Angel Investors Are Feeling The Crunch
Bill Warner Sunday, October 12, 2008
Private angel investors as well as organized angel investor networks and funds are already feeling the impacts of the economic downturn that has just hit us. The average angel investor is well over 50 years old and is getting ready for retirement or is already retired. Their portfolio of investments is financing their lifestyle. With the volatility in the public markets, some are seeing their net worth and their cash flow from investments drop by 30% to 40%, and they haven’t seen the bottom yet.
The Impacts to Angel Investors
Angels are getting hit in many ways. Whether it is an impact to personal wealth and cash flow, ability to borrow money, downturn of business for their own companies, or ability to find new angel investor money for additional investment, the picture isn’t pretty.
- If they are invested in the public markets, they are seeing a tremendous decline in the value of their investments.
- Depending on what they are invested in, their losses could be astronomical especially if they are invested in financial institutions or the real estate market.
- Their own companies are feeling the impact of the slow movement of credit as they try to borrow money for business operations.
This all adds up to a need to conserve cash and reprioritize their investments to lower risk opportunities.
- Depending on their investment strategies, they may decide to sell the securities that have been irreparably harmed.
- They may conclude that the depression in the market is not over and that we are going to fall deeper into depression, and therefore put their money into very low risk investments.
- They may actually increase investments in areas that are fundamentally sound, getting great deals in this depressed market.
No matter how you look at it, their personal portfolio is in turmoil and is undergoing some massive reengineering.
The Impacts to Angel Investment
Like the VC’s, angels are encouraging their portfolio companies to conserve cash by getting even more focused on their core businesses and driving profitable revenue.
- If the company can make a deal for additional angel investment now, take it, no matter what the valuation. Angels realize that any portfolio company that is not already cash flow positive is in dire trouble. Raising money later is going to be very hard.
- They want to see more aggressive strategies for exits as they will be willing to take a lower return to cash out earlier. Entrepreneurs will have to focus on creating earlier exit opportunities and creating greater shareholder value faster.
- Many will become much more selective and even pull back on making any further investments until the economy stabilizes and they find out exactly where they stand, holding in reserve some funds to protect their current company investments.
- Getting them interested in a new investment in a start-up is going to be extremely difficult. Entrepreneurs will have to really focus on putting together their business plans to show not only an attractive opportunity but a substantial return more rapidly than ever before.
- As occurred early this decade with VC’s, angels may move to more mature companies that represent lower risks. This will challenge entrepreneurs to form businesses that can reach profitability and positive cash flow earlier.
Angels are angry right now. Well, actually, who isn’t angry? I wish our presidential candidates were angrier though. We all have been let down by every agency that is supposed to protect us as well as businesses who lost all common sense. In less than ten years, we burst another bubble. We need a new administration and congress that will provide appropriate oversight and make the changes necessary to continue a free market economy without government influence for purposes of social engineering.
As we have done over and over again, we will pull through this and respond to the new economic realities. After all, we are dealing with the beginnings of new businesses that fuel the majority of our economy.
Filed Under: Angel Investment, Financing a Company
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
This article is worded perfectedly, but it should offer an alternative perspective that this is America and opportunities will always be available, and possibly at a discount simply due to the credit markets. This is a time to be able to pull together and squash the competition. Less competitors will allow more market share to be on the table, even if that market has diminished. Some will survive, some will wither and die, yet others will thrive and conquer. We look forward to surrounding ourselves with more angels who can look just a year out to position for a turn around and be able to dominate.
