September 18, 2014

Can Angels Make up for Declining Venture Capital?

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The Wall Street Journal reported this morning that venture capital investing was down in the third quarter as compared to the same quarter last year. So if you’re trying to raise money for a high potential company, the going is probably getting tougher.

In response to this news, I’m sure someone is going to say that the venture capital numbers don’t matter because angels are the real source of financing for high potential companies anyway. Given that likely statement, it’s probably for entrepreneurs to know the facts about the angel capital market. So this week, I’m offering some numbers (from Fool’s Gold: The Truth Behind Angel Investing in America.)

The general picture one gets from the numbers is that angel investors aren’t likely to be able to pick up the slack from a declining venture capital market. Here are some facts about the angel capital market:

  • Contrary to what most people say, the angel market isn’t that big, it’s about the same size as the venture capital market.
  • Angels make up only 8 percent of the informal capital market, which is money from friends, family, and business angels combined.
  • Less than one percent of companies get an angel investment every year.
  • Less than one percent of the companies that get an angel investment every year get it from an organized group of accredited angel investors – the ones that make investments most similar to venture capitalists. In absolute numbers, about 500 companies per year get money from these groups.
  • Measured over a three year period, less than one percent of adult Americans make an angel investment.
  • Only about two percent of those who make angel investments are part of an organized angel group.

Angel investing, particularly the kind that involves the sophisticated, accredited investors talked about all of the time in the media is very, very rare. Even the overall angel capital market isn’t that large. So it’s unlikely that angels are going to plug the hole in the financing of high potential start-ups created by declining venture capital investing.

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About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool’s Gold: The Truth Behind Angel Investing in America; Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs; and From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company.

13 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

13 Reactions

  1. Scott: Could you compare and contrast venture capitalists with angel investors? That’s the main difference? Any similarities?

  2. Can’t wait to read your new book, Scott. Looking forward to it. Anita

  3. I am concerned that Scott’s book does not address the trends and changes in the angel capital market over the past 10 years. Based upon the excerpts I have read to date, there is a lack of data mentioned about formalized angel groups’ growth – throughout the world. This leaves me very concerned about whether Scott painted the true picture of the landscape in angel investing. There have been some very clear changes in the sophisticated angel population, particulary as numbers in professionally managed angel groups have grown and the best practices of these groups have been maturing. The most prominent changes have occurred in the last 3 years, thus making rather bold marketing statements can taint Scott’s reputation for future publications.

  4. First, to answer Martin’s question, the essential difference between venture capitalists and angel investors is that the former are professional money managers who raise a pool of capital from limited partners (usually institutions like university endowments and pension funds, plus some really rich individuals) and then invest that pool into potential high growth early stage companies. In contrast, angels are individual, ‘somewhat rich’ people who invest their own money into companies at an even earlier stage. Typically, venture capital (VC) investments start at around $2 million, whereas individual angels might invest from $10,000 – $100,000 in a given company. The angel groups that Scott discusses are associations of these angel investors who come together to share deal flow and then pool their funds to invest a total of (more or less) $100,000 to $1 million into a deal. There is a pretty good article on angel investors in Wikipedia: http://en.wikipedia.org/wiki/Angel_investor.

    Now, on to Scott’s original post. In general terms, his figures are a little low, but roughly accurate (within an order of magnitude). I can say that with some certainty because our firm, Angelsoft, operates the underlying infrastructure that a large majority of the world’s angel groups use to process their deal flow and investments. We have recently brought up a page with live statistics from the system, which might be instructive to anyone interested in this space: http://www.angelsoft.net/industry.

    HOWEVER, where I differ from Scott is in the interpretation of the data. I’m a little confused by the consistently negative spin that he seems to keep putting on the issue. It’s as if he is setting up a strawman simply so that he can knock it down. For example, “contrary to what people say, the angel market isn’t that big, it’s about the same size as the venture capital market”. Huh?! What “people” are “saying” it’s any bigger?? VCs in the US invested about $30 billion last year (mostly in later stage companies.) Angels (according to UNH Center for Venture Research estimates, which puts out the best numbers we have, other than those from Angelsoft) invested about $26 billion into almost exclusively early stage companies.

    That’s $26 BILLION dollars, which, at least to me, is a heck of a lot of money! I’d be really curious if Scott could point to any legitimate source claiming any higher numbers.

    But the important take away here is that angels ARE a not-insignificant source of early stage (NOT necessarily “startup”) capital, and put money into over 50,000 companies each year (as compared to fewer than 4,000 for VCs). Organized angel groups are playing an increasing role in the funding spectrum, as is Angelsoft, which now connects over 12,500 accredited angel investors in over 450 groups.

    So, my bottom line on the original post is that yes, Scott’s data is generally in the ballpark, but no, I disagree with his conclusions (or at least the spin he puts on them.) I’d be delighted to continue this discussion, either here, on Scott’s blog, or on the Angelsoft blog at http://blog.angelsoft.net.

