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Breaking down Wisconsin's angel capital numbers

Madison, Wis. - Investments in early-stage Wisconsin companies topped $100 million last year, but the average size of each deal might point to some interesting investment patterns.

The figures were outlined in a recent report titled “Risk Capital in Wisconsin: A Progress Report for 2006,” which was produced by NorthStar Economics, the Wisconsin Technology Council, and the state Department of Financial Institutions.

While the total amount of “angel” investing - $102.9 million - represented an impressive 54 percent increase over 2005 - just over half of the total was secured by companies in the industry segments that make up the so-called knowledge economy - biotechnology, information technology, and medical devices.

Investments in early-stage companies in these key industries accounted for $52.7 million - $35.7 in 13 life-science deals, just over $10 million in six information technology deals, and $7 million for medical devices.

The report does not disclose how many individual angels participated, and what their level of commitment was, in each deal. Overall, there were a total of 46 deals, with an average deal size of $2.2 million, and an average life science deal size of $2.7 million.
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Nationally, the average angel deal ranges from $1 million to $1.5 million, according to Bill Payne, an entrepreneur-in-residence for the Kauffman Foundation.

“The [ideal] sweet spot for angel deals is between $500,000 and $1 million,” he added.

Big deals

Wisconsin, however, has been trying to lay the groundwork for future venture investing by first building an infrastructure for angel investments. In 2003, the state established Act 255, which is designed to stimulate angel and later-stage venture capital investments by providing tax credits to investors that fund companies certified by the Wisconsin Department of Commerce.

In recent months, the state has seen some unusual angel investment deal sizes and structures, such as the $7 million commitment to the early-stage oncology company Cellectar, which involved roughly 70 investors contributing $100,000 a piece.

Wisconsin's 16 angel networks, which accounted for only $7.4 million of the total angel investments in 2006, have been known to syndicate deals.

In addition, the state's angels have combined with outside funds such as the Illinois-based Rosetta Partners and the Louisiana Fund, which took part in deals for Mithridion ($1.4 million) and Primorgen Biosciences ($2.5 million), respectively.

"We're seeing a number of angel-and-fund deals," said Joe Kremer, director of the Wisconsin Angel Network.

Thus far, Act 255 has worked well to stimulate angel investing, but the tax credits are not considered large enough to incentivize venture investments, which declined from $69 million in 2005 to $61 million in 2006.

Tom Still, president of the Wisconsin Technology Council, said it's not unusual for a state to report more angel capital than venture capital. He said as venture investors have changed their focus to later rounds, angels have become the vehicle of choice for early-stage companies.

In addition, he believes a lot of angel activity is underreported, and he said Wisconsin has more companies in the early stages than most states.

"As more companies move through the pipeline, we should get more venture capital," he said.

Double dealing?

The average size of angel deals, and the fact that angel networks accounted for less than seven percent of the total, leads John Gee, the new president of the Information Technology Association of Wisconsin, to believe that some of the state's angel investors might be assuming the role of venture investors in follow-up rounds.

“If you have only $60 million in venture capital, where are companies getting growth capital?” he asked. “They have got to be getting it from angels.”

Perhaps angel capital reporting will never be as complete as investment trackers would like. John May, chairman of the Angel Capital Association, said the organization continues its work on some type of national reporting system. He said it's a daunting task because unlike venture investors, many individual angels would prefer to not report their investments.

Gee offered a reason why.

“Many angels may like it that way because they don't want people hitting them up for money,” he said.

Total picture

Data on Wisconsin angel investments was gathered from three data sets: the state's seven major law firms, where attorneys advise entrepreneurs on prospective deals, the angel networks, and deals reported through Act 255.

Outside of life science, information technology, and medical devices, David Ward, president and founder of NorthStar Economics, said angel investments break down as follows: a mixture of energy investments totaling $14.7 million; real estate, $9.5 million; retail, $4.7 million; agriculture, $4.7 million; manufacturing, $2.6 million; business services, $2.4 million; logistics, $2.1 million; consumer services, $1 million; and other assorted investments, $6.9 million.

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