On a Wing and a Prayer: 300,000 Angels in Search of a Unicorn


As co-founder and managing partner of San Diego’s TVC Capital, I awake every morning to a certain routine that includes scanning my Term Sheet e-mail to see what investments and acquisitions got done in the tech space.

I have noticed in recent years that the space Dan Primack has devoted to investments is long, while the section for exits is short. In the private equity business, we promote our successes and minimize the failures. The ratio of investments to exits is usually about 10:1. Of late, the exit section has been longer than usual, but still pretty short.

Every morning I ask myself, “What will happen to all of these companies in the long section?” They won’t all grow, and they won’t all sell. Many are headed for a great winnowing.

One of my business school classmates calls the big ones “unicorns.” She studied all of the investments made in the last ten years, and found that only 0.7 percent of those funded deals will grow to achieve a billion dollar market cap. They are as rare as unicorns. Another classmate found that 66 percent of the 22,000 venture deals done in the last decade yielded a 1x return or less. If a politician wins an election by two-thirds of the vote, we call it a landslide. But this number is a much-overlooked fact of the startup life, and his study received scant attention.

Like us, the press has a tendency to focus on the unicorns. They don’t spend much time on the failures, unless they are colossal. The nightly news is focused on fear; the tech press is focused on hope. We all focus on the really big returns because winning is just exhilarating. It validates that it all can work—dreams really can come true. And the big wins get everyone fired up. More money gets raised, more deals get funded, and more people embark on quests for unicorns.

Beating the odds defines the venture model. The data suggests that the model kind of works, if you are at the right venture firm with the right partners seeing the right deals. For everybody else, the game can be painfully short. Most of the venture firms that were based in San Diego when I got here in 2001 are gone. But there are no hard feelings. Everyone knew the rules of the game, and hoped that they would hit it out of the park and into the water, or whatever. When they didn’t, they moved on.

But it wasn’t just the San Diego based firms that went away. Since 2001, the number of active VC firms in the US has decreased by about fifty percent. While we are setting records on capital deployed right now, this is largely driven by more money in fewer deals invested by fewer firms. Much more money is going into the winners showing dramatic revenue growth, and this has all created a void for the entrepreneurs in the garage. Early stage money was the first to disappear and, the seed stage companies needed a new funding source. But just as things dried up for them with the VC firms, a new investor class arrived on gossamer wings to help these very early stage companies spin their dreams into gold.

We call this wave of new investors “angels” and they are even bigger believers in the probability of finding the unicorns. They share a common belief that it doesn’t take a miracle or steroids to hit it out of the park and into the water.

But some research we have been conducting on angel investments is alarming.

In the last five years, angels have invested over $100 billion dollars in startups—often really, really early startups. We estimate that by the end of 2014, 350,000 companies will have received angel funding since 2010.

Past data indicates that less than 5 percent of these companies will receive institutional VC funding or get acquired. So I ask myself, what is going to happen to the other 95 percent? What’s going to happen to the billions of dollars deployed by angel investors? Time will tell, but there will likely be a great many software companies available as “tuck-in” acquisitions in the days ahead. That would be good for our portfolio companies.

Some of the angels who are part of this massive investment wave are big names, hugely successful entrepreneurs who are sharing the wealth. Some of the angels flock together, and some fly solo. Most have enjoyed a … Next Page »

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Jeb Spencer is the co-founder and managing partner of TVC Capital, a San Diego growth equity firm focused on software companies. Follow @

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One response to “On a Wing and a Prayer: 300,000 Angels in Search of a Unicorn”

  1. Theodore says:

    Great post, and for those of us in the trenches a nice confirmation of the constraints we see building. I am on the entrepreneur side, and we see a lot of angels without any operational experience in the verticals they want to invest in. We also see a lot of unrealistic participation demands. When we evaluate angels, they need to do two things for us: 1- have operational experience in the industry, and 2- be able to generate new customer deals for the business. Their money is not that important to us; their management skill and rolodex are essential as our goal is to build a scalable business.

    I do feel that angels can make a nice difference in the start-up ecosystem. The VCs are looking for 20-30x returns which means multi-billion dollar markets, and there are just not that many business that have that scale. But there is a lot of interesting technology that can be developed for <$10M that can generate exits in the $25-50M range as technology or team acquisitions. Angels could completely own that segment of the investment spectrum.