If you’ve watched “Shark Tank” on ABC (or its British forbear “Dragon’s Den” on BBC in America), you’ve seen, to some extent, angel investors in action. Underneath the high-gloss of ratings-driven reality TV, you can catch a glimpse of this opaque, mysterious investment market. As Colleen Debaise of the Wall Street Journal explains, angel investments can act as bridges “between that money you’ve gotten from friends and family and the venture capital that you hope to secure down the road.” Of course, there’s a price to pay:
“An angel is a wealthy individual willing to invest in a company at its earlier stages in exchange for an ownership stake, often in the form of preferred stock or convertible debt. Angels are considered one of the oldest sources of capital for start-up entrepreneurs…
But little is known or understood about the angel market, largely because it consists of individuals who make investments quietly.”
Angels, Debaise notes, are willing to take big risks in a company’s early stages if they see big opportunities for expansion–and profit. In other words, these investors are picky, and in exchange for taking on serious risk, they can demand serious concessions from entrepreneurs.At the same point, this class of stealth investors is incredibly important to business development in this country–and therefore, to the economy as a whole. That’s the overarching takeaway from the report “The Angel Investor Market In 2011: The Recovery Continues” by Jeffrey Sohl. He’s Director of the Center for Venture Research at the University of New Hampshire. The report’s short, but heavy on the numbers. So we’ve broken it down into the five key things you should know about the angel investment market right now.
- Angel Investors Create Jobs: According to Sohl’s calculations, these investments created 165,000 American jobs in 2011, “or 2.5 jobs per angel investment.”
- Investments Are Up–By A Lot: The short version is that more people are putting more money into more businesses. In other words, the market for this particular type of aggressive, high-risk investment has grown. Last year, angels invested $22.5 billion–a 12 percent increase from 2010. And the number of people in the game has increased by 20 percent. Last year, 318,480 people pumped money into 66,230 ventures. And they were willing to put more cash into each deal. That’s good news, since angel investment seriously contracted when the economy tanked in 2008 and 2009. In 2010, activity picked up, and last year, it gained more steam. “It appears that optimism in angel investing is taking hold,” a UNH news release quotes Sohl.
- After Two Years, Angels Are Taking More Risks: This is good news for early-stage entrepreneurs. The years 2009 and 2010 were lean years for start-ups. In 2010, only 31 percent of angel funding went to seed and start-up projects, while 67 percent of funding went to early- and expansion-stage–and somewhat safer–investments. Here’s another way to look at it: The investors whose signature move is taking aggressive, well-reasoned risks weren’t taking many risks. But last year, the overall angel investment portfolio’s balance shifted, with 42 percent of capital going to seed and start-up companies, while only 55 percent went to companies in early- and expansion-stages.
- And Optimism Aside, Angel Investing Is Still Really Risky: Investors can leave a company for any number of reasons. Last year, nearly a quarter of angels saw the door when their investments went bankrupt. Meanwhile, 54 percent of investors left when their company merged or was acquired by another business. And, when angels left companies, they only got out with a profit about half the time. Meanwhile, Sohl writes, “annual returns for angels’ exits (mergers and acquisitions, notes and IPO’s) were between 18 percent and 28 percent, however, these returns were quite variable.“
- High-Tech Is Still The Hot Investment: Last year, nearly one-in-four angel investments went toward software, while one-in-five went into health care and medical equipment, and media trailed the pack. Here’s the full breakdown of the deals:
Health Care/Med Devices
|Percent of Deals||23%||19%||13%||13%||7%||5%|
Source: Center for Venture Research, UNH