Please ensure Javascript is enabled for purposes of website accessibility

Angel Investors Continue to Shy Away from Startups

Posted on by GoingConcern

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

Many startups, especially ones with high-growth potential, depend on receiving at least some of their funding from angel investors. Now, a new report sheds light on what type of entrepreneurial ventures got angel money last year.

Specifically, the report from the Center for Venture Research at the University of New Hampshire found that financing for really early-stage companies declined and a larger percentage went to more-established ventures. That is, 35 percent of investments in 2009 were in seed stage companies, a decrease of 10 percent from 2008. And new, or so-called first sequence investments, were 47 percent of all angel activity, a significant decline over the last two years.


What this means, of course, is that angels are favoring proven quantities that are less risky than newer ventures. That’s been a trend for several years now and it’s worrisome. You might not know it from press coverage, but angel funding is considerably more prevalent than venture capital financing: Many more startups receive angel money than VC dollars. So, if angels shy away from early ventures, that means the loss of a significant historical source of funding for these companies.

Then, there’s the matter of what these companies mean to the economy, which I’ve written about before. The startups that receive angel money tend to be ones with high-growth potential, the kind with at least a fighting chance of becoming a lot bigger and employing a lot of people. Thus, it’s not a positive development over the long haul if angels choose to play it safe and avoid very early-stage ventures.

On the modestly good side, the report showed a decrease in investment dollars but little change in the number of investments. Total investments in 2009 were $17.6 billion, down 8.3 percent from 2008. But a total of 57,225 ventures received funding, a 3.1 percent increase from 2008. In other words, more startups got money, although deal size was smaller.

It would be more reassuring if a larger share of the $17.6 billion had gone to a different type of venture.

Related Posts

Small Business Still Not Showing Signs of Life

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

Don’t look for small businesses to lead the economic recovery.

The monthly reading from the National Federation of Independent Business Index of Small Business Optimism clearly shows little optimism among small business.


Sure, nine of the 10 components that comprise the index rose from the prior month.

However, some of the critical factors that would indicate whether small business owners plan to invest in their firms did not show encouraging results. The NFIB’s job measures barely moved and capital expenditure plans were flat.

More specifically, according to the survey average employment per firm was negative in April. What’s more, since July 2008 employment per firm has fallen steadily each quarter, logging the largest reductions in the survey’s 35-year history.

If small business is key to job growth – as some pundits think – then this does not bode well for our economy.

And the jobs small businesses create are not exactly great ones. They are more likely to come without benefits and less time off for vacation.

Meanwhile, the Index does not suggest that small businesses will be investing heavily in non-personnel. It noted that plans to make capital expenditures over the next few months were unchanged from the prior month and its reading is only slightly above the 35-year record low.

Yikes!

The survey also noted that small business owners continued to liquidate inventories and weak sales trends gave little reason to order new stock. In fact, more owners plan to reduce stocks than plan new orders, according to the NFIB.

Meanwhile, regular borrowers continued to report difficulties in arranging credit. “Historically weak plans to make capital expenditures, to add to inventory and expand operations also make it clear that many borrowers are simply on the sidelines, waiting for a good reason to make capital outlays and order inventory that requires businesses to take out the usual loans used to support these activities,” the report notes.

Obviously, small businesses are not going to turn this economy around any time soon.

Boss-friends-social-media-med

How Should You Handle a Partner’s Facebook Friend Request?

Ding. It’s a friend request. You’re so popular. One problem. It’s from one of your […]

Are Big Banks Really Helping Small Business?

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

In the latest move by a big bank to make itself into a friend to small business, Chase recently announced a program to offer incentives to small companies for hiring. But the actual benefit to most small businesses is hard to see.


Specifically, the bank will lower its interest rate on new lines of credit by 0.5 percentage points for each new hire, up to three employees, for the life of the loan. The offer is available to business owners who are approved for a line of credit of up to $250,000 or existing business customers who increase their line of credit by at least $10,000. And if you open a business checking account, you get an additional half percent discount on your loan rate.

A typical interest rate on a line of credit is 6 percent. According to the bank, if you choose the whole ball of wax – take the discount for three hires and open a checking account – you’ll lower that to 4 percent. And counting the discount for a new checking account, small business owners can save about $4,000 over three years on an outstanding balance of about $65,000.

Trouble is, that’s an offer most businesses are likely to refuse. Those already planning to hire and that are in good health might take advantage of the deal. In fact, they’d be silly not to. But the offer is hardly enough to inspire a business to hire if it wasn’t going to do so already.

What the offer might accomplish is to help Chase seem like a nice institution, not the greedy enterprise that helped bring down the economy. And it’s hardly the only attempt by Chase, or other banks, to do something to lift their image, something I’ve written about before. For example, last year, Chase unveiled plans to increasing lending to small businesses by $4 billion to a total of $10 billion. Bank of America recently said it would buy more from small businesses. In May, Citicorp launched a $200 million fund to boost small-business lending in low-income communities. And of course, last year, Goldman Sachs announced its own $500 million small-business fund.

It’s also a way to attract healthy businesses at a time when loan demand is down.

So a win-win for Chase. Not so much for small businesses.