Angel Investor Activity on the Rise: Private Placements Continue to Grow

One silver lining that the bottom may have been reached is that, according to a mid-2009 report from the Center for Risk Research at the University of New Hampshire, angel investment numbers have begun to rise. During the first half of 2009, angel investors financed 24,500 new ventures, 6% more than during the same period in 2008.

The figures suggest that 2009 will have seen the birth of approximately 50,000 companies, all financed by angel investors and not venture capital firms. In a November 12 Business Week article, Spencer Ante reports that angel activity continues to increase and there are still great ideas out there. “This may be the best time to start a company,” says Carl Schramm, president of the Kauffman Foundation, an organization that promotes entrepreneurship.

There are many reasons for this. The first costs are low. Office space, labor and materials are cheaper and the contractors weathering these storms are on a mission. This separates the “posers” from the true visionaries. The people who make it through the tough times are the type who want to start these startups and make their dreams (and those of investors) come true.

Another reason is that competitive incumbents tend to focus on themselves as they fight the daily battles of tough markets. This allows startups to gain critical market share early.

This is fertile ground for private angel investors who can invest in these companies. These entrepreneurs see a real need in the market. Anyone who can see a real need and fill it is the secret to successful companies and exciting returns for investors.

If the stock market doubles in 5 years, that’s a 15% annual growth rate in investments. New venture angels typically see returns of 20-40% and some bigger, much bigger. This makes the world of PPM private placement investing a valuable addition to portfolios and an important way to offset last year’s losses. Be sure to look for ones that comply with Securities Exchange Commission (SEC) rules.

The following table was compiled by Gary Beach, Editor Emeritus of CIO Magazine. The table, based on the Fortune 500, shows what percentage of the top companies joined during a recession.

Based on Fortune 500

Percentage who entered the business during a recession year

top 10 companies

70%

Top 25 companies

64%

Top 50 companies

52%

Top 100 companies

43%

Top 500 companies

36%

Percentage of years the US has been in recession: 39%

Data: Gary Beach, Fortune, NBER, Wikipedia

From this data, the US has been in a recession for 39% of its years. Among the top 10 Fortune 500 companies, 70% started in recessions. What this means is that almost 40% of the time, the US has had slow economic times, and yet we continue to grow.

Giants are still made in tough times. According to US history, recessionary times are not new.

Most angel investments range from $10,000 to $1 million. This is a portfolio investment game for spreading your bets. Not all are winners. Typically, 24% end up bankrupt, but the winners more than make up for the laggards. This is the power of a diversified portfolio. As companies with strong innovation seek funding, this provides an opportunity to offset past losses and build personal enthusiasm.

Leave a Reply

Your email address will not be published. Required fields are marked *