How can Angels Make up for Declining Venture Capital?

The Wall Street Journal reported this morning that venture capital investing was down in the third quarter as compared to the same quarter last year. So if you’re trying to raise money for a high potential company, the going is probably getting tougher.

In response to this news, I’m sure someone is going to say that the venture capital numbers don’t matter because angels are the real source of financing for high potential companies anyway. Given that likely statement, it’s probably for entrepreneurs to know the facts about the angel capital market. So this week, I’m offering some numbers (from Fool’s Gold: The Truth Behind Angel Investing in America.)

The general picture one gets from the numbers is that angel investors aren’t likely to be able to pick up the slack from a declining venture capital market. Here are some facts about the angel capital market:

• Contrary to what most people say, the angel market isn’t that big, it’s about the same size as the venture capital market.
• Angels make up only 8 percent of the informal capital market, which is money from friends, family, and business angels combined.
• Less than one percent of companies get an angel investment every year.
• Less than one percent of the companies that get an angel investment every year get it from an organized group of accredited angel investors – the ones that make investments most similar to venture capitalists. In absolute numbers, about 500 companies per year get money from these groups.
• Measured over a three year period, less than one percent of adult Americans make an angel investment.
• Only about two percent of those who make angel investments are part of an organized angel group.

Angel investing, particularly the kind that involves the sophisticated, accredited investors talked about all of the time in the media is very, very rare. Even the overall angel capital market isn’t that large. So it’s unlikely that angels are going to plug the hole in the financing of high potential start-ups created by declining venture capital investing.