I was still mulling over the implications of yesterday’s briefing by Nate Burgess when I came across “Prediction: Angel investing in 2009 will be up?” by Alexander Muse on the Texas Startup blog. Briefly his thesis is:
The angel investment market hovers around $12 billion each year. I predict that the turmoil on Wall Street will actually improve the ability of startups to access investments from angels. The logic is fairly simple, wealthy individual investors no longer trust Wall Street, but they still need to invest their capital. […] With the failure of the major brokerage houses investors may start looking locally to invest their capital. They may seek out ventures in their own backyard where they can exercise some level of control and oversight.
More and more angels I know have been moving more and more funds out of their brokerage accounts and into their bank accounts. […] 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.
I have come to a different conclusion.
The current worldwide economic recession is lowering the wealth of many current and would be angel investors. Exits are driven primarily by acquisition. Companies who are potential acquirers are for the most part opting for expense and headcount controls in response to this recession. This means that acquisitions will be driven primarily by market consolidation objectives and not a desire for strategic advantage. This will drive acquisition prices much lower and make venture/angel investing less attractive. As ugly as the stock market has become, minority equity investments in private firms are not at all liquid and routinely subject to complete loss. I cannot see Angel investment growing next year.
This does not mean zero. But Angels can sit on the sidelines in a way that VC’s cannot: the VC’s have raised funds for the purpose of investment and are accountable to their limited partners for the management fees they are collecting, while Angels are investing their own funds and are only accountable to themselves (and spouses).
Update Nov-10 Susan Campbell did a follow up “Interesting Finding on Venture Investment in 2009” referencing these dueling predictions and citing first half 2009 results compiled by University of New Hampshire Center for Venture Research report “Angel Investor Market Declines in First Half 2009“
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