As Angel Investor Ranks Swell, Focus Shifts to Later-Stage Companies

The shift to more mature companies could result in a "capital gap" for start-ups, experts say.

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More angel investors  are putting fewer dollars into fewer businesses this year compared to the first half of 2006, with most of the investments going toward later-stage business funding, a new report shows.

While the number of active investors  nationwide increased by 8 percent over the same period last year to 140,000, the number of ventures receiving angel funding dropped by 2 percent to 24,000, according to the University of New Hampshire's Center for Venture Research.

At the same time, the total dollar size of deals declined by 6 percent to $11.9 billion. Even as the average deal size dropped by 4 percent, the number of investors per deal jumped by 10 percent, researchers said.

Health-care, medical services, and software continued to attract most of the funding, together accounting for 36 percent of all angel investments this year -- compared to 10 percent each for biotech, electronics, computer hardware, IT services, retail, and energy companies.

Continuing a three-year trend, nearly half of these deals went toward post-seed investments, as opposed to seed and start-up stage funding  for new businesses.

"While angels are not abandoning seed and start-up investing, it appears that market conditions, the preferences of large formal angel alliances, and a possible slight restructuring of the angel market are resulting in angels engaging in more later-stage investments," Jeffrey Sohl, the center's director, said in a statement.

According to Sohl, first-sequence investments accounted for 55 percent of this year's angel activity, indicating that most of the investments came from new deals -- but not necessarily for start-ups. By shifting strategies toward later-stage funding, investors are reducing the proportional amount of seed and start-up capital, resulting in a growing "capital gap" for seed and start-up funding across the country, Sohl said.

Business sales  remained the most popular strategy for exiting deals, with 61 percent of angels cashing out through trade sales, compared to only 6 percent exiting through initial public offerings. Among all exit strategies, angel investors achieved a rate of return of 30-40 percent. While roughly half were at a profit, as many as 33 percent ended in bankruptcy, the report said.

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