Business Angels rise in prominence

As funding dries up from venture capitalists, the public markets, and banks, one source that to date has taken a back seat in innovation, the angel investor, expects for the most part to keep funding at the same pace or higher this year. Angels are being heralded by industry groups as an important source of money that can help fund technologies seen as key to an economic turnaround.

Almost 54 per cent of angel groups polled recently by the US Angel Capital Association said they expect 2009 investments and dollars to be the same or higher than in 2008. They also believe the quantity and quality of 2009 investment opportunities will hold steady or rise above 2008 levels.

In fact, the average investment activity per angel group declined in 2008 over 2007, but several angel groups increased investments in new opportunities during the recession, according the ACA.

The importance of business angels in funding start-ups is increasing around the world. As we report elsewhere, the UK’s business angel association is today launching a government-backed campaign to promote angel investing on the back of fresh research that attempts to measure their overall contribution.

Meanwhile, the Singapore Manufacturers’ Federation recently signed a memorandum of understanding with Exploit Technologies, the commercial arm of the Agency for Science, Technology and Research, to collaborate under Exploit Technologies’ Angel Investment Management initiative to promote angel investments in start-up companies.

And the Indian Angel Network (IAN), comprising about 90 individual investors, recently led the formation of a global association of angel groups from 11 countries, including the US, UK, India, China, France, and Australia, called the World Business Angels Association (WBAA). “The idea behind the WBAA is that entrepreneurial opportunities in India should be visible to angels all around the world,” said Saurabh Srivastava, IAN’s director. “So this way, start-ups here will have more access to capital, as well as better access to global markets.” WBAA angels also can find investment opportunities overseas.

Despite cheap deals, US angels struggle in recession

According to the ACA survey, the average group investment per deal in the US in 2008 was $278,918 (€199,626), about 4 per cent higher than the 2007 average. However, at 6.3, the average number of investments per group saw a decline of about 14 per cent compared to 2007. Total funding per group averaged $1.77 million, down 9 per cent over 2007. The decline in 2008 was largely attributed to the loss of individual wealth amongst angels, and the overall economic decline.

Although 40 per cent of the angel groups polled by ACA expect overall investment to decrease in 2009, 53.8 per cent expect 2009 investments and dollars to be the same or higher than in 2008. Nearly a quarter of angel groups said the overall decline in company valuations and the high quality of investment opportunities means they will be more aggressive in seeking new deals in 2009.

There is even more belief that deal flow will be strong during the recession, with 70 per cent of angel groups believing that the quantity and quality of 2009 investment opportunities will maintain or increase over 2008 levels. However, angels will be choosier in dolling out money.

“Heightened selectivity by angels and venture capitalists has clearly amplified the financing challenge young ventures are facing today, even at collapsed valuations,” said John Huston, ACA Chairman. “However, highly capital-efficient start-ups that can reach cash flow break even with just a few million dollars of investment are having no trouble attracting capital.”

More than 90 per cent of US business angels want to co-invest with other angel groups. In 2008, nearly 63 per cent of ACA member groups co-invested with a venture capital firm and/or had a portfolio company receive a follow-on round from a venture capital firm. Plans for syndication are expected to increase in 2009. In all, 53.8 per cent of those surveyed said they plan to increase co-investment activities with other angel groups, while about one-third said they would increase syndication with venture capitalists and individual angels. One third of the respondents said they plan to increase the number of investors in their group.

ACA said several new angel groups were established in late 2008 and early 2009. Many of the groups are looking for opportunities in reduced valuations for companies, in sectors like cleantech and healthcare, and in capital-efficient companies. Others are putting more money in current investments.

Funding new and existing deals

Tech Coast Angels (TCA), the largest angel investment network in the U S, provided 15 first-time financings and 16 follow-on rounds in 2008, more than the 12 first-time financings and 14 follow-on financings in 2007. TCA’s 250 angel members have put $100 million into 150 Californian companies over the last 12 years.

“Studies have shown that start-up companies, in addition to being important sources of technical and societal innovation, are critical sources of jobs, particularly during economic downturns,” says Ralph Mayer, chairman of TCA. “These companies play an essential role both in propping a sagging economy, and eventually, contributing to turnaround.”