Saturday, August 1, 2009
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Why do most entrepreneurs I speak to in South Africa still think that either Venture Capital firms is the key source of funding for small business in or have never heard of the term Angel investment. Its interesting how we feel that once we have a business plan, our choice for business funding is between the big old anti small business risk bank and the risky give to much of your equity and business control away Venture Capital firm. Surely there must be something better. Well the good news is that there is and its called Angel Investment or Angel Funding.
A recent study in the US found that VCs only fund 400 to 600 seed or start-up companies per year in America while Angel investors fund about 16,000 seed / start-up companies per year in the US - about 27 times more.
In 2003 already, the American Federal Reserve did a study on Small Business Finances. The data estimates that angels fund about 50,700 companies each year in America.
The Center for Venture Research (CVR) has been conducting research on the angel market since 1980. The CVR is a multidisciplinary research unit of the Whittemore School of Business and Economics at the University of New Hampshire. They report that 55,480 entrepreneurial ventures received angel funding in 2008 – in the same range as the number above from the Fed study.
In an email to Scott I asked: “On page 114 you reference data from the Entrepreneurship in the United States Assessment study that says 35.5% of angel investments are in pre-revenue companies. I appreciate that ‘pre-revenue’ is not precisely the same as seed/start-up, but if we take those as roughly equivalent, would you agree that angels invest in about 35% x 50k = 16k seed/startup companies per year?
And that if angels fund about 16,000 seed/startup companies per year and VCs fund about 600, then angels fund about 27 times more seed/startup companies per year?
Scott responded: "I think that 27:1 is about right for the ratio of angel to VC seed and start-up stage investments."
This is very good news for entrepreneurs and the economy. There has been a lot written about the traditional venture capital model being broken and the reduction in venture capital financing all around the world. With VCs financing only about 4% of seed and startup-up companies, the decline of traditional venture capital funds shouldn’t be a serious problem for early stage companies - or the next phase of growth in the global economy.
Thank you to the guys at Angel Blog for the finer details and stats used in this post.
This post was written by: Franklin Manuel
Franklin Manuel is a professional blogger, web designer and front end web developer. Follow him on Twitter