A background on angel group investment activity in Texas

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January 03, 2018
By Madison Pedigo, director, innovation and entrepreneurship programs at the Naveen Jindal School of Management, UT Dallas

The angel investment climate in Texas is alive and well. 

At the national level, angel investment activity was down in 2016, with the number of deals being funded dropping 9.5% as reported by the Center for Venture Research (CVR). Investment levels were moderate with $21.3B invested, down from $24.6B in 2015.

During the past four years, Texas has accounted for 7.9% of the total companies that angel groups have invested in, according to the Angel Resource Institute. For the first six months of 2017, Texas accounted for seven percent of total angel group investments.



Two Texas angel groups have been listed in the top 10 most active angel groups for the past two years.  Central Texas Angel Network (CTAN) in Austin and the Houston Angel Network (HAN) tied as the top most active angel groups in the country in 2016. In the category of angel groups with multiple office locations, Golden Seeds, which also has an office in Dallas and focused on women leaders, has been ranked in the top five most active investors in this category for the past two years. 
   
Angel groups are active in many cities and regions across Texas, including the major metropolitan hubs, but also in locations such as Amarillo, Corpus Christi, Lubbock, San Angelo and Wichita Falls. During 2016, the 14 Texas angel groups who are members of the Alliance for Texas Angel Networks (ATAN) funded 174 companies according to the ATAN. In the DFW region, ATAN members include the North Texas Angel Network (NTAN) in Dallas and Cowtown Angels in Fort Worth.  Collectively, the 14 ATAN angel groups are comprised of more than 600 accredited investors across the State. Examples of other angel groups located in the DFW area include the Dallas Angel Network and Lone Star Angels.      

Valuation also varies by region because of the types and stages of companies being funded and the supply and demand of angel investment capital. The median valuation in Texas is roughly in line with valuations in other high-tech investment centers.   


Source: 2016 Halo Report 

Angel groups primary invest in the region where they are located, since often members of the group actively work with the companies and serve on their board of directors. Within Texas, 73 percent of the angel group investments in 2016 were made in companies located in the state with 27 percent of investments being made in other states. The out-of-state activity is presumably the result of deal syndication with angel groups in other states.

How the angel investment deal is structured also varies by region. Angel investments can be straight equity investments in companies issuing preferred stock for cash, or they can be implemented using convertible debt instruments that can be converted to preferred stock at a later date at the investor’s option. Alternatively, angel investments can be made in a variety of other ways such as using straight debt or contractual arrangements, such as simple agreements for future equity or SAFEs. [For a discussion of SAFE’s, see https://www.ycombinator.com/documents/].

On average, Texas angel groups made more investments using convertible debt in 2016 than other regions, even though the percentage of new and follow on investments is similar to the national average (51 percent of new investments in Texas versus the national average of 49.6% new). Several possible reasons include that on average Texas may be investing in earlier stage companies than other regions where valuations are more difficult to set.

Another reason is the growing sophistication of Texas angel groups which understand the advantages that a convertible note can provide in some situations. Since a valuation does not need to be formally negotiated when making an investment with convertible debt, this streamlines the negotiation process. Many of these convertible debt investments convert at a discount to the valuation negotiated in a future financial round and employ a cap to limit the conversion price of the debt. If the company performs better than expected, the use of a cap in the convertible debt helps allocate a fair amount of the upside to the angel investor that invested and took early stage risk with the entrepreneur. If the company performs poorly, the angel investor retains a debt instrument that has a superior claim relative to the preferred or common stock holders in the company.   
           

Source: Halo Report, 2016
 
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