Technology entrepreneurs are having a devil of a time finding angels.
Closing shop: Rose Ors, a founder of Two Smart Dogs. The Internet start-up in Los Angeles was building an online hub for adult education. Unable to raise money, Ors and her partners have decided to down shutters. Stephane Diani / NYT
Angel investors are the optimistic financiers who give entrepreneurs their crucial first infusion of cash to bring their ideas to life. Now, in the midst of an economic downturn that is sparing few companies, these patrons are cutting back on their bets and threatening the very foundation of the technology economy.
Unlike venture capitalists (VCs), angels invest small amounts of their own money—as little as $10,000 (about Rs5 lakh) and usually less than $1 million—in very young companies. 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.
For Two Smart Dogs, an Internet start-up in Los Angeles that was building an online hub for adult education classes, this sudden pullback was disastrous.
In 2007, the company raised $715,000 in its first round of angel financing. When the founders approached investors for more capital in September, they were met with silence.
“There was real interest,” said Rose Ors, a founder of the company. “But the economic meltdown ended all conversation.” Unable to raise money, Ors and her partners decided to shut the company.
The angels who rejected them are not unusual. Half of the investors surveyed in November by the Angel Capital Association, the industry’s trade group, said they invested less than they had predicted in 2008, and one-third said the number of deals and dollar amounts they invest would decrease again this year.
“Crashes make liquidity vanish, and venture investing—especially angel investing—runs on liquidity,” said Steven McGeady, an angel investor and former Intel Corp. executive. “When markets go wonky, everyone sits on cash until the situation resolves itself. This makes capital hard to find, and if a company is caught unprepared or at the wrong time, that can be the end.”
Many professional angels—those who invest as a full-time job, rather than as a side project—are still financing start-ups, if at a slower pace. They say the best opportunities come during downturns, as companies’ valuations fall significantly. The median valuation of start-ups seeking angel financing fell 25% to $3 million, from the third to the fourth quarter of 2008, according to Angelsoft, a Web service for angel investors and entrepreneurs.