December 22, 2014

Will Angel Investment Slowdown Hamper Recovery?

Just as most sources of small business financing have slowed down in the recession, angel financing has gone through some changes, too.

Like all investors, angels became more cautious about their investments. But what long-term effect will this slowdown have? A recent study holds some useful news for small businesses that are seeking this type of financing.

Conducted by the Center for Venture Research at the University of New Hampshire, The Angel Investor Market In Q1q2 2010: Where Have All The Seed Investors Gone?, surveyed angel investment during the first half of 2010. First, the good news: Angels are investing in more businesses. The number of businesses that obtained angel capital in 2010 grew three percent compared to 2009 numbers, reaching 25,200.

Recovery at Risk Due to Angel Investment Slowdown?

Now, the bad news: Although angels are investing in more companies, they’re investing less money overall. Total angel investments in the first half of 2010 dropped by 6.5 percent (to $8.5 billion) compared to the same period in 2009. At the same time, fewer angels are investing. The percentage of angels that are “latent” (meaning they haven’t made an investment) went from 36 percent in 2008 and 54 percent in 2009 to 65 percent in 2010.

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More bad news: Today’s angels are focusing on later-stage companies. A mere 26 percent of angel investments in the first six months of 2010 went to startup stage investments—continuing a decline from 35 percent in 2009 and 45 percent in 2008. And that has implications for more than just startups.

“Historically angels have been the major source of seed and startup capital for entrepreneurs and this declining interest in seed and start-up capital represents a significant change in the angel market,” notes study author Jeffrey Sohl. “Without a reversal of this trend in the near future, the dearth of seed and start-up capital may approach a critical stage, deepening the capital gap and impeding both new venture formation and job creation.”

In fact, even a company with a track record of success might have difficulty getting angel capital if it’s in a risky industry. Angels are focusing on industries that have proven demand even during tough times. Specifically, here’s where they’re putting their money:

  • Healthcare/medical devices and equipment: 24 percent
  • Biotech: 20 percent
  • Software: 12 percent
  • Industrial/energy: 11 percent
  • Retail: 9 percent
  • Media: 5 percent

Recovery could be at risk if angels’ confidence doesn’t improve. Here’s hoping that the rest of 2010 brings more positive news.

Editor’s Note: This article was previously published at OPENForum.com under the title: “Is an Angel Investment Slowdown Putting the Recovery at Risk?” It is republished here with permission.

8 Comments ▼

Anita Campbell - CEO


Anita Campbell Anita Campbell is the Founder and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses, and also serves as CEO of TweakYourBiz.com.

8 Reactions

  1. As this trend continues, “Friends & Family” will continue to be the most popular angels for most small businesses getting started, and probably a good place to start.
    Also, more angels are becoming more sophisticated in their screening. We are researching this now and should have an post on SBT in the near future with our findings…

  2. I agree with Todd’s comment about friends and family providing key financial backing. I’d also argue, however, that not as much is needed to start a new business. At least from the technology side, you need a fraction of the amount of money you did even five years ago to get going. It’s a point that I make in The New Small (shameless plug, I know.)

  3. Anita, I am glad to see a report from New Hampshire! I studied at nearby university, Southern New Hampshire University, in Manchester. I will mention this post to some people at SNHU.

    Phil Simon: I got interested in your book, The New Small, so I will listen to Mitch Joel’s interview with you in the near future.

  4. I can understand that angel investors are also feeling the pressure of a tough economy, thus spreading their investments around with lower-risk, later stage companies. However, some are going to have to manage a little more risk if we’re going to get out of this mess.

  5. The fact remains that friends and family are “angel investors” as well, but aren’t part of any study. Since banks are still reluctant to lend to small business, especially start-ups, these special angels are an extremely important part of our entrepreneurial ecosystem.

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