Why Business Angels Committed Less Cash in 2010

Statistics show that angel investing is a risky business.

Far from plugging the funding gap, the latest statistics from the US reveal that business angels are now committing less of their cash in new business according to figures released in the first and second quarters of this year.

With the latest GDP figures painting a rosy picture it would be easy to get caught up in the positives. But elsewhere signs of optimism are as thin on the ground as the margin between a growing economy and one that could lurch back into recession.

Lord Sugar making an appearance on C4 News tonight said he fears for 2011 when the VAT increase and government cuts really begin to kick-in. But then he would say that wouldn’t he. Unfortunately Lord Sugar isn’t alone in his cautionary outlook.  Perhaps worse still the prospects of a sustained recovery could be held back by lack of investment in new ventures. There still remains a question mark over business angels’ capacity to fill the funding gap left by the banks.

The latest analysis from the US paints a far from rosy picture of angel investor activity. They are, it appears, becoming cautious with their cash at a time where business and innovation needs it most.

Angel investors committed fewer dollars in 2010, with seed and start-up stage investing declining to its lowest level in several years, according to Market Analysis for the first and second quarters of 2010 released by the Center for Venture Research at the University of New Hampshire.

Levels of investment are prone to natural fluctuations along with market conditions. But according to the report, total investments in the first half of 2010 were $8.5 billion, a decrease of 6.5 percent over the first half of 2009. Looking further into the analysis, this appears to be no temporary blip and more like the start of a new trend that could impact on new ventures and job creation if it hasn’t done so already.

There was some good news. According to the analysis a total of 25,200 entrepreneurial ventures received business angel funding in the first half of 2010, a 3 per cent increase from the same period in 2009. However the number of active angel investors in the same period was 125,100 individuals, a drop of 11 percent from the same period in 2009.

A situation where total funding is declining and more businesses are receiving funding from less angel investors can only mean one conclusion – business angels are still investing but spreading it more thinly amongst more businesses.

Commenting on the analysis Jeffrey Sohl, director UNH Center for Venture Research at the Whittemore School of Business and Economics said; “These data indicate that while angels remain committed to this investment class they do so with a cautious approach to investing. Angels are committing fewer dollars in more deals, a result of the lower valuations. While the market exhibited stabilization from the first half of 2009, when compared to the market correction that occurred in 2008, these data indicate that the angel market appears to have reached its nadir in 2009”

Sohl was also downbeat in his long-term assessment; “Historically angels have been the major source of seed and start-up capital for entrepreneurs, and this declining interest in seed and start-up capital represent a significant change in the angel market.

Without a reversal of this trend in the near future, the dearth of seed and start-up capital may approach a critical stage, deepening the capital gap and impeding both new venture formation and job creation. This change in investment behaviour is likely an indication of both a need to increase investments in existing portfolio companies in order for these portfolio companies to survive the recession and an extended exit horizon,” he added.

Then again these results could be more indicative of a change in attitudes and a more realistic assessment of the risks involved. Business angels will naturally commit less cash when the odds are stacked against a successful exit particularly in these more cautious times.

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