Angel Groups Give a Tentative Thumbs Up to 2008 Outlook

3/4/08Follow @bbuderi

Greater Boston ranks as a startup haven. And there are few, if any, places in the country where more and better-organized angel investor groups exist. So the news that even with a recession looming (or already here), angels around the country are expressing cautious optimism about the startup scene for 2008 should perk up some area entrepreneurs’ ears and spirits.

Angels’ relatively positive predictions for 2008 come courtesy of the Lenexa, KS-based Angel Capital Association, which recently released its Angel Group Confidence Report, a survey of its roughly 135 member groups in 37 U.S. states and Canadian provinces. The report (which didn’t get any local coverage that I have spotted, though I confess I was on vacation when it was released in late February) offered pretty sunny 2008 forecasts about the numbers and quality of startup opportunities, as well as the numbers and sizes of deals to be done.

Speaking as an entrepreneur, and keeping my fingers crossed that angels’ optimism holds if the economy continues to sour, this is good news. Angel investors, of course, are the rich (angel groups like to call them “high net-worth”) individuals who put money into promising new (usually very new) ventures. They’re often the main source of funding for companies before venture firms get involved, and therefore an important driver of innovation.

In recent years, many individual angels have banded together into small groups or associations, and these organizations have become increasingly sophisticated—forming committees to do due diligence on deals, pooling resources to make larger investments, and sometimes hiring professional staff and acting very much like seed-stage venture firms themselves. (Xconomy’s lead investor is one such group, Lexington, MA-based CommonAngels). The ACA, which executive director Marianne Hudson says really only got going in the last year or two, estimates that some 275 angel groups now operate in the U.S. and Canada, up 65 percent since 1999. About half are ACA members.

Before we get to the prognosticating, here’s what the angel groups that the ACA surveyed had to say about last year: In 2007, the ACA reports, its member groups made an average of 7.3 investments each (of which 3 deals were typically follow-on investments). The average size of each deal or round was $265,926, making the average total funding allocated by each group $1.94 million. That was roughly even with 2006, when the groups invested an average total of $1.8 million in 7.4 deals each, with an average round size of $241,528.

And here are the main predictions for 2008 that the ACA gleaned from its survey data:

Deal flow will remain strong in 2008.
Many angel organizations expect improvements in the quality and quantity of deal flow this year. From the ACA’s press release about the survey: “Nearly 55 percent of the respondents said that the number of investments and total dollars invested will increase this year, with another 32 percent believing that the activity would be the same as 2007. All angel group leaders predicted that their group would invest in a new company in 2008—with 81 percent planning to invest in three to nine companies. Most impressively, twelve percent think they will invest in ten or more companies.”

Exit activity will hold steady.
Nearly 60 percent of the ACA’s respondents foresaw no change in the outlook for IPOs, M&As, and other exit events this year. Some 25 percent thought exit activity would strengthen slightly in 2008, while 16 percent predicted it would weaken slightly. Just 1.4 percent of those surveyed predicted a significant decrease in exits.

Ongoing stock market uncertainty could affect angel investments.
“Some groups are concerned that their capacity for investment may be reduced if problems continue in the public stock markets,” the ACA reports. “Many angels have investments in corporate stocks and may lose some liquidity, and therefore will have reduced ability to make angel investments, if the public markets don’t grow this year.” Not to worry (too much), though. The ACA reports that “these concerns were factored into the 2008 predictions, but the strength of deal flow appears to have led to the generally optimistic forecast.”

Co-investment will continue to be a strong component of angel group strategy.
Just about two-thirds (65 percent) of angel groups reported co-investing with other angel groups in 2007—a strategy that increased their capacity to take part in bigger deals. Two-thirds reported that their portfolio companies also took investment from venture firms, either as a co-investment or in follow-on funding as the startups grew and required additional investments. Those figures look to be rising, as 95 percent of respondents said they intended to work with other angel groups in 2008, and 81 percent expected to work with early-stage venture firms (a smaller number expected to partner with later-stage VCs and other private equity groups).

Bob is Xconomy's founder and editor in chief. You can e-mail him at bbuderi@xconomy.com, call him at 617.500.5926. Follow @bbuderi

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