National Association of Seed and Venture Funds
| MoreLIP - The Ascendancy of Angels |
02/17/2008
Preview:
The National Governor’s Association’s Best Practices report on state angel-group investment programs and incentives is a welcome contribution to the limited information about who is doing what in this relatively recent but important function of providing capital to start-up and very early stage companies. Coming just a few months after publication of the Wiltbank study on investment returns in angel groups, it help form a valuable baseline for tracking and measuring both the who and what of the growth of angel investment groups. We heartily applaud both! But....
Article:
The National Governor’s Association’s Best Practices report on state angel-group investment programs and incentives is a welcome contribution to the limited information about who is doing what in this relatively recent but important function of providing capital to start-up and very early stage companies. Coming just a few months after publication of the Wiltbank study on investment returns in angel groups, it help form a valuable baseline for tracking and measuring both the who and what of the growth of angel investment groups. We heartily applaud both!
There is an enormous challenge, however, in trying to take the temperature of this addition to the capital markets that is both daunting and vulnerable to too much praise too soon, especially this early in its evolution.
It took a couple of decades for the institutional venture capital community to mature to the point that it became a recognizable and measurable function of capital formation. And, memory requires that it, too, was initially concentrated on the opportunity for funding, mentoring and profitably exiting early stage companies with high growth potential tended by business driven entrepreneurs. Today no one would think of publishing a paper or book about the business finance spectrum without including a chapter ob venture capital.
Unfortunately, at least for start-up companies, and many geographic regions of the country, institutional venture capital firms have found it significantly more rewarding to invest its funds in more mature companies. And today more than 80% of its $25 billion investment goes to expansion and later stage companies; and about 60% is concentrated in California and Massachusetts. Those trends left a huge gap in the capital markets for the initial, more risky, funding of start-ups and technology-transfer opportunities from our publicly funded research institutions.
A substantial number of fledgling angel groups were generated around cashed out, successful entrepreneurs, also concentrated in the geographic regions where venture capital had become a so-highly successful segment of the capital markets. Even as the venture capital trend toward later stages got started, these angel groups came upon the opportunity to invest in the ignored or abandoned worthy start-ups. But such activity only rarely reached beyond the same geography in which venture capital was concentrated.
Meanwhile those states not favored by the geographic alignment of venture capital, the fly-over states, were struggling with a wide variety of state-sponsored venture investing programs in an effort to retain the economic opportunity often coming out of the research institutions which their taxpayers supported. Some worked to varying degrees. Some failed miserably.
Then, about the turn of the century, the states began to notice the success of angel groups around Boston, Silicon Valley, San Diego and Raleigh. And a few of the more adventurous, perhaps visionary state government policy makers decided to seek ways to motivate or encourage the formation of angel groups in their states.
So here we are nearly a decade later. Angel investing has evolved to become the hope of startups and policy wonks in the fly-over states as well as the established entrepreneurial centers. They have begun to fill the increasingly huge gap in the need for seed capital.
So far there’s reason for hope. But we need to be cognizant that it will take another decade to really see how well the angels, both those incented by the states as well as those acting on their own, perform. There is a an open question created between the hope of what we envision and the actual performance yet to be measured. Seed investing has a long time horizon from initial investment to exit. And many of those angel groups are just now in the first blush of getting into the water. It will be a while, perhaps another decade, before we know if angel investing, particularly in the fly-over states, proves to be the worthy successor in the seed capital gap.
We need to exercise a little caution about anointing the champion before she crosses the finish line.