Angel Groups Cautiously Optimistic about Investing in Start-Up Businesses in 2008

ACA angel groups forecast greater opportunities and at least similar investment activity in 2008

WASHINGTON--(BUSINESS WIRE)--Angel group leaders expressed optimism about the climate for investments in early-stage businesses in 2008 in a recent survey by the Angel Capital Association (ACA). This optimism comes despite recent news about the slowdown of the US economy and follows a year in which investment activity stayed level with 2006.

“We have found that new entrepreneurial opportunities can arise in turbulent times like these.”

In the Angel Group Confidence Report of North American angel group leaders, ACA member angel group leaders predicted that the quantity and quality of entrepreneurial investment proposals will increase in 2008 and that the number and amount of investments they anticipate making will grow slightly this year. The survey was completed by a majority of ACA member groups and respondents are located in 37 American states and Canadian provinces.

These predictions may indicate that sophisticated angel groups and perhaps other private investors have different reactions to economic challenges than public markets, said John May, chairman of ACA and co-manager of the Washington Dinner Club in Washington, DC. We have found that new entrepreneurial opportunities can arise in turbulent times like these.

Angel investors are high net-worth individuals who make equity investments in entrepreneurial businesses, and angel groups are formed when individuals join together to evaluate investment opportunities and make investments. Currently, there are about 275 angel groups operating in the United States and Canada, an increase of 65 percent since 1999.

Predictions for 2008

Not only do nearly half of angel organizations expect deal flow to improve in both quantity and quality this year, but they expect investment activity to continue at the same level or increase somewhat this year over 2007. Nearly 55 percent of the respondents said that the number of investments and total dollars invested will increase this year, with another 32 percent believing that the activity would be the same as 2007. All angel group leaders predicted that their group would invest in a new company in 2008 with 81 percent planning to invest in three to nine companies. Most impressively, twelve percent think they will invest in ten or more companies.

Predictions for positive exits were not as rosy. Fifty eight percent of responding angel group leaders did not think there would be any visible change in opportunities for acquisitions of their portfolio companies or Initial Public Offerings this year, after fewer angel groups experienced positive exits in 2007 compared to the previous year. Another 17 percent predicted a decrease in exit activity.

John Huston, ACA Board member and founder of the Ohio Tech Angels in Columbus, Ohio notes that the two different predictions may fit together. Angel organizations may be betting on economic growth in the long-term for strong exits in the future while also are seeing an increase in the number of high quality entrepreneurs pitching for investment. When you add supportive state policies to develop entrepreneurial talent and grow the amount of capital available in different parts of the country, there are great opportunities for angel group investments in 2008.

In follow-up interviews of its members, ACA did find that some groups are concerned that their capacity for investment may be reduced if problems continue in the public stock markets. Many angels have investments in corporate stocks and may lose some liquidity, and therefore will have reduced ability to make angel investments, if the public markets dont grow this year. These concerns were factored into the 2008 predictions, but the strength of deal flow appears to have led to the generally optimistic forecast.

2007 Angel Group Investment Activity

ACA angel investment groups made an average of 7.3 investments in 2007, with average total funding of $1.94 million. These numbers are similar the numbers that angel groups reported in 2006, in which they invested an average of $1.78 million in 7.4 deals. The average size of an investment per round for a group was $265,926 in 2007.

Co-investment was a key component of angel group activity in 2006: Two-thirds of the reporting groups noted that their portfolio companies received investment from venture capital firms, either as co-investment in the same round or as follow-on funding as the entrepreneurial ventures grew. In addition, 65 percent of the respondents reported co-investing with other angel groups in the same early-stage firm, allowing for larger overall investments in promising companies.

Investment Preferences

By a considerable margin, the reporting angel groups prefer to invest in seed and start-up companies (81 percent) and early-stage firms (85 percent), than they do in expansion (38 percent) and later stage companies (6 percent). This focus complements venture capital, which currently invests mostly in growth and expansion-stage opportunities. The groups expect little change to the stage of companies in which they will invest in 2008. Additionally, the groups also provided follow-on funding for their portfolio companies an average of three of angel groups 7.3 deals in 2007 were follow-on investments in portfolio companies.

Angel group leaders expressed interest in a wide variety of industries in the survey. Five industry areas were of particular interest:

  • Software (83 percent)
  • Medical Devices (75%)
  • Industrial/Energy including clean tech (64%)
  • Business Products and Services (64%)
  • IT Services (63%)

Few angel groups specialize in a particular industry area, and most have interests and expertise among their member investors in a variety of other areas. Five other industry areas were preferred by 50 percent or more of the responding angel groups, including: Biotechnology; Consumer Products and Services, Electronics and Instrumentation; Healthcare Services; IT Services; and, Networking and Equipment.

The industry preferences are slightly different than in 2006, when the Medical Device category had the highest level of interest. Based on the survey and additional anecdotal evidence, the area of greatest growth is clean tech, which attracts interests from ACA members across the continent and is also the subject of a few new angel organizations that were formed in 2007 or 2008.

The full report, including additional survey results and demographics, is available at www.angelcapitalassociation.org/dir_about/news.aspx.

The Angel Capital Association (ACA) is the professional alliance of angel groups in the U.S. and Canada. Currently, there are 154 affiliate organizations and member groups representing more than 6,000 accredited angel investors. ACA focuses on professional development, sharing best practices and building relationships between angel groups. More information can be found at www.angelcapitalassociation.org.

Please note that ACA is not a funding organization itself. The ACA Web site has a directory of member groups, with links to group Web sites. Entrepreneurs should contact individual groups directly rather than ACA (or work with a trusted advisor to gain an introduction). Angels interested in learning more about ACA or member groups are welcome to contact ACA or the member group.

Contacts

Communication Partners
Tom Phillips, 212-935-4655
comptwp@aol.com
or
Angel Capital Association
Marianne Hudson, 913-894-4703
mhudson@angelcapitalassociation.org

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