Angel investing slows during first half of 2007

21 Nov Angel investing slows during first half of 2007

Though I have written on several occasions about angel investing in the U.S. and the Midwest, it has been a while since I’ve looked at the most recent trends in this vital sector. Unfortunately, the data for this key segment of company financing is not followed as assiduously as the venture capital or private equity segments.
Angel investing, which is the first money often coming into a young company, is as large a segment as venture capital. According to Digital Media Wire on March 23, 2007, U.S. angel investors invested a total of $25.6 billion in 2006. This is an 11 percent increase over 2005.
According to the study quoted in this article, which was done at the University of New Hampshire’s Center for Venture Research:
1. Healthcare services, medical devices and equipment accounted for 21 percent of the total or $5.4 billion. This is the largest share of angel investments.
2. Software represented 18 percent of the total or $4.6 billion.
3. Biotech also garnered 18 percent of the total or another $4.6 billion.
If you add up the first and third groups, which would comprise total health care and life sciences investing, this number represents $10 billion and 40 percent of the total. That’s pretty amazing.
Angel diversity
Angel investing is much more diverse than venture capital and is investing in many more companies. In 2006, 51,000 businesses received angel investments (or an average investment of $502,000 per company). This seems to be the sweet spot of angels. The number of companies receiving angel investment increased 3 percent over the prior year.
The number of angel investors in the U.S. was 234,000 individuals. This means that each investor on average invested $109,000 in 2006. The average angel deal size grew 7.5 percent over 2005. These angel investments created 201,400 new jobs in the U.S.
Unlike the more detailed MoneyTree report on venture capital from PricewaterhouseCoopers, there is no regional breakdown of where the money’s coming from. This additional analysis would be helpful – as most angel investing is local – with angels investing not more than 100 miles away from where they live.
While that’s all great and encouraging news, it’s old. What about 2007? According to the same institution, angel investing for the first half of 2007 hit $11.9 billion, which is a decrease of 6 percent over 2006 numbers. About 24,000 companies received funding from 140,000 individuals.
The number of companies receiving angel money declined 2 percent while the number of individuals investing increased 8 percent. On average, each company received $496,000 in investment and individuals made investments of about $85,000.
These are important numbers for entrepreneurs to take into account when they are seeking money. I would bet the average angel investment is going to be higher on the two coasts and lower in the Midwest.
Healthcare services, medical devices and equipment represented 22 percent of the total or about $2.6 billion while biotech investing was down (about 10 percent of the total or $1.2 billion). The total still was an impressive (32 percent of total angel investments for the life sciences).
An interesting statistic is what the report calls the yield (or acceptance) rate. This term means the percentage of investment opportunities that are brought to an investor and an actual investment is made.
The yield rate for the first half of 2007 was 19.1 percent (versus 20 percent in 2006). This means that angels on average invested in almost one of every five deals brought to their attention. In other words, they turned down four deals out of every five seen. This is probably a better success rate than venture capital, which must see hundreds of deals for every one in which they invest.
Comparison to Venture Capital
Let’s contrast venture capital investing with the angel investment sector. U.S. VC investments for 2006 were $26.4 billion. In other words, angel investors just about equaled VC investors for the year.
VC investors, however, only invested in 3,416 deals with an average investment of $7.5 million. VC investments grew by 12 percent during 2006. Medical devices, biotech and health care services represented about 28 percent of total investments (or $7.2 billion). Overall, this is a lower percent than in angel investing.
Surpassing angel investment, VC investing for the first half of 2007 reached $14.7 billion. VC investment for the first half of 2007 increased about 11 percent. VCs invested in 1,850 deals during the first half (or about $7.9 million per deal on average). While the number of deals was up only 3 percent, the amount invested per deal was up significantly.
In the Midwest, we are vitally concerned about what happens to angel investors because this is often the earliest level of investment. Wisconsin and Missouri have led angel investment due to favorable state legislation to give incentives to angels investors to invest in local companies via tax credit programs. Michigan seems to have followed suit.
However, the rest of the Midwest (including Illinois) is woefully deficient in this area.
Some creative, early stage funding alternatives have been created in places like Illinois such as the Small Business Innovation Research grants match. Still, these funds are very limited. If anything, angel groups seem to be dying on the vine in Illinois and other parts of the Midwest. As we start with limited and smaller VC than the two coasts, it’s critical that we pick up the slack with angel investors.
In addition to studying what Wisconsin has done to create more angel investor groups and investment, I would look at Maryland. It has a whole range of investment programs for its thriving biotech community (more than 400 companies strong) including a state VC investment fund, an angel tax credit, matching SBIR grants and stem cell grant funding.
Musical gifts for the holidays
In case you music fans think I have forgotten you, I offer my apologies for the dormant activity in this important realm. For those of you blues men and women who are particular fans of Eric Clapton, he has been incredibly productive in the last few years.
Now 62 and turning 63 in March, Clapton recently released his autobiography entitled “Clapton: The Biography.” While this is hardly exquisite or soulful writing, it does provide some good rock lore and insights into one of the legends of rock (he would most likely cringe at this term) and blues.
For all his success, Clapton has gone through heroine, cocaine and alcohol addictions, has survived the death of a young son and was mothered by not his own mother but his grandmother (who he believed was his mother for most of his childhood). Married a few times (including to George Harrison’s former wife, Patti), he seems to have finally reached a harmony in his life with his most recent wife and young children.
It’s a good and interesting rock read! I also recommend the DVD of Cream’s revival tour from 2005 at the Royal Albert Hall in London. While similar concerts were held later at Madison Square Garden, I have not seen any musical material emerging from this.
The first reaction I had to this DVD set was surprise at how old they all are (particularly the geriatric Ginger Baker and hardly jumping Jack Bruce who literally sits for most of the concert except when he’s singing). The tempo of the music was clearly slower and the riffs not nearly as exciting and adventurous.
Nevertheless, the music is compelling and nostalgic and they have their jamming moments.
One thing I noticed was that you could actually distinguish the music more than the original cuts. Clapton seems to have voided totally the use of the wah-wah pedal that was so cutting in songs such as “White Room.”
“Stormy Monday” is much more in the blues tradition that Clapton has evoked in more recent years.
This DVD set is a trip back to the rock era of the 1960s (albeit a geriatric one). For all of us Baby Boomers, this is a grim reminder that retirement lurks as the first wave of those of us turning 62 this year will get their first social security checks.
If this is not enough, Clapton is planning a revival tour with Stevie Winwood at Madison Square Garden in Feb. 2008. The man is active! Happy Thanksgiving and see you soon!
Previous articles by Michael Rosen
• Michael Rosen: University research and life science collaborations drive new approaches to disease
• Michael Rosen: The ease of biotech beyond the Midwest and the U.S.
• Michael Rosen: Japanese biotech: A Midwestern perspective
• Michael Rosen: The cost of doing biotech business: Midwest cheaper than the coast, but not by much?
• Michael Rosen: Midwest nanotechnology whittles away at top states