    -David S. Rose
    Chairman, New York Angels
    CEO, Angelsoft

  5. Scott, Your book sounds like it offers some interesting info and facts. With only under 1% of businesses getting an angel investment, how can you make sure your business is included in that percentage? It sounds like only the most select businesses get chosen by angel investors.

  6. These are interesting statistics and they really do shed some realistic light onto the situation. Although statistics such as this, “Measured over a three year period, less than one percent of adult Americans make an angel investment” really aren’t all that surprising. As a matter of fact, I never even heard the term “angel investor” until about 2 years ago. And at the time, had no clue what it meant. I imagine it really does represent a very small portion of individuals as Scott points out.

  7. The same factors that are hitting VC firms are also hitting angels. Because of this, I agree that it is unlikely angels will fill a VC funding gap. During and just after the dot com bust angel investing fell substantially here in Silicon Valley. I’m hearing this is happening again.

    The other problem is Silicon Valley has not had many new, large wealth events over the last couple of years. The IPO market has been closed and acquisition numbers down. Because angel investing failure rates are high, the market needs a steady flow of new investors and not a lot of new ones have been created.

    On the positive side, angels jumped back in quicker than traditional VCs after the bust. The other positive news is IT related tech companies are starting with much smaller amounts of seed and first round capital – or even self funding.

    Also good companies with good ideas can still get funding from angels, it is just harder. I just got a note today from a company that closed an angel seed round last week.

  8. Hi Scott,

    I believe I have misunderstood before about Angel Investors and Venture Capitalists. I thought they are the same. I would like to know more of the differences of Angel investors and venture capitalists.

    Thank you in advance!

  9. David S. Rose,

    Thanks for your explanation. Does your company invest in foreign companies that want to have a presence in North America? I will meet a lawyer from a law firm in Chicago this week. He is visiting Sweden. I met him at an event that the Swedish-American Chambers of Commerce arrange a couple of years ago.

    All the Best,

    Martin Lindeskog – American in Spirit.
    Gothenburg, Sweden.

  10. The reality is that there are a category if businesses that will never be looked at seriously by venture capital nor should they. These companies are probably not raising a large enough amount of capital to be taken seriously and they probably don’t want to give away a lion share of their deal.

    Angel capital is used more often than people realize and falls into sort of a grey area. I mean if I borrow 50 grand from a friend of the family to start my business does this get earmarked by anyone. I don’t see how.

    If you have a project that does not fit into the venture capital model. Consider not letting that stop you from learning how to raise angel capital.

    A lot of entrepreneurs don’t want to do the work but the reality is someone does. If its a valid cogent idea you have to prove it by raising the money and getting it to market.

  11. Catherine,

    I wish that you would have read my book before posting your comment because I feel compelled to clarify that Chapter 9 of the book discusses formalized angel groups.

    While formalized angel groups have certainly grown in recent years, they don’t account for a very large portion of the angel capital market. Based on data from the Angel Capital Association, in 2006, the U.S.-resident angel groups that compose it were made up of 5,632 investors who made 947 investments in 512 companies for a total of $228.8 million. (It is hard to identify the U.S. angel groups from ACA data for 2007 so I use 2006 numbers here.) Even if we were to assume that the ACA member groups only accounted for half of the U.S. angel groups, then an estimated 260 angel groups in this country only account for about 1.8 percent of the companies receiving angel investment and 2 percent of the dollar value of angel investments in the United States every year.

    So I don’t think I’m ignoring angel groups. I’m just trying to put the size of their effort in context.

    Dave,

    First, I don’t think my numbers are that different from yours. I am focused on angels, not VCs, and am estimating the numbers for just the U.S. The angelsoft page you refer to (by the way a very important source of information) includes groups from outside the U.S. and other kinds of organizations. If you took the angelsoft data and you limited to the category “angel group” on your site and you limited those groups to those domiciled in the United States, how many angel investors would you have in how many groups? I suspect it would be roughly the same as the 10,000 investors making 2000 investments in 1,000 companies that comes from roughly doubling the ACA numbers.

    If I make the ACA-doubling calculation described above I get an estimate of about $500 million per year in money invested in start-ups by U.S. angel groups. Clearly organized angel groups aren’t a big portion of the angel dollars if the total for all angels is about $23 billion per year. That goes back to my response to Catherine.

    You point out that I say that the $23 billion in angel money isn’t that large. I don’t think it is in comparison to other sources of money for start-ups. In the same years that the angel money was of this order of magnitude, entrepreneurs invested $124 billion in their own companies and friends and family invested $139 billion. By comparison to what friends and family are providing, what angels are providing is not large (though all these numbers are large by the definition of being bigger than my income).

    I’ll leave aside your comment on my “spin”. Interpretation of numbers will always be different across observers.

  12. And then..Geography does matter! Angel & VCs in different geography respond in a different manner and the determining factors attribute lot to cultural mindset than the economic trends.

  13. Hi Ajitesh, Could you point some article to this – Angel & VCs in different geography respond in a different manner? Would love to learn more about it.

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