Angel Investment Update
Anon
14-Oct-06
The US angel investor market has shown signs of a continued modest growth in the first half of 2006, with total investments of $12.7 billion, an increase of 15% over the first half of 2005, according to the Center for Venture Research at the University of New Hampshire (USA). A total of 24,500 entrepreneurial ventures received angel funding in the first half of 2006, a 6% decline from the first half of 2005. The number of active investors in the first half of 2006 was 130,000 individuals (3% above Q1Q2 2005). These trends indicate that whilst the total dollar size of the market and the number of investors were comparable to Q1Q2 2005, this increase is offset by the slight decline in the number of investments. Reflecting this trend is the increase in the average deal size by 22% over the first half of 2005.
Sector Analysis
Healthcare services/ medical devices/equipment and software remained the sectors of choice, with 27% and 18%, respectively, of total angel investments in the first half of 2006. While biotech, retail, media and IT services garnered close to 10% each, there was a significant decline after the two largest sectors. The remaining investments were approximately equally weighted across high tech sectors, with each having 3-5% of the total deals. This market level sector diversification indicates a robust investment pattern. Since the angel market is essentially the spawning grounds for the next wave of high growth investments, this sector diversification provides an indication of investment opportunities that will be available for later stage institutional investors.
Stage
Angels continue to be the largest source of seed and start-up capital in the United States, with 40 % of the first half of 2006 angel investments in the seed and start-up stage. This preference for seed and start-up investing is followed closely by post-seed/start-up investments of 45%. This increase in post-seed/start-up investing continues a trend that began in 2004 and represents a significant increase in historical levels. While angels are not abandoning seed and startup investing, it appears that market conditions, the preferences of large formal angel alliances, and a possible slight restructuring of the angel market are resulting in angels engaging in more later-stage investments. New, first sequence, investments represent 66% of first half 2006 angel activity, indicating that some of this post-seed investing is in new deals. This shift in investment strategies toward post-seed investments reduces the proportional amount of seed and start-up capital. This restructuring of the angel market has in turn resulted in fewer dollars available for seed investments, thus exacerbating the capital gap for seed and start-up capital in the US.
Yield Rates
The yield (acceptance) rate is defined as the percentage of investment opportunities that are brought to the attention of investors that result in an investment. The peak yield rate of 23.3% occurred during the height of the investment bubble in 2000. Since that peak the yield rate had stabilised at around 10%, the historical average. In 2005 yield rates continued the upward climb that began in 2004, with the yield rate increasing to 23.0%, on the heels of a 2004 yield rate of 18.5%. For the first half of 2006 the yield rate has retreated to a more sustainable level of 12%. While this drop in yield rate is encouraging, it remains to be seen if the final yield rate for the full year 2006 will stabilise around the 10% level.
Women and Minority Entrepreneurs and Investors
Women angels represent approximately 8% of the angel market. Women-owned ventures account for 6% of the entrepreneurs that are seeking angel capital and 14% of these women entrepreneurs received angel investment in the first half of 2006. Thus, it appears that while the number of women seeking angel capital is quite low, the percentage that receives angel investments is in line with the overall market. This indicates that there appears to be a need to provide the mechanism for more women entrepreneurs to seek angel capital. Minority angels account for 3% of the angel population and minority-owned firms represent 4% of the entrepreneurs that presented their business concept to angels. However, the yield rate for these minority-owned firms was 7%, which is below the general yield rate. These data indicate that not only do more minority-owned firms need to attract the attention of angel investors, but minority-owned firms, given the low yield rates, need to increase their “investor readiness” through education and networking.
The Center for Venture Research (CVR) has been conducting research on the angel market since 1980. The CVR’s mission is to provide an understanding of the angel market and the critical role of angels in the early stage equity financing of high growth entrepreneurial ventures. Through the tenet of academic research in an applied area of study, the CVR is dedicated to providing reliable and timely information on the angel market to entrepreneurs, private investors and public policymakers.
For more information visit http://www.unh.edu/cvr
US VC Update
$6.7 billion of venture capital invested in Q2 2006 Up rounds exceeded down rounds in Q2 2006 for the tenth quarter in a row (69% up vs. 25% down, with 6% flat), although by less than Q1 2006 (which was 74% up vs. 15% down, with 11% flat). Fenwick & West recorded a 34% average price increase for Silicon Valley companies receiving venture capital in Q2 2006 compared to such companies’ previous financing round. Although this was a significant increase, it was less of an increase than in the prior four quarters.
