Bank loans have been hard to come by in the past two years, which has many small businesses looking for angel investors. In one sense, it's an ideal market for angel investing--many sound business ideas, and even established businesses with orders in hand, can't get a loan. Seems like a great opportunity for angels to step in and make a nice return.
But the dark side--the current economy and accompanying increased failure rate for small businesses--has angels staying cautious.
Research is showing angels have been playing it close to the vest in the downturn. The Center for Venture Research at the University of New Hampshire's study of angel funding in the first half of '09 showed the average deal size down 31 percent. Total investments were down 27 percent to $9.1 billion. The New York Times reported that in general, angels are pickier and more risk-averse. Advice: Be realistic about valuations. Be very, very realistic--because they're way down.
Giving angels serious pause these days: returns are down. Case Western Reserve University economist Scott Shane estimates 7 percent of angel investments hit the jackpot with tenfold gains. But at least half of their investments result in the loss of all the money invested.
Some sobering background for anyone thinking about approaching angel investors. Be ready to make a strong case about why your business represents a safe investment if you're hoping angels will land on your doorstep.
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