01 Apr Angel investors showed caution in 2007
Durham, N.H. – Even before the current economic slowdown was acknowledged by government reports, angel investors took a more cautious approach to investing, according to the 2007 Angel Market Analysis released by the Center for Venture Research at the University of New Hampshire.
The angel investment market showed mixed signs of growth in 2007, when national economic growth dramatically slowed to 0.6 percent in the fourth quarter.
While it continued a reasonable growth path in investment activity, total investments in 2007 were $26 billion, an increase of 1.8 percent over 2006. A total of 57,120 start-up ventures received angel funding in 2007, a healthy 12 percent increase over 2006, and the number of active investors was 258,200 individuals, a jump of 10.3 percent.
Jeffrey Sohl, director of the Center for Venture Research, said in a release that the modest increase in total dollars, coupled with the increase in investments and more angels participating, resulted in smaller deals.
“In contrast to venture capital, in which money must be invested during the life of the fund and is in part based on the size of the fund, angel investing is an individual decision and angels invest from their net worth,” Sohl said. “These data indicate that angels are exhibiting a cautious approach to investing in light of the recent volatility in the economy.”
Seeding the later stage
Angel investors, who often identify the next wave of high-growth investments by later-stage institutional investors, continue to be the largest source of seed and start-up capital. According to the report, 39 percent of 2007 angel investments came in the seed and start-up stage. Angels also showed a strong interest in post-seed/start-up investing, as 35 percent of their investments were made to businesses in this stage.
Meanwhile, expansion-stage investing, which represented 21 percent of angel commitments, showed the biggest increase. This indicates a growing interest among angels to fill a widely recognized gap between early and later-stage deployments.
“While angels continue to represent the largest source of seed and start-up capital, market conditions and the capital gap are requiring angels to engage in more later-stage rounds,” Sohl said.
In terms of exit preferences, mergers and acquisitions represented 65 percent of the angel exits, while IPOs comprised four percent and bankruptcies accounted for 27 percent. With M&As and IPOs, annual returns for angel exits were 27.7 percent but the center noted that these returns were variable and that a reasonable estimated range for 2007 returns is between 20 percent and 40 percent.
According to the report, angel investments resulted in about 200,000 new jobs in the United States last year, which represents 3.3 jobs per angel investment. The study tracks jobs created at the time of the angel investment, however, so it’s likely that the ultimate job-creating value of these angel commitments will exceed 200,000.
By industry, software accounted for the largest share of angel investments, with 27 percent of the 2007 total. Software was followed by healthcare services/medical devices and equipment, 19 percent; biotech, 12 percent; industrial/energy, eight percent; retail, six percent; and media, five percent.
Capital of Wisconsin
The more cautious approach of national angel investors comes as Wisconsin is trying to boost angel and venture capital deployment. Under Gov. Jim Doyle’s Accelerate Wisconsin proposal, which is designed to build on tax incentives established under Act 255, a capital gains re-investment initiative has been proposed to increase investment in new Wisconsin businesses. The initiative would give individuals a limited, 100 percent capital gains exclusion of up to $10 million for long-term capital gains reinvested in qualifying Wisconsin businesses.
• Fischer likes prospects for venture capital program
• Will economy, tax hikes dry up venture capital?
• Wisconsin Technology Council endorses Doyle investment plan
• Accelerate Wisconsin seeks to improve early-stage, venture capital performance