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Dr Stephen Darori on Angel Investments in the Context of 2009 and the first 2 Quarters of 2010
Caution. Uncertainty. Opportunity. That's the theme from members of the Angel Capital Association (ACA) as they consider 2009.
In December, the ACA reported on a mid-November survey of its membership that indicated that due to the recession, investments had decreased in 2008 from 2007 levels and were anticipated to decrease in 2009. However, some angel groups increased their investments in 2008 and anticipated making new investments in 2009 as new opportunities arise from difficult economic conditions.
While most groups (76.4 percent) expected to receive more investment requests in 2009, forecasts for completed investments were mixed. More than a third believed that both the number of investments and the dollar amount of investments will decrease this year, while nearly half said that investment will increase or stay the same.
"I am certain that today there is a lot of angel capital available to fund promising ventures," says John O. Huston, ACA chair. "I have not heard a single angel group say they have seen wonderful deals they cannot fund because their members don't have the capital. The definition of wonderful has changed, however."
At a recent meeting of the combined boards of the ACA and the Angel Capital Education Foundation, angel group leaders from 12 states talked about what they were seeing in their regions.
First, angels are not moving to the sidelines or leaving the field. They continue to evaluate deals, make investments, and in fact, several angel groups are raising new sidecar funds to co-invest along side the angel group's deals.
"If someone comes up with an idea which makes or saves money in a down economy, they are more attractive than ever," Huston says. "At Ohio TechAngels, we ask every entrepreneur to explain how their solution is more needed in a prolonged recession. Why is it more essential now than a couple of years ago? A wonderful deal today has a very compelling answer to this question."
Many angels belonging to ACA member groups have lived through the 1987 recession, the 1998 Long-Term Capital Management crisis, and the 2001 implosion of the Internet bubble. They are working more closely with existing portfolio companies, providing mentoring and hands-on advice, and contributing ideas about reducing expenses, increasing revenues, and conserving cash.
Angel groups are increasingly in discussions with other angel groups about syndicating deals-both for promising portfolio companies likely to need additional capital before 2010 and for new investments. This seems to be driven both by the lack of institutional capital and by the organized syndication process many angel groups have developed over the last few years.
Cash and valuation rule. Market forces are driving valuations down from California to the Carolinas. The speed of the decline in valuations is a bit of a shell-shock to entrepreneurs raising early stage cash from angel groups. Many early stage companies now intend to "bootstrap" until valuations begin to rise or they achieve milestones that reduce their risk and improve their valuations. That may be fine with many angels who can often be more patient than new VC funds when deploying capital.
State and local governments are beginning to recognize the importance and impact angel groups can have in funding the young companies that create jobs. 21 states have passed state tax credits bills crafted as an incentive to angel investing and many other states have bills pending. Also, entrepreneurs are getting much smarter about investigating every grant program available to them.
"Obviously we will eventually come out the other end of this economic hurricane," Huston says. "Those companies that stay standing through this downturn because they have achieved cash flow breakeven-those who make it through this storm-will be more valuable than ever."
In December, the ACA reported on a mid-November survey of its membership that indicated that due to the recession, investments had decreased in 2008 from 2007 levels and were anticipated to decrease in 2009. However, some angel groups increased their investments in 2008 and anticipated making new investments in 2009 as new opportunities arise from difficult economic conditions.
While most groups (76.4 percent) expected to receive more investment requests in 2009, forecasts for completed investments were mixed. More than a third believed that both the number of investments and the dollar amount of investments will decrease this year, while nearly half said that investment will increase or stay the same.
"I am certain that today there is a lot of angel capital available to fund promising ventures," says John O. Huston, ACA chair. "I have not heard a single angel group say they have seen wonderful deals they cannot fund because their members don't have the capital. The definition of wonderful has changed, however."
At a recent meeting of the combined boards of the ACA and the Angel Capital Education Foundation, angel group leaders from 12 states talked about what they were seeing in their regions.
First, angels are not moving to the sidelines or leaving the field. They continue to evaluate deals, make investments, and in fact, several angel groups are raising new sidecar funds to co-invest along side the angel group's deals.
"If someone comes up with an idea which makes or saves money in a down economy, they are more attractive than ever," Huston says. "At Ohio TechAngels, we ask every entrepreneur to explain how their solution is more needed in a prolonged recession. Why is it more essential now than a couple of years ago? A wonderful deal today has a very compelling answer to this question."
Many angels belonging to ACA member groups have lived through the 1987 recession, the 1998 Long-Term Capital Management crisis, and the 2001 implosion of the Internet bubble. They are working more closely with existing portfolio companies, providing mentoring and hands-on advice, and contributing ideas about reducing expenses, increasing revenues, and conserving cash.
Angel groups are increasingly in discussions with other angel groups about syndicating deals-both for promising portfolio companies likely to need additional capital before 2010 and for new investments. This seems to be driven both by the lack of institutional capital and by the organized syndication process many angel groups have developed over the last few years.
Cash and valuation rule. Market forces are driving valuations down from California to the Carolinas. The speed of the decline in valuations is a bit of a shell-shock to entrepreneurs raising early stage cash from angel groups. Many early stage companies now intend to "bootstrap" until valuations begin to rise or they achieve milestones that reduce their risk and improve their valuations. That may be fine with many angels who can often be more patient than new VC funds when deploying capital.
State and local governments are beginning to recognize the importance and impact angel groups can have in funding the young companies that create jobs. 21 states have passed state tax credits bills crafted as an incentive to angel investing and many other states have bills pending. Also, entrepreneurs are getting much smarter about investigating every grant program available to them.
"Obviously we will eventually come out the other end of this economic hurricane," Huston says. "Those companies that stay standing through this downturn because they have achieved cash flow breakeven-those who make it through this storm-will be more valuable than ever."
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