Editor’s note: “The Angel Connection” is a regular feature in WRAL Local Tech Wire. LTW asked consultant Bill Warner to share advice for entrepreneurs seeking angel investors and/or venture capital investment. He is chairman of the Triangle Accredited Capital Forum, an angel investor network with over 100 members throughout the Southeast.
RALEIGH, N.C. – In its recent national survey, the Angel Capital Association (ACA) points at some optimism for investments in start-up companies in 2008, despite the concerns about the difficulties emerging in the economy.
They predicted that the quantity and quality of entrepreneurial investment proposals will increase in 2008 and that the number and amount of investments they anticipate making will grow slightly. This lends credence to the idea that the time to invest is when the economy is down, in that there may be some good deals to be had.
Predictions for 2008
Nearly 55 percent of the survey respondents said that the number of investments and total dollars invested will increase this year, with another 32 percent believing that the activity would be the same as 2007. All angel group leaders predicted that their group would invest in a new company in 2008, with 81 percent planning to invest in three to nine companies. Most impressively, twelve percent think they will invest in ten or more companies.
However, predictions for positive exits were not as rosy. Fifty eight percent did not think there would be any visible change in opportunities for acquisitions or IPO’s of their portfolio companies, after fewer angel groups experienced positive exits in 2007 compared to the previous year. Another 17 percent predicted a decrease in exit activity.
They also found that some groups are concerned that their capacity for investment may be reduced if problems continue in the public markets. Many angels have investments in corporate stocks and may lose some liquidity, and therefore will have reduced ability to make angel investments. These concerns were factored into the 2008 predictions, but the strength of deal flow appears to have led to the generally optimistic forecast.
2007 Angel Group Investment Activity
Angel investment groups made an average of 7.3 investments in 2007, with average total funding of $1.94 million. These numbers are similar to what the groups reported in 2006, in which they invested an average of $1.78 million in 7.4 deals. The average size of an investment per round for a group was $265,926 in 2007.
Co-investment was a key component of angel group activity. Two-thirds of the reporting groups noted that their portfolio companies received investment from venture capital firms, either as co-investment in the same round or as follow-on funding as the entrepreneurial ventures grew. In addition, 65 percent of the respondents reported co-investing with other angel groups in the same early-stage firm, allowing for larger overall investments in promising companies.
Investment Preferences
81% of the groups prefer to invest in seed and start-up companies than they do in expansion and later stage companies, and don’t see this trend changing in 2008. This focus complements venture capital, which currently invests mostly in growth and expansion-stage opportunities.
Angel group leaders expressed interest in a wide variety of industries. Five industry areas were of particular interest:
• Software (83%)
• Medical Devices (75%)
• Industrial/Energy – including “Clean Tech” (64%)
• Business Products and Services (64%)
• IT Services (63%)
These preferences are nearly the same as last year, but Clean Tech is clearly the one that is growing the fastest.
Five other industry areas were preferred by 50% or more, including: Biotechnology; Consumer Products and Services, Electronics and Instrumentation; Healthcare Services; IT Services; and, Networking and Equipment.
This is a particularly positive report, flying into the wind of what we are now seeing with the weakness in the stock market and the real estate industry. Nevertheless, entrepreneurs should proceed full speed ahead with approaching angel investors to appropriately finance their companies.
About the author: Bill Warner is the managing partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.