The angel investor market is considered the spawning ground for the next wave of high-growth investments, and judging by the continued growth in the national angel market, a diversified range of opportunities await later-stage institutional investors.
In its 2006 Angel Market Analysis, the Center for Venture Research at the University of New Hampshire reports that angel investing grew by nearly 11 percent in 2006, with total investments of $25.6 billion.
A report on 2006 Wisconsin angel investment activity is due out next month.
The Center for Venture Research, which has been conducting research on the angel market since 1980, said a total of 51,000 entrepreneurial ventures received angel funding in 2006, a three percent increase from 2005.
The increase in total investment dollars was produced by a more modest increase in total deals, resulting in an increase in the average deal size of 7.5 percent.
Jeffrey Sohl, director of the Center for Venture Research, said the market has plenty of room to grow due to the number of what he called “latent angels.” These are individuals who have the necessary net worth ($1 million, according to the Securities and Exchange Commission), but have not made an investment. If the angel market is to achieve sustainable growth, and if capital gaps such as the one that exists between seed stage and early stage are to be eliminated, there must be a reasonable augmentation in active investors, he said.
The number of active investors totaled 234,000 in 2005, and Sohl believes that if all the latent angels became active, that figure would double. “If we could get half of those [latent angels] to participate,” he added, “we could make quite a dent in that capital gap.”
Also among the study’s findings:
• As was the case in 2005, the healthcare services sector – which includes medical devices and equipment – accounted for the largest share of angel investments, with 21 percent. Healthcare services was followed by software, 18 percent; biotechnology, 18 percent; retail, eight percent; financial and business products, six percent; and industrial/energy, six percent.
• Angel investments contribute significantly to job growth. At a minimum, the study attributes the creation of 201,400 new jobs in the United States in 2006 to angel investment, which translates into four jobs per investment. However, since the study tracks jobs created at the time of the angel investment, it is likely that the 201,400 figure is the minimum number of jobs created by angels in 2006.
• Angel investors continue to be the largest source of seed and start-up capital, with 46 percent of 2006 angel investments in the seed and start-up stage followed closely by post-seed/start-up investments of 40 percent. Angel seed and start-up stage investments in the 45 percent to 55 percent range appear to be the reasonable range for the foreseeable future.
• Yield rates, defined as the percentage of investment opportunities that are brought to the attention of investors that result in an investment, declined from 23 percent in 2005 to 20.1 percent in 2006. On the surface, a declining yield rate is one of the few dark clouds in the 2006 study, but it also reduces concerns about an unsustainable investment rate. The yield rate peaked at 23.3 percent in 2000, the height of the investment bubble, and Sohl believes a 15 percent yield rate would reflect a healthy, disciplined market. “That [2006 yield rate] is a very good number,” Sohl said. “I would like to see it go down a bit more.”
• In 2006, women angels represented 13.8 percent of the angel market, and women-owned ventures accounted for 12.9 percent of entrepreneurs seeking angel capital. In terms of the yield rate, 21.5 percent of these women entrepreneurs received angel investment in 2006.
• Minority angels accounted for just 3.4 percent of the angel population, and minority-owned firms represented 6.9 percent of entrepreneurs who presented their business plans to angels. The yield rate for minority-owned firms was only 7.1 percent, about two-thirds below the overall yield rate.
Sohl said the restructuring represented by greater investment in later-stage opportunities has resulted in fewer dollars available for seed investments, and has exacerbated the capital gap for seed and start-up capital in the United States. While angels continue to represent the largest source of seed and start-up capital, he said market conditions and the capital gap in the post-seed investing stage require angels to engage in more later-stage investments.
Although the annual NorthStar Economics report on Wisconsin angel investment won’t be released until about mid-April, Joe Kremer, director of the Wisconsin Angel Network, believes the national numbers reflect activity in Wisconsin.
NorthStar’s 2005 report indicated that angel investing in Wisconsin totaled more than $19 million, with $14 million coming from individual angels and $5.5 million from organized angel groups. The dollar amount of group investing increased 65 percent, while the number of deals more than doubled from 9 in 2004 to 20 in 2005, and angels took full advantage of the $3 million in available angel tax credits under Act 255.
“I think we’re feeling the same positive upsurge in angel activity,” Kremer said.