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Investing through the Downturn

The recession has changed the way angel investors allocate their money, but not their willingness to remain active in funding new ventures.

(originally published by Booz & Company)

The Angel Investor Market in 2009: Holding Steady but Changes in Seed and Startup Investments

Jeffrey Sohl (University of New Hampshire)

Center for Venture Research

Date Published: 
March 2010

Angel investors provide an important source of funding for fledgling businesses. Backing from these typically wealthy individuals, who tend to invest more in early-stage startups than conventional venture capital firms and who hardly ever take on management roles at the companies they fund, led to the creation of more than 250,000 jobs, or roughly 4 percent of all new jobs, in the U.S. in 2009, according to this paper. And although angel investors tightened their belts in 2009 — the total amount they disbursed last year fell to US$17.6 billion, an 8 percent decrease from 2008 — the number of projects they backed rose by 3.1 percent. This suggests that the angels’ coffers were lighter, no doubt thanks to the recession, and that they attempted to limit their risk by investing fewer dollars per deal; indeed, the author reports that investment size declined by about 11 percent.

Overall in 2009, nearly 260,000 angels invested in 57,225 ventures in the U.S., the same number of angels as the prior year. Software firms enjoyed 19 percent of investments; health-care and industrial/energy startups attracted the second-largest percentage of funds, at 17 percent each. However, the angels’ investment strategies reflected a cautious approach. They were less willing than previously to back early-stage investments — companies with an unproven business plan or model — and instead allotted the majority of their investments to businesses that had raised initial funds and were looking for additional capital to expand existing activities. Venture capitalists mirrored this approach last year, focusing their investments on concerns with established customers and revenue.

Bottom Line:
Angel investors are still actively investing in firms, but are reducing their risk by focusing more on established businesses than unproven startups. 

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