There is no doubt that the current economic crisis has certainly affected mainstream
America. From overall reduced consumer spending, to layoffs hitting an all time
high, to home foreclosures, to the bankruptcies of small and large businesses alike,
it is apparent that everyone is feeling the impact of today’s down economy.
This economic downturn has also taken its toll in the way angel investors finance
startups. According to the University of New Hampshire's Center for Venture Research,
the year 2008 marked a decrease of roughly 26.2% of total
angel investments when compared to the previous year. There was also a 3%
drop in the number of deals being funded, but this is a rather insignificant decline
from 2007. While there is no significant change in overall angel investment activity,
based on these findings, angel investors have taken an extremely cautious approach
in today’s market.
The reason why
angel investors are committing fewer dollars per deal may perhaps be due
to the fact that start-up valuations are low, about a 50% reduction, according to
one source. Their cautious approach is also reflective in the decline of yield rates,
making it more difficult for entrepreneurs to secure angel dollars.
There had been speculation that in 2008, the trend of angel investors would be to
provide more money towards follow-on investments and portfolio companies, as well
as syndicating deals on multiple
angel investors. This new adaptation to the market is logical and sure to
enable a stable return on investment during these hard economic times. However,
the CVR notes that there is a preference for more novel as opposed to follow-on
investments, as indicated by the decline in expansion-stage investments and increase
in investments in post-seed/startup companies.
In 2008, the largest share of investments was seen in the healthcare services and
medical devices/equipment sector, accounting for 16% of total angel investments.
This was followed by software (13%), retail (12%), biotech (11%), industrial/energy
(8%), and media (7%). Angel return rates for angel exits in 2008 were variable,
accounting for 22% of the exits that comprised of mergers and acquisitions (70%),
bankruptcies (26%), and IPO's (4%). In addition, while women and minority entrepreneurs
represented 16.5% and 3.7% of those who obtained
angel capital in 2008, the overall number of these groups was low, but in
line with yield market rates.
The trend in 2009 should not deviate much from 2008.
Entrepreneurs seeking capital for their startups should find it somewhat
difficult to obtain proper funding, since accredited angel investors have less new
worth and will make fewer investments. However, since venture capitalists are making
sure that their current investments are secure, as opposed to investing in new ventures,
there will still be more investment opportunities
for angel investors.