SOURCE: Angel Capital Association

April 02, 2007 12:28 ET

Angel Groups Optimistic About Investing in Start-Up Businesses in 2007

ACA Angel Groups Forecast Increased Investments After Growth Year in 2006

WASHINGTON, DC -- (MARKET WIRE) -- April 2, 2007 -- Angel group leaders expressed optimism about the climate for investments in early-stage businesses in 2007 in the first-ever survey by the Angel Capital Association (ACA). This optimism came at the same time angel groups reported increases in investments in 2006 over 2005, with a 23 percent increase in average total investment dollars by group and 34 percent growth in the average number of deals the groups funded.

In the Angel Group Confidence Report of North American angel group leaders, ACA found that angel groups forecast that the quantity and quality of entrepreneurial investment proposals will increase in 2007, that more than 80 percent of groups will continue investing in seed and early stage companies, that there is a strengthened opportunity for more positive exits, and more plans to co-invest with other sources of capital.

"These predictions bode well for angel group investing in 2007," said John May, chairman of ACA and co-manager of the Washington Dinner Club in Washington, DC. "Not only are angel groups funding early-stage ventures at an increased level, but many are also reserving follow-on funding for their portfolio companies to help them grow. All of this is good news for high potential entrepreneurs looking for capital to start and grow their businesses."

Predictions for 2007

Not only do the angel organizations expect deal flow to improve, but they expect investment activity to continue at the same level or increase somewhat this year over 2006. Almost all angel group leaders (96.5 percent) predicted that their group would invest in a new company in 2007 -- with 77 percent planning to invest in three to nine companies. Five percent think they will invest in ten or more companies.

Attitudes on the positive liquidity of investments are also optimistic, as 51 percent forecast that "overall exit activity should strengthen" in their region, with exits generally coming from mergers and acquisitions. Another 48 percent believed that exit activity would not change in 2007, but noted that the climate for exits improved in 2006 as compared to 2005.

Angel investors are high net-worth individuals who make equity investments in entrepreneurial businesses, and angel groups are formed when individuals join together to evaluate investment opportunities and invest together. Currently, there are about 265 angel groups operating in the United States and Canada, an increase of 67 percent since 1999.

2006 Angel Group Investment Activity

ACA angel investment groups made an average of 7.4 investments in 2006, with average total funding of $1.78 million. These numbers are up from the numbers that angel groups reported in 2005, in which they invested an average of $1.45 million in 5.5 deals. The average size of an investment per round for the group was $241,528 in 2006.

The largest change reported from 2005 to 2006 was in the percentage of groups that experienced a positive exit from one of their investments. Just under 30 percent of the angel groups reported distributing returns to their member investors in 2006, nearly double the 15 percent reported in 2005.

Co-investment was a key component of angel group activity in 2006: 72 percent of the reporting groups noted that their portfolio companies received investment from venture capital firms, either as co-investment in the same round or as follow-on funding as the entrepreneurial ventures grew. In addition, two-thirds of the respondents reported co-investing with other angel groups in the same early-stage firm.

Marianne Hudson, ACA's executive director, notes the importance of co-investment for the investors and the companies involved. "Our research has shown a 'capital gap' for entrepreneurs looking for $200,000 to $2 million to get their companies to the next stage. By banding together with other angel groups and early stage venture capital groups, ACA member groups can help some companies obtain the capital they need," she said. "More and more, I'm hearing of deals in which three or more groups are working together to invest $850,000 to $1.5 million. Most groups cannot make that type of investment on their own."

Investment Preferences

By a considerable margin, the reporting angel groups prefer to invest in seed and start-up companies (80 percent) and early-stage firms (85 percent), than they do in expansion (22 percent) and later stage companies (5 percent). The groups expect little change to the stage of companies in which they will invest in 2007. Additionally, the groups also provided follow-on funding for their portfolio companies -- an average of three of angel groups' 7.3 deals in 2006 were follow-on investments in portfolio companies.

Angel group leaders expressed interest in a wide variety of industries in the survey. Three industry areas were of particular interest:

--  Medical Devices (89%)
--  Software (85%)
--  Biotechnology (67%)
    
Few angel groups specialize in a particular industry area, and most have interests and expertise among their member investors in a variety of other areas. Seven other industry areas were preferred by 50 percent or more of the responding angel groups, including: Business Products and Services; Electronics and Instrumentation; Healthcare Services; Industrial/ Energy; IT Services; Networking and Equipment; and, Telecommunications.

The Angel Capital Association (ACA) is the professional alliance of angel groups in the U.S. and Canada. Currently, there are more than 120 affiliates and member groups representing more than 5,000 angel investors. ACA focuses on developing professional standards, sharing best practices and building relationships between angel groups. More information can be found at www.angelcapitalassociation.org.

Please note that ACA is not a funding organization itself. The ACA Web site has a directory of member groups, with links to group Web sites. Entrepreneurs should contact individual groups directly rather than ACA (or work with a trusted advisor to gain an introduction). Angels interested in learning more about ACA or member groups are welcome to contact ACA or the member group.

Contact Information