of the large groups are doing it because they have more of the resources to be able to collect the information. [00:41:00] But the good news is there is, we've got ones that reported one deal or two deals or three deals, so we've got smaller groups.

They're all across the country. So I think we're getting a representative sample across all those. If some of those less representative ones were to start to contribute, it would strengthen the validity, the assumptions of whether that was a representative sample of whatever that characteristic group would be.

But I don't think it would really necessarily change, uh, the dynamics that much. One thing we are trying to do to make it easier for groups to collect the information is we streamline the collection process every year and refine it and make it less cumbersome. It does take time. We haven't figured out a way to man, you know, pull it out of the ether and, you know, somebody has to do something to collect all this information.

And the way it started out was, you know, we had a set of questions and [00:42:00] you tell me what these things are and that most groups would go to the deal lead and say, okay, here are the questions ACA wants to know all these things. And deal, lead scratch their heads says, you know, I don't know what that answer to the question is.

And or some really good deal leads could do most of those questions and we'd get the thing done and then they'd maybe have to go around and follow up and ask other kinds of questions to fill it in. So some are still doing it that way. We've kind of modified our process at TCA. There's a spreadsheet that we send out and you just filled in a row of all these columns and they're dropdown menus to fill in the row and so that's the way it works. But at TCA, we take that and there's some questions we ask at TCA that ACA hasn't asked. And we put it in a SurveyMonkey 'cause I've, my personal opinion's, easier to fill out a SurveyMonkey than a spreadsheet.

So, and you also know how much time they put into it, 'cause it measures it, you know, the web tool does that. And so what we do [00:43:00] is we ask when a deal close. Says, just tell me the CEO's email address. I'm gonna send this link to the survey to the email. And they don't always fill it out. We have to remind them five times to do it.

But eventually we get 95% of them to fill it out. And then for the other 5% we do it the old fashioned way. We fill it in as best we can, but we feel that we get more of the fields populated and it's more accurate information. 'Cause it's not based on a recollection. It ends up making the data better, but it, streamlined our process. And so what we're doing is, is, you know, for groups that want to use that, we've got an option. If you want this, you have to have a subscription to paid SurveyMonkey. But if you do, you can have a plop in, use this form and you know, send it off that way.

But another thing we're doing, it doesn't convolve any extra costs, is this year we developed a tool, which is a web tool like a, it's like a Google form or a Jotform kind of thing, but it's a whole app basically on the web that asks the same kind of [00:44:00] questions, but it stores it for you that you have access to it.

If you don't know all the answers, you can come back later and add questions back in. And you have it there for your record. It's not a one and done. Send it in and you can collect it during the year rather than have this massive scramble in January, February to get all this stuff done. And we've got some very positive feedback on that form of the tool and bunch of groups saying, oh, this a lot easier.

I can use it this way. So the more we can do to make it easy for groups to collect the information, we'll get more collecting it. The reality is, if the groups that are not collecting, one common element in them is they're probably almost all volunteer, a hundred percent volunteers. They don't have anybody, staff, paid staff.

And so you have to have some volunteer willing to put that time in. You can't just delegate it to whoever the person who's your paid staff. So for those groups, these kinds of tools we think will [00:45:00] get. We'll make it easier for them to do it. If all the volunteer is gonna do is collect emails and, and send a link to that form to their CEOs.

And then at the end of the year, it's all collected. They don't have to do much else. Um, so we're trying to make it more streamlined process so more can do it. So now, there are groups that aren't in the ACA universe that are investing, and we're always kind of trying to grow, you know, who's participating in ACA and that sort of thing.

And some of those new ones will come in. But I think what we have is a pretty representative sample if we have. If you know 70% of the votes are in, can you really call the election? Sure. You know, that's sort of where we are and I don't think it's really gonna change.

We try, because you mentioned the question earlier about, whether using averages or medians, we're trying not to drive it off of averages as much as, as medians, because that way the biggest advantage of having a bigger set is there's less difference [00:46:00] between the averages and the medians if you have a really, really big set.

But, you can really understand that. And I think we will get to the point where, there are certain questions we ask that are a little vague, and so we tweak the questions every year to try to remove some of the ambiguity and tighten that up.

And we're starting to figure out if there's reliable places to fill in information. Um, like one of the things we did differently this year was we asked, one of the questions we asked was number of employees. And a bunch of the returns didn't have that filled in. There's a lot of, almost every company that's on PitchBook has a, an employee count.

They're not always reliable, but they're a lot more reliable than some of the other stuff is on PitchBook. So what we started doing was, if we got the number specifically from the company, we used that. But for the ones we didn't have the information, we pulled it out of PitchBook. So if there's something like that that ends up giving, then now we're looking at [00:47:00] a whole bunch of things on, based on employees.

There's more that are in there. We had, for instance, uh, we asked questions about whether the CEO had prior experience. In the past, some were filled in, some weren't filled in. Now what we do is all the ones that are weren't filled in, we go to LinkedIn and we looked up their LinkedIn profile and we look to see whether they've been CEO before and we fill those things in.

So it's every year the data gets better, but we're very careful about what data we add to the submissions, only when it's something that we know is a good source of data. So it'll get better year to year and we'll have more information on long-term trends. Also, I'm very excited we're getting more and more information now on the exits and outcomes and, um, as we start doing that, we can go back a look at the investments from four years ago and say, okay, well for those [00:48:00] ones that were invested four years ago, which ones are going out of business? And which ones have had exits and were there any patterns on that?

Even if they weren't reported, we can start to look at that. So that's where you really start getting into this being a so what or what can I do differently? It says, oh, well maybe I don't wanna make that same mistake. If we seem to invest in X, Y, Z, and X, Y, Z doesn't seem to have good outcomes, well maybe we'll go to A, B, C instead of X, Y, Z.

Andrew Kazlow: Wonderful. Well, clearly this report is the accumulation of decades of experience and, quite a bit of energy over this last six years to improve and refine it. I certainly have benefited from it and anybody that's listening to this, it's uh, it's worth the read I can't believe you guys give it away for free.

It's such a great resource. John, thank you for spending some time with me today to walk through this and for your work just to serve the angel ecosystem so well.

John Harbison: My pleasure. Thank you.

Andrew Kazlow: Thanks for listening to this episode of The Diligent Observer. I'm your [00:49:00] host, Andrew, and if you're an angel investor looking for essential angel intel in five minutes every week, I think you'd enjoy my newsletter. I send my best stuff, interesting deals, and more straight to your inbox so you never miss a thing.

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