Seed Stage Angel Capital Becoming Scarce

Angel investors continue to move their focus from seed stage startups to later stage deals, according to recent analysis by the University of New Hampshire's Center for Venture Research. During the first half of 2010, 26 percent of angel capital was invested in seed and startup stage companies, down from 35 percent in 2009 and 45 percent in 2008. Meanwhile, overall angel funding fell to $8.5 billion, a 6.5 percent decrease from the first half of 2009. Though angel investors are conducting a greater number of smaller deals than they were in the last few years, this has not translated into investment in younger companies.

Jeffrey Sohl, director of the Center for Venture Research, hypothesizes that the migration away from seed and startup deals reflects a need to invest in portfolio companies to help them survive the recession and eventually reach a profitable exit. If the trend toward later stage investment continues, however, the lack of capital availability for young startups could result in a crisis for new venture creation.

Read the Center for Venture Research release at: http://wsbe.unh.edu/files/q1q2_2010_angel_market_press_release.pdf.

On the venture capital side, the picture for startups is less bleak. While overall venture investment fell in the third quarter of 2010, first-time financings remained steady and seed and startup stage investment is on track exceed last year. Seed stage investment totaled $1.75 billion in 2008 and $1.73 in 2009, according to the most recent release from PricewaterhouseCoopers and the National Venture Capital Association (NVCA). As of the third quarter of 2010, seed state venture investment totaled $1.51 billion. The number of seed stage deals also appears to be holding steady. Investors have made 285 seed and startup deals so far this year compared to 245 during the first three quarters of 2009.

Read the latest PricewaterhouseCoopers and NVCA Moneytree Report: https://www.pwcmoneytree.com/MTPublic/ns/moneytree/filesource/exhibits/10Q3MTPressRelease_Final.pdf.

Though capital is reaching startups through venture capital investment, it is not increasing at the pace required to fill the growing seed-stage capital gap. With seed investment declining and new, first-sequence investments down 12 percent in the first half of the year, the recession may have a long impact as new companies are unable to secure the financing they need. Without new deals in the pipeline, investors may not have suitable targets for lower-risk, later-stage investments.