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Tough times spur angel, venture investing

Madison, Wis. - One might think the fallout from the subprime mortgage crisis would crash down equally on all investment markets, given the size of the problem working its way through the economy's digestive system.

That may not be the case with private equity investments such as angel investments and venture capital, two investment classes that have done more to spur company formation in the United States than any other.

In Wisconsin and elsewhere, there are encouraging signs that angel investors and venture capitalists will continue to invest in start-up deals in many sectors, from biotechnology to advanced manufacturing, from energy to software. The structure and complexity of those deals are changing, but that's due less to any economic jitters than to the evolving habits of angel investors.

Shrewd investing

Angel investors are high net-worth individuals who make equity investments in entrepreneurial businesses. Angel networks or funds are formed when these investors band together to jointly evaluate investment opportunities and to invest. While most angel investors go it alone on their deals, or involve a few family members, a rising number are members of networks or funds.
There are about 275 angel groups operating in the United States and Canada today, an increase of 65 percent since 1999. In Wisconsin, there were six angel groups three years ago; there are 17 organized today. Most are members of the Wisconsin Angel Network, which tracks risk capital investments statewide every year.

In early April, the Center on Venture Research at the University of New Hampshire released a report that indicated angel investors might be acting more cautiously in 2008. The report noted that angel deals nationwide grew by 12 percent (to 57,120) in 2007, but total dollars invested grew by just 1.8 percent, to $26 billion. The number of active investors in 2007 was 258,200 people, the center reported, up 10.6 percent over 2006.

Wisconsin Angel Network Director Joe Kremer believes the gap between deals and dollars invested is not an indication of a soft economy, but smarter investing patterns on the part of angels.

“Angel capitalists are becoming more sophisticated, diversifying their portfolios by making smaller investments in more companies,” Kremer said. “A positive result of this is entrepreneurs are being forced to spend their dollars more wisely. A related trend is that angels are lowering their risk by releasing money to entrepreneurs as they hit specific performance `milestones,' versus giving them the entire investment up front.”

Kremer is not alone in his assessment that private equity investments may weather the economic storm. Experts say the investments in software and other tech sectors are actually enticing because they're far removed from credit-centric securities such as hedge funds.

“The credit crunch can help venture,” wrote Keith Benjamin, a partner in Levensohn Venture Partners, a San Francisco firm that focuses on tech investments. “One man's ceiling is another man's floor.”

Confident angels

A report issued in late February by the Angel Capital Association was similarly optimistic. In its annual Angel Group Confidence Report, the ACA predicted the quantity and quality of entrepreneurial investment proposals will increase in 2008 and the number of deals will also grow.

Nearly 55 percent of the respondents to the survey said the number of investments and total dollars invested will increase in 2008, with another 32 percent saying it will remain on par with 2007 levels. All of the angel group leaders surveyed predicted their group would invest in a new company in 2008 - with 81 percent planning to invest in three to nine companies. Another 12 percent expect to invest in 10 or more companies.

“Co-investment was a key component of angel group activity in 2007,” the ACA reported. Two-thirds of the angel groups reported that venture capital firms or other angel groups had joined in their deals, allowing for larger overall investments while spreading the risk.

The totals for Wisconsin's 2007 early-stage investments are still being calculated, but Kremer said he expects strong results in both the deals made and dollars invested columns. “Things are going well in the early-stage market, even if that market is constantly changing,” he said.

In Wisconsin, there are more angels and angel networks, strong state incentives for investors, and more venture capital activity to push companies beyond the start-up stage. The economic slowdown is real, but it may be creating new opportunities to invest in entrepreneurs.

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Tom Still is president of the Wisconsin Technology Council. He is the former associate editor of the Wisconsin State Journal in Madison.

The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of Wisconsin Technology Network, LLC.

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