Are Angels Changing Their Strategy?

StartupJournal reports on a study from the Center for Venture Research at the University of New Hampshire that reaffirms a trend that we have been observing for a while now. Angel investors seem to be shifting to later stage deals. Rather than providing seed funding, which has been their bread and butter investment, angels are now doing deals that were once the focus of VCs. And VCs are shifting to even later stage deals.
A few years back 75% of angel money was seed investments in start-ups. in 2005 it had dropped to 48%. It is now around 40%, according to this report.
But before we panic and predict the end of the entrepreneurial economy we need to step back and look at the context of all of this.
– There are more angel investors than ever with lots of cash. There are only so many seed deals to go around that meet their requirements for investment.
– Some angels are gathering in packs, called angel networks, that are mimicking venture capital firms in many ways, including more pooling of funds on deals and professional management. It is not surprising that this also includes developing investment strategies that look a lot like those of venture capital firms.
– Angels that do smaller deals are off the radar. They are hard to get data on in the first place because there is no formal reporting mechanism. Add to that their intense desire for privacy, and it is no surprise that we are seeing mostly the larger deal angels working in networks.
– Our entrepreneurial economy is dynamic. As the percent of GDP that is created by smaller companies surpasses 50%, we can expect that there are more deals that have grown to need more capital. Supply follows demand. We must also take into account that it is beginning to look like success rates are climbing for new ventures, due to both a favorable economy and better education for the entrepreneurs.
Here is my fear from this report. Policy makers and politicians eager to get their claws into the entrepreneurial part of the economy will use this to say, “We have a crisis!! We need to develop programs for government seed capital funds or the economy will stumble.” Or how about this one: “We need to get control of this to make sure we understand what it going on so we can enact effective legislation. It is time to call for registration of private equity placements so we can track all of this.”
Mark my words — we are moving toward socialized entrepreneurship. Our government is no longer ignoring our entrepreneurial economy and once they pay attention to it, can not leave it alone.