Angel Investor Activity on the Rise – Private Placements Continue to Grow

A positive data point that the bottom may have been reached is that per the University of New Hampshire’s Center for Venture Research mid-2009 report is that angel investment numbers have started to rise. During the first half of 2009, angel investors financed 24,500 new ventures, 6% more than during the same period in 2008.

The figures suggest that 2009 will have shown the birth of roughly 50,000 companies-all funded by angel investors and not venture capital firms. In a November 12 Business Week article Spencer Ante reports that angel activity continues to rise and great ideas are still out there. “It may be that this is the best time to start a company,” says Carl Schramm, president of the Kauffman Foundation, an organization that promotes entrepreneurship.

There are several reasons for this. First costs are low. Office space, labor and materials are cheaper and entrepreneurs who weather these storms are on mission. This separates the “posers” from the real visionaries. People who weather tough times are the kind that you want to start these new companies and take their (and investor) dreams into reality.

Another reason is that competitor incumbents tend to get inwardly focused as they fight the daily battles of hard markets. This allows the start-ups to gain early critical market share.

This is fertile ground for private angel investors who can make investments in these companies. These entrepreneurs see a real need in the market. Anyone who can see a real need and fill it is the secret for successful enterprises and exciting investor returns.

If the stock market doubles in 5 years, that is a 15% annual growth rate on investments. New venture angels typically see returns of 20-40% and some larger, much larger. This makes the world of private placement investing with PPM’s a worthy addition to portfolios and a major way to make up for past year losses. Be sure to look for ones that are Security Exchange Commission (SEC) rules compliant.

The table below was put together by Gary Beach, publisher emeritus of CIO magazine. The table, based on the Fortune 500, shows what percentage of top companies were incorporated during a recession.

Based on Fortune 500

Percentage that were incorporated into business during a recession year

Top 10 companies

70%

Top 25 companies

64%

Top 50 companies

52%

Top 100 companies

43%

Top 500 companies

36%

Percentage of years that the U.S. has been in recession: 39%

Data: Gary Beach, Fortune, NBER, Wikipedia

From this data, the U.S. has been in recession for 39% of its years. Among the top 10 Fortune 500 companies, 70% started in recessions. What this means is that in almost 40% of the time the US has had slow economic times, and yet we keep on growing.

Giants are still made in tough times. Based on America’s history, recessionary times are not new.

Most angel investments range from $10,000 to $1 million. This is a game for portfolio investing to spread your bets. Not every one is a winner. Typically 24% end in bankruptcy, but the winners more than make up for the laggards. This is the power of a diversified portfolio. As companies with solid innovation seek funding this provides opportunity to offset past losses and generate personal excitement.

Angel Investor Directory – How to Use One to Raise Capital

This article provides tips and strategies on how to raise capital using an angel investor directory. If you are currently working with investors these tips should help you do so more effectively.

Angel Investor Directory Capital Raising Tips:

  • First, make sure you obtain a high quality directory that provides pro-rated refunds for data that is bad. Also make sure that you get this resource from a well known organization that appears to be a real business and not just a small garage ran media company.
  • Meet face-to-face whenever possible so that you have a chance to really read the response from the investor and get as much feedback as possible. See each meeting as a learning experience and take very good notes and listen carefully to what the angels are saying. Their advice could help you land an investment with the next investor or save your company from going out of business.
  • Don’t be too cocky or over confident about your prospects in business. Most businesses fail after just a few years and everyone thinks they have a $1B idea, be modest and plan out everything after doing your homework, no before.
  • Work daily to reach out to new angels and expand your reach. This way you are always uncovering new opportunities and learning more about the capital raising process. If you reach out to 20-30 potential investors every day and refine your approach as you go it is only a matter of time before you are success are can determine that your idea will not get funded.

If you follow the tips above you will most likely be more 70% more effective at raising capital than your competitors. Good luck fundraising!

