Interesting Finding on Angel Investments in 2009

Much like the majority of the economy, angel investments have felt the crunch of 2009. In fact, according to a University of New Hampshire Center for Venture Research analysis, The Angel Investor Market in Q1Q2 2009: A Halt in the Market Contraction, total investments are down 27% over the first half of 2008.

The interesting finding from this analysis is that while overall investment dollars are down, the total number of ventures that received funding in the same period increased 6% over last year. The number of active investors in the first half of 2009 was virtually unchanged from 2008.

A Change in Focus

One very obvious change between 2009 and 2008 is the number of investments in the seed and startup stage for angels. In the first half of 2009, 27% of angel investments focused on this area. While this appears to be a strong number, it is actually a 19% decrease from the year prior and the smallest percentage focused on this area in several years.

“This change in investment behavior is likely an indication of both a need to increase investments in existing portfolio companies and a change in angel’s risk tolerance,” said Jeffrey Sohl, director of the UNH Center for Venture Research at the Whittemore School of Business and Economics.

Trend Recognized Early On

Investors and others watching the market are likely not surprised at the UNH finding as this lower spending trend was identified earlier in the year. The Charlotte Business Journal reported in March that the dollar amount of angel investments had declined 26% nationwide versus 2007, although the volume of deals had remained largely unchanged.

This trend is interesting in that angel investors appear to still want to invest their money, but the number of dollars per opportunity has changed. While these cautious individuals are striving to spread the risk, startups are finding that their valuations are no longer the bloated approximations of a booming economy and instead more realistic and achievable.

Predictions Challenged

In late 2008, a number of industry participants were attempting to predict what 2009 would hold for the angel investing market. Alexander Muse of the Texas Startup Blog wrote the following:

I predict that the turmoil on Wall Street will actually improve the ability of startups to access investments from angels…More and more angels I know have been moving more and more funds out of their brokerage accounts and into their bank accounts. This flight to safety will continue for a time, but soon the specter of inflation will rise and investors will look to invest their money.  The lack of professional private equity will only increase the opportunities for angels to make great investments and their access to greater percentages of their own capital will mean startups will get more.

Others like Murphy believed the economic recession lowered the wealth of many current and would be angel investors. At the same time, acquisitions were being driven through market consolidation instead of strategic advantage, thereby lowering prices and value. At the same time, angel investors do have the luxury of taking a “wait and see” approach.

Looking Back to Prepare for What Is Ahead

In hindsight, it appears both Muse and Murphy were correct, but maybe not in the ways they originally intended. The UNH report suggests that while angels have not taken a backseat to investing this year, they have treaded very lightly and with much caution. Will that change for 2010? What’s your take?