How to Raise Seed Capital From Angel Investors: Who Are They? Pt 2

If You’re Seeking Seed Capital From Angel Investors it Helps to Know Who They Are

Let’s take a quick look at the contribution angel investors make towards financing companies in the USA. According to The Center for Venture Research at the University of New Hampshire:

Market Size
The angel investor market in 2010, following a considerable contraction in investment dollars in 2008 and 2009, exhibited a rise in investment dollars and in the number of investments. Total investments in 2010 were $20.1 billion, a robust increase of 14% over 2009, according to the Center for Venture Research at the University of New Hampshire. A total of 61,900 entrepreneurial ventures received angel funding in 2010, an increase of 8.2% over 2009 investments.

The number of active investors in 2010 was 265,400 individuals, a small growth of 2.3% from 2009. The significant increase in total dollars, coupled with the rise in the number of investments resulted in a larger deal size for 2010 (an increase in deal size of 5.4% from 2009). These data indicate that angels have significantly increased their investment activity, and are committing more dollars resulting from higher valuations. It appears that a cautious optimism to investing is taking hold. Noteworthy changes did occur in the critical seed and start-up stage investment landscape.

Job Growth
Angel investments continue to be a significant contributor to job growth with the creation of 370,000 new jobs in the United States in 2010, or 6 jobs per angel investment.

These are the sectors that angel investors tend to be found in.

Sector         

Healthcare 30%

Software 16%

Biotech 15%

Industrial/Energy 8%

Retail 5%

IT Services 5%

This sector breakdown shows that angel investors prefer more sophisticated types of businesses to invest. By this I mean the types of businesses that understand their markets well, have a management team instead of a single founder, and have potential for serious growth. Serious growth is commonly defined as having the potential to $100 million in revenues within five to ten years.

Return Rates
Mergers and acquisitions represented 66% of the angel exits, and bankruptcies accounted for 27% of the exits in 2010. About half of the angel exits were at a profit and annual returns for angel’s exits (mergers and acquisitions and IPOs) were between 24% and 36%, however, these returns were quite variable.

This is another interesting set of stats. In over two-thirds of cases, the exit for the investors is created by flipping the company to someone else such as a corporate buyer or venture capital firm.  What we can infer from this is that investors want companies that have the potential to be sold in this manner.  Small personal service businesses and lifestyle companies, for example, need not apply.  The other interesting number is that 27% of the portfolio companies fail. This makes it all the more important for investors to back only the premium startups.

Stage
Angels again reduced their investments of seed and start-up capital, with 31% of 2010 angel investments in the seed and start-up stage, a decrease of 4% from 2009. Angels also exhibited an increased interest in post-seed/start-up investing with 67% of investments in the early and expansion stage, an increase from 2009. New, first sequence, investments represented 41% of 2010 angel activity, also a decline from the last year of 6%. This decrease in seed/start-up stage and first sequence investing is of concern. However, as existing investments move to an exit and thus reduce the need for follow-on investments, it is anticipated that angel capital will become available for new seed stage investments.

Conclusion

Here’s the takeaway from this. Angel investors are sophisticated investors who occupy a specific position in the funding chain and expect a high return on their investments. They strive to minimize their risk by investing in hot sectors and companies which have the potential to create the all-important exit event.

Angel investors are not to be confused with the 3Fs, otherwise known as family, friends, and fools.

Here’s a good read at this point: Understand the Funding Chain.

In the next post I will show you how to find them.