Angel investors, the early-stage investors in new start-up companies, are feeling the pinch of the economic downturn writes the NYTimes:
But like all investors, many angels suffered deep losses when the market plunged last fall. That has left them skittish, investing in fewer technology start-ups and demanding more of those they do consider, leaving founders struggling to find money at the stage they need it most. The slowdown, entrepreneurs and investors say, could stunt the growth of new companies and have long-term effects on innovation.
The long-term effect is fewer good start-ups that are in the pipeline for venture capital firms in the next several years, limiting venture capital prospects when the economy does come back:
The real impact will hit Silicon Valley two or three years down the road, said Mark Heesen, president of the National Venture Capital Association. That is when start-ups that receive angel financing today would typically turn to venture capitalists for their first round of institutional investments, known as a Series A.
The reverse is also true as the current slowdown in venture funding is making angel investors skittish because they are worried the companies they invest in won't be able to get venture funding down the road:
During normal economic times, several years after a start-up raises angel financing, it seeks larger amounts of money from venture capitalists to grow. But as venture capitalists also cut back on investments, many angels are wary of investing in a start-up without the assurance that the company will be able to raise more money to keep growing.
The angels investors who are still in the game are asking for more at lower valuations:
The angel investors he met with this fall, though, were far more demanding. “I could not believe the complexity,” he told The Times. “For small investments compared to their net worth, they brought in financial advisers and a whole list of questions.”
Some made impossible requests, like proof of patents, which take several years to acquire. Others would not even meet with him. “I think we have a very compelling business, we’ve hit all our milestones. I set up lunches with friends and they just keep putting them off,” he told The Times.
But many angels are sitting on the sidelines looking at other, less risky opportunities - particularly potentially undervalued blue chip stocks:
Investing in the stock market “smells to me like a much better opportunity than investing in the friend of a friend who wants to open a green Chuck E. Cheese restaurant or software to let people choose their dental implants,” Mr. Martin told The Times. “Those could be great ideas. But that versus Pfizer stock is an easy choice for us right now.”
Yes, 2009 is going to be a difficult year for start-ups. Hopefully the stimulus package will find ways to help small, innovative companies.
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