Seed Capital Gap Growing As Angel Investors Shift Focus
Angel investors are continuing to shift their focus to the post-start-up stage of business formation, exacerbating the capital gap for seed capital in the US, according to the latest survey of angel investor activity from the Center for Venture Research at the University of New Hampshire.
The angel investor market in the first half of 2007 showed signs of a small retreat from the growth of the past several years, with total investments of $11.9 billion, a decrease of 6% over the first half of 2006, according to the survey. A total of 24,000 entrepreneurial ventures received angel funding in the first half of 2007, a 2% decline from the first half of 2006. The number of active investors in the first half of 2007 was 140,000 individuals, 8% above the first half of 2006.
“These trends indicate that while the total dollar size of the market and the number of investments exhibited a slight decline from the first half 2006, there was a significant increase in the number of investors,” said Jeffrey Sohl, director of the Center for Venture Research. “Reflecting this trend is the decrease in the average deal size by 4% over the first half of 2006 and an increase of 10% in the number of investors per deal.”
Angels continue to be the largest source of seed and start-up capital in the United States, with 42% of the first half of 2007 angel investments in the seed and start-up stage. This preference for seed and start-up investing is followed closely by post-seed/start-up investments of 48%.
“This appetite for post-seed/start-up investing continues a trend that began in 2004 and represents a significant change from historical levels. While angels are not abandoning seed and start-up investing, it appears that market conditions, the preferences of large formal angel alliances, and a possible slight restructuring of the angel market are resulting in angels engaging in more later-stage investments,” Sohl said.
New, first sequence investments represent 55% of first half 2007 angel activity, indicating that some of this post-seed investing is in new deals. “This shift in investment strategies toward post-seed investments reduces the proportional amount of seed and start-up capital.
This restructuring of the angel market has in turn resulted in fewer dollars available for seed investments, thus exacerbating the capital gap for seed and start-up capital in the United States.
In the first half of 2007 angels exited their investments primarily through sale of the business (acquisitions by another firm), with 61% of the first half 2007 exits through trade sales. Exits by initial public offerings represented 6% of exits and bankruptcy occurred in 33% of the exits. For all these exits the average rate of return was 30-40% and roughly half were at a profit, the survey shows.
The yield (acceptance) rate is defined as the percentage of investment opportunities that are brought to the attention of investors that result in an investment. The peak yield rate of 23.3% occurred during the height of the investment bubble in 2000. Post 2000 the yield rate stabilized around 10%. In 2006 yield rates leveled off at 20.1% after a steady growth that began in 2004. For the first half of 2007 the yield rate was 19%. “This mitigation in the rise in the yield rate from the historical average reduces the concern of an unsustainable investment rate, at least for the short term,” said Sohl.
Healthcare services/medical devices/equipment and software remained the sectors of choice, with 22% and 14%, respectively, of total angel investments in the first half of 2007. This was followed closely by biotech at 10%. Electronics/computer hardware, IT services, retail and industrial/energy (which include environmental products and services) garnered close to 10% each. The remaining investments were approximately equally weighted across high tech sectors, with each having 3-5% of the total deals.
More details are available at the Center for Venture Research website.
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