Angel Investors Supported Smaller Deals in the First Half of 2009

Angel investors are reducing the average size of their investments, according to the latest report from the University of New Hampshire Center for Venture Research. In the first half of this year, total angel investment dollars fell by 27 percent from the same period in 2008, but the number of angel deals increased by six percent. As a result, the average deal size has fallen by 31 percent since early 2008.

The report attributes the change to lower company valuations and to angel investors taking a more cautious approach to investing without decreasing their level of activity. Investors have also begun shifting their focus away from seed- and startup-stage firms in order to support their portfolio companies and reduce their risk.

The trend toward smaller deals began in the second half of 2008, when private equity markets were affected by the global economic crisis. Total angel investment dollars fell by 26 percent last year, while the number of deals fell by only three percent. Though the crisis has constricted capital markets, the number of angel investors has remained steady since 2007. Angels have adjusted their investment strategy by investing fewer dollars rather than decreasing their participation in the market.

Part of this adjustment has been investing more in portfolio companies. First-sequence investment by angels has fallen from 65 percent to 58 percent of angel activity over the past year. While an increase in the number of deals usually would be an encouraging trend for startup entrepreneurs, the declining amount of angel dollars and first-sequence investments suggest that it may be more difficult to secure angel capital now than it has been in recent years.

Seed- and early-stage deals made up only 27 percent of angel investment in the first half of the year, its lowest point in several years. While expansion-stage investment remained unchanged, post-seed- and startup-stage investment rose to 58 percent of angel activity. Though angel capital still has a reputation for a focus on early-stage investments, later-stage deals have represented a majority of angel activity since 2008.

Healthcare has expanded its lead as the most popular sector for angel investment with 28 percent of all angel deals, according to the report. Software, once the leading angel recipient, represented only 14 percent of investment. The industrial/energy sector grew to 13 percent of deals, up from 10 in the first half of 2008, which the report attributes to a continued interest in green technologies.

Read the full report from the University of New Hampshire Center for Venture Research at: http://wsbe.unh.edu/files/Q1Q2_2009_Analysis_Report.pdf.