March 29, 2005--Angel funding for start-ups grew 20% in 2004 and helped create 141,200 new jobs, according to the Center for Venture Research at the University of New Hampshire, in Durham, N.H.
The total investment by angel investors rose to $22.5 billion last year compared to $18.1 billion in 2003. The volume of angel investments was 16 times more than the number of venture capital investments, and the number of entrepreneurial ventures that received angel funding in 2004 increased 24% to 48,000.
Barring any major external jolts, funding is expected to grow 10 to 12% in 2005, said Dr. Jeffrey Sohl, director of the Center for Venture Research.
"Since the bubble of 2000, the market has gone through major restructuring," said Sohl. "The market has been rid of rampant speculation and we now have mature investors who do not expect returns in one to two years and are willing to wait for five to seven years."
Last year, active investors in the market grew 2.5% to 225,000, with an average of four to five investors collaborating to fund a start-up.
Software continued to be the most heavily invested sector, garnering 22% of all angel investments in 2004, followed by healthcare services (16%) and biotech (10%). IT services and financial services received 8% of the investments followed by retail (7%) and telecom (6%).
"In 2005, we expect to see the domination of software in investments," said Sohl. "In software, the ramp up costs are less, there is a reasonable potential for investment and it makes an attractive acquisition target for other companies."
The acceptance rate, defined as the percentage of investment opportunities brought to the attention of the investor that results in an investment, increased to 18.5% in 2004 compared to 10.3% the previous year. The acceptance or yield rate had peaked in 2000 when it touched 23.3%.
The increase in the acceptance rate is, however, being viewed as a disturbing sign as it could signal the entry of inexperienced investors into the market.
According to the Center for Venture Research, the acceptance or yield rate would have to stabilize at the historical rate of 10% for the market to remain healthy.
Women-owned and minority firms showed significant difference in the response that they received from the investment community.
Women-owned ventures, which account for nearly 5% of entrepreneurs that seek angel capital, lagged behind their male counterparts. Acceptance rates for women-owned businesses stood at 12.5% (a 6% lag). Just one quarter of women angels, who represent about 5% of angel investors, made an investment in 2004.
Minority-owned firms had better luck with an acceptance rate of 20%, in line with the general rate. Minority angel investors account for just 3.6% of angel investors and only one in 10 made an investment in 2004.