New and Public Investors Join Seed and Early Stage Capital Boom

Angel and venture capital firms invested more in seed and early stage companies last year than any time in the past decade (for details see the related Useful Stats article). Seed and early stage companies appear to be generating a great deal of attention from the venture capital industry, even as overall U.S. investment activity remains steady. Both seed and early stage investment continue to grow, a development that a recent CB Insights report attributes to the proliferation of new micro VC funds and multi-stage venture firms. Though year-end numbers are not yet available for angel investing, which represents a major source of financial support for seed and early stage companies, early reports indicate that activity levels continue their trend of steady growth.

CB Insight’s analysis of the U.S. seed capital market over the past few years reveals a large spike in active seed investors in 2012, powered by smaller-scale investors and new attention on the need to support startups on the way to becoming profitable investments down the line. The number of seed VCs, defined as firms that made at least four seed deals per year, almost doubled from 63 in 2011 to 112 in 2012. That number remained steady last year at 112.

Though CB Insight’s list of the most active seed investors in 2013 is led by well-known private firms from Silicon Valley and the Bay Area, this year’s list includes a number of new firms in its top ranks and includes several high ranking public funds from outside usual VC hotspots. Eight of the top 20 firms (actually 24, due to ties) were new to the leader list this year. Upstart Business Journal profiled the eight newcomers, finding a great deal of optimism about the seed market despite much public discussion of scarce series A capital.

Innovation Works, a publicly operated fund in Southwestern Pennsylvania, debuted on the list this year tied for seventh place with another public fund, Connecticut Innovations. They were joined on the top 24 by Virginia’s CIT GAP Fund, which ranked 15^th in its first year on the list. These public funds are helping to support startup companies and entrepreneurs at the earlier stages to build a pipeline of high-quality investments in areas traditionally underserved by the national venture capital market. That several of these funds rank among the most active seed investors in the country indicates their importance as a generator of high-quality deals may be growing.

Angel investors are a key source of capital for seed and early stage companies. In the first half of 2013, angels invested $9.7 billion, an increase of 5.2 percent over the first half of 2012, according to the most recent report from the University of New Hampshire’s Center for Venture Research. About 38 percent of 2013 angel dollars went to seed and startup stage companies, and another 51 percent supported early stage companies. This distribution of angel funds is consistent with previous years for seed stage activity, but represents a fairly large shift to early stage funding from later deals. In the previous year, early stage investments made up only 38 percent of angel dollars, about equal with seed stage investment. Full-year data for 2013 is expected early this year.

The Q3 2013 Halo Report, published by Silicon Valley Bank and the Angel Resource Institute, provides some information on the regional distribution of angel capital investment. California is less dominant in angel capital than in venture capital, consistently representing about 20 percent of all investments. No other geographical market represents a clear advantage over the others, though activity has remained quite high in New York in terms of deals over the past few quarters and New England actually led in terms of dollars in the third quarter. The Halo Report notes that the Great Lakes region has posted the largest gains of any region in terms of dollars, though its share of total deals fell last quarter, indicating a number of high-dollar deals by angels.