Circular Patterns in Venture Capital and Angel Investing: Interesting Trends and Tips

1. During the past decade, the size of seed rounds has remained stagnant and number of deals have decreased. To the untrained eye, it seems that there is more competition for seed dollars. Below the surface, however, startups are recycling founders experience. The reason why the number of deals has decreased is that teams are better prepared, are more financially savvy, have access to better-priced support, waste less time and resources, are using other forms of funding PRIOR to seed rounds, and are pivoting or deciding to get out earlier -at the pre-seed stage. (Founders will jump into exploring new opportunities).

Founding teams are recycled

2. More firms seeking seed rounds already have sales, expression of interests, and some form of market validation as a result of the circular economy of entrepreneurial mind and action. Firms that seek seed rounds are more advanced than 10 years ago. Founders are using other ways to get funded (as they should! Because seed funding is very expensive!), AND they are also recycling the experience of founding, co-founding, advising, and/or being early employees in previous firms. This is creating a circular economy of entrepreneurial experience. Not just serial entrepreneurs but a large pool of people who have experienced startup development (failed, successful, and everything in between, in so many roles!).

Supplier of funds are recycled

3. More investors are getting into each round, and seed rounds have become more collaborative. More and more small funds, angels and angel groups are co-investing. That means more eyes are evaluating deals (GOOD) but also BAD deals are getting through because the impact of each deal in the overall portfolio is lower, and the FOMO (fear of missing out) can get that signature! Think Theranos (ouch).

TIP: Nobody talks about the herd mentality and there will be some lessons to learn going forward. Because of the cycling and recycling nature of funding, early investors are able to scan deals early, with lower amounts, and, if they want to play in future rounds, they need to get in early and with others: pay to play.

Founders and funders’ recycling is also changing the exits:

4. Exits are being recycled too! Companies are being acquired, taken public, broken into pieces, resold, privatized, re-public’ed, and there are many emerging opportunities for exit. This is actually an area ripe for disruption. Welcome to the world of recycling exits.

And the funding process has become more interesting and complex.

5. As both entrepreneurs and funders become more comfortable navigating many options of funding startups or grownups, new funding options are emerging: there is better knowledge about crowdfunding, cryptocurrencies, hybrids (safes/convertible notes), and SFI-types (can we call this special funding instruments?). Capital suppliers are borrowing mechanisms from SPV, SPE, and SVI. I can’t wait to see what new options sprout of this.

All of these recycling and repurposing has an impact on ROI and capital markets

6. Cycles are longer: It takes longer to climb a larger mountain, especially if, along the way, there have been some quasi-exits, pivots, more and larger rounds. This is having an impact on the way we negotiate funding going INTO the firm, because there is light at the end of the tunnel, but the tunnel is getting much longer. Combine this with the uncertainty of how investors get OUT. Again, this is an area ripe for disruption and I can’t wait to see new options emerging. With longer cycles, the return on investment decreases, so firms are pushed into finding new and disruptive ways to excite investors and NEW investors who supposedly are more risk-averse and adventurous, but in reality are reckless.

Longer roads need more resources,

But the supply of capital does not exist in a vacuum

7. Public markets are shrinking, and investors -especially institutional investors- are navigating through a rollercoaster of political insanity. Mostly derived from the surprising interest in protecting borders than in having healthy global economies, financial and economic illiteracy is permeating the political arena where decisions are reckless and financial managers are focusing on reducing stupid (gasp) risks instead of creating and supporting new wealth.

Overall, a combination of healthy recycling of talent, capital, and technology is fueling the economy despite mistakes made by politics.

For investors the signals are clear: Get in early, support many startups, learn and collaborate.

For entrepreneurs the signals indicate: Use many forms of funding, use dynamic funding, ask investors for support (not just money), and create dynamic teams.

Oh, and for small business owners that think “small is beautiful”, now, more than ever, my famous quote of 100% of 1 is 1, but 1% of 1000 is more, is more valid than ever. Get in line, ditch the illusion of a “safe” and embrace the “growth” mindset. If we stop growing, we start dying. Small IS beautiful, it is just not sustainable.

For Government and Economic Development Agencies, the puzzle is getting more and more complex… Hang in there!

We really don’t know what we are doing, but we are doing!