2007 Angel Group Predictions are "On The Money"

ACA angel groups report improvements in deal flow and better relationships with venture capitalists in 2007

Washington, DC, September 18, 2007 -Angel groups are on track to meet their predictions for increased investment activity in 2007, based on a mid-year survey by the Angel Capital Association.  The new survey followed another survey completed in early 2007 in which angel group leaders expressed optimism about the climate for investments in early-stage businesses in 2007, forecasting gains over 2006 in number of investments made, the quality of business opportunities presented by entrepreneurs, and co-investment activity with other investors.

The survey also captured angel group opinions on their relationship with venture capital firms and found that 74 percent of the respondents believed that the relationships between angel groups and venture capitalists have improved over the past three years.

”The fact that angel groups are making their optimistic predictions a reality is good news for investors and entrepreneurs,” said John May, chairman of ACA and co-manager of the Washington Dinner Club in Washington, DC. “Indications are that angel groups will invest more money in more early-stage companies this year than in 2006, which is significant when you consider that the groups made a 34 percent increase in the average number of deals per group in 2006 over 2005.”

Angel investors are high net worth individuals who make equity investments directly into growing companies, often as they are starting up.  In the last decade, individual angels began forming angel organizations with other individual angels to better pool their money and resources to support entrepreneurial firms.

 

Accuracy of Predictions for 2007

 

In the first Angel Group Confidence Report of angel group leaders in North America earlier this year, ACA member angel groups forecast that the quantity and quality of entrepreneurial investment proposals will increase in 2007, and that sentiment has proved true for the first two quarters of 2007 in the mid-year survey.  Fifty percent of angel group leaders expressed that their group’s deal flow had continued to increase in quality and quantity during the first six months of 2007, and most of the remaining respondents said that deal flow was similar to 2006. 

ACA members also expected investment activity to continue at the same level or increase somewhat this year over 2006. In the mid-year survey, angel groups reported investment activity in the first half of the year is on track for slight growth in the number and amount of investment.   The groups made an average of 7.4 investments in 2006.  In the first half of 2007, the angel groups reported an average of 3.7 investments.

The mid-year survey also revealed that ACA member groups are following the interests stated earlier in the year in increasing the number of investors involved in their organizations and in investing alongside other angel groups and early-stage VCs.  In the first half of 2007, the average number of accredited investors per group grew from 41 to 52.5, with 58.3 percent of the groups reporting their group grew either slightly or significantly.  Almost half (49.2 percent) of angel groups reported syndication and/or follow-on investment with VC firms and 53 percent of angel groups had co-invested with another angel group in the same early-stage firm.

 

Relations with Venture Capital Firms

 

Angel groups also expressed optimism regarding relationships with venture capitalists. A majority of angel group leaders (73.7) thought that the relationships between VCs and angel groups had improved in the last three years.  Reasons given for the improved relationship with VCs included: market segmentation, increased understanding about their respective roles in early and later-stage financing, better deal structuring, and good company referrals, among other things.  One respondent said that improvements are happening because, “angel groups operate with a high level of sophistication and VCs are becoming aware of it. Communication between the two [groups] is essential.” 

“It is important for angel groups and VCs to build strong and trusting relationships,” notes Marianne Hudson, ACA’s executive director.  “Many promising entrepreneurial companies start with funding and mentoring from angels, but need additional capital from VCs to support their growth and success.  A good flow of communication between these investors may lead to better support for the companies and a more efficient path toward obtaining the financing they need, as well as better investment returns.”

In addition to the view of improved relations, 80 percent of respondents reported having positive experiences with VCs in 2006 and 2007. Most angel groups (70.8 percent) had received good referrals from venture firms for prospective angel investments. Fifty-four percent of responding angel groups have attracted venture capital investors as members of their group, as some VCs are angel investors themselves, and the same amount of groups had regular meetings or communications with VCs to discuss issues of mutual benefit.  Fifty-two percent of groups had positive portfolio company board relationship with VCs, working together to ensure the ventures meet mutually developed goals.

Despite the improvement in deal relations, angel groups have still reported some negative deal structure issues with VC investors in the past year and a half.  Most angel groups (70.8 percent) encountered a “pay to play provision” in dealings with VCs.  A “pay to play provision” is a charter provision in which the prior investor who does not invest pro rata in a new round loses rights and is converted to common stock. Other issues that angel groups encountered include: recapitalization (54.2 percent), excessive preference (20.8 percent) and the forced sale or liquidation of the company (8.3 percent). 

“In large part, these events underscore the maturity of angel groups as they grapple with later-stage, growth issues within their portfolio companies,” said May.

Angel groups and venture capital firms continue to build relationships that lead to more benefits for VCs, angel groups, and entrepreneurs.  Forty-four percent of the angel groups in the survey had established partnerships with VC firms to expedite co-investments or follow-on investments.

“It will be interesting to see the new models for partnerships and cooperation developed by VCs and angel groups in the future,” says May.  “ACA is happy to work with the venture capital community to spread best practices and help build more great businesses.”

About the Angel Capital Association and the Survey

The Angel Capital Association (ACA) is the professional alliance of angel groups in the U.S. and Canada. Currently, there are more than 155 affiliates and member groups representing more than 6,000 angel investors. ACA focuses on developing professional standards, sharing best practices and building relationships and collaboration between angel groups. More information can be found at www.angelcapitalassociation.org.

In the mid-year survey, leaders of ACA member angel groups were asked about their organizations’ 2007 investment activity for the first two quarters, their preferences and attitudes about the current environment for angel investment, and their experiences and relationships with venture capital firms.  The survey was conducted by ACA of its member angel organizations in July and August.  Survey respondents represented a majority of ACA’s membership, in a wide variety of locations, sizes, and investment interests. Responding groups were from both rural areas and large cities, from both coasts, spanning 29 states as well as Canada and Mexico. The groups that responded to the survey represent about 3,000 individual angel investors.

Please note that ACA is not a funding organization itself. The ACA Web site has a directory of member groups, with links to group Web sites. Entrepreneurs should contact individual groups directly rather than ACA (or work with a trusted advisor to gain an introduction). Angels interested in learning more about ACA or member groups are welcome to contact ACA or the member group.