As venture capitalists tighten their purse strings, entrepreneurs are seeking out angel investors for funding. Too many venture firms need to make large investments with huge payoffs on individual companies to keep their funds’ overall performance appear attractive. Over the last two decades, the number of venture funds has grown from 650 to over 1,600, with the average fund size ballooning from $53 million to $350 million. Since VCs are focusing on existing companies, and the limited partners are not giving them additional capital, deals that would have traditionally gone to VCs are flowing to angels. One VCs trash is another angel’s treasure.
Angel groups are made up of high-net-worth individual investors, generally based in San Francisco, Seattle, New England and Washington D.C. These loosely collaborative bodies are receiving far more funding requests from a higher caliber of start-ups while keeping prices low. By increasing their investments in companies that are in post-product and post-revenue, angels have significantly improved their risk profile. Groups like the Alliance of Angels, based in Seattle, and Hub Angels in Boston have seen a substantial increase in companies requesting funding from both coasts. And numerous angel groups have seen their membership double and triple in size.
The Angel Capital Association recently surveyed 150 angel group leaders and learned that nearly 60% of them said that the number of business plans they received and the quality of those opportunities was better or the same as in 2008. Those comments were based on improved economic conditions for angel investors, but all access to good companies. However, 16% of those surveyed said that the quantity and quality of investment opportunities was down, while the remainder felt increases in quality or number of opportunities, but not both.
Angel investing, which generally provides financing in smaller slices than venture capitalists would consider, has not been immune from the financial downturn. One report from the Center for Venture Research suggests that the average amount of money angels are investing per deal is dropping even as the number of deals trends upward. The fact that dollar allocation per angel is decreasing can be frustrating for entrepreneurs as well as investors. Competition for angel financing has intensified, driving companies to improve products, find compelling markets, form impressive management teams and propose attractive deal terms. While competition should be a good way to weed out the weaklings, it can be a mixed blessing. Some firms are seeing the quality of early stage deals declining because there are more bad deals made, increasing the odds that really good deals will slip through the cracks.
Photo Credit: Metropilot