The bright outlook for venture capital funds this year has narrowed to a distant light that may just turn out to be an oncoming train. Following forecasts for improved conditions over the previous year, the venture capital industry has experienced a cascade of circumstances which could make this year one of its worst in years. Already set back by a deteriorating IPO market, the industry just recorded its worst quarter of fundraising in nearly a decade. According to the National Venture Capital Association, funds raised in the third quarter were 53% below the amount raised in the same quarter a year ago.
Meanwhile, angel investments have shown a marked increase in funding over prior years. During the first two quarters of 2011, angels
Source: www.jasonnazar.com
funded over 26,000 ventures. Of particular note is that the average deal size, which had been declining in recent years increased as well. Overall investments in seed and start-up stage companies increased by 13% over the same period in the prior year.
Historically, angel investors would only tread where venture capital would not – in the seed or start-up phase. But there are indications that, with the drop in VC funding activity, angel investors may be looking at more mature ventures which could fill a critical void. While the percent of total angel investing as declined in post-seed ventures, the overall increase in funding has led to a “spillover” into ventures left vacant by the VC firms.
Angel investors are also benefiting from the overpopulation of venture capital firms all competing for the larger deals that can turn the bigger profits their investors thirst for. Many situations that would have, at one time, been a great fit for a VC fund, are now too small in terms of what they could possibly return to investors, so they are left behind for angel investors who are more than willing to scoop them up. Additionally, the start-up landscape is changing where initial capital requirements are much smaller than they used to be which keeps more new ventures out of the reach of venture capital funds.
The good news is that fears over stalled capital and job formation due to the decline in venture capital funding are being tempered with the increase in angel activity that has created more than 134,000 jobs in 2011.