The amount invested by venture capitalists in the US in Q2 2006 was approximately $6.7 bln, an increase over $6.4 bln in Q2 2005 and $6.2 bln in Q1 2006. The combined total of $12.9 bln for the first half of 2006 puts the industry on pace for its largest investing year since 2001. Acquisitions of venture backed companies in the US in Q2 2006 was approximately $7.1 bln in 92 transactions. This was a decline from $8.5 bln/97 transactions and $8.4 bln/103 transactions in Q2 2005 and Q1 2006, respectively, although the combined total of $15.5 bln/195 transactions for the first half of 2006 puts the industry on pace for its best acquisitions year since 2000.
European VC Update
Ernst & Young/Dow Jones VentureOne European Venture Capital Report Finds Significant Activity for Seed and First Round Deals and Most Technology Investment in Four Years.For the second quarter in a row, renewed interest in early-stage investments boosted overall venture capital investment in European companies. In the second quarter of 2006, a total of EUR 962.4 million was invested in 213 deals, according to the quarterly European Venture Capital Report released by Ernst & Young and Dow Jones VentureOne, the publisher of VentureSource. This is 13% more capital invested than in the second quarter of 2005. Deal flow was down by 30% from a year ago, but steady with the first quarter of the year.
Among the trends in the second quarter were the significant size of first- and second-round deals, the dominance of early-stage activity in overall deal flow and the rekindled interest in select technology and services segments.
“A very strong initial public offering market in Europe in the second quarter is providing investors with the exits needed to enable them to support the next wave of start-up companies,” said Steve Harmston, director of global research for VentureOne. “Despite a tightening of the reins around deal flow, we are seeing the most interest in initial financings, in proportion to the total activity, since 2001.”
As a percentage of total rounds, seed and first-round deals accounted for 43% of all rounds, and the actual number of rounds, 92, was steady with the total count of early-stage deals from a year ago. The capital raised was also up for seed and first rounds combined, by 37%, to EUR 282.8 million. But the gains in early-stage activity came at the expense of other rounds. Deal count for second rounds dropped by 41%, from 66 to 39, and later-stage rounds fell 39%, from 115 to 70 deals. Capital investment directed to second rounds displayed a 29% increase, to EUR 266.5 million. Conversely, the amount raised in later rounds declined 16% to EUR 362.5 million.
“With increased globalisation as well as the emergence of new innovation centers and markets around the world, it is vital for earlystage companies to be properly equipped to compete in this new landscape. The fact that the median size of early-stage financing rounds is the largest it’s been in at least seven years is clear evidence that European start-ups are receiving the recognition and resources that they need from their investors” said Gil Forer, global director of Ernst & Young’s Venture Capital Advisory Group. “These larger early stage investments enable European start-ups to compete on the global stage much sooner in their life cycle. In addition, the predominance of early stage deals this quarter is a sign of a healthy innovation pipeline in Europe that will generate potential market leaders in the years to come.”
Overall, the first round median reached EUR 2.5 million in the second quarter, more than twice the size of a year ago when it was EUR 1 million. The median size of a second round was EUR 3.9 million, up from EUR 1.4 million a year earlier. Later rounds were up only slightly to EUR 2.3 million. The favourable climate for early-stage companies was also evidenced in the round distribution for the two most active countries in Europe--the United Kingdom and France. In the United Kingdom, early-stage deals represented 53% of deal flow and U.K. first rounds raised 52% more this quarter than in the second quarter of last year, registering EUR 90.5 million. First rounds in France accounted for 43% of the deal flow, a much greater portion than the 29% they posted in the second quarter of 2005. The capital directed to first rounds in France also was up, by 120% from a year earlier.
As occurred in the U.S. in the second quarter, interest in emerging areas such as energy as well as key technology segments are drawing the attention of venture capital investors in Europe.
For example, the energy segment grew by one deal over a year ago, but experienced a five-fold increase in the amount of capital directed here to EUR 46.2 million. The largest deal in this segment was alternative energy producer Ocean Power Delivery (U.K.) which received a EUR 19.1 million second round. The information technology segment as a whole had capital investment increase 45% to EUR 583.6 million in the second quarter; although deal flow was down by 50 financings. Still, this was the most capital investment to the IT category since the second quarter of 2002, boosted in particular by increased activity for the Internetheavy information services segment. The overall IT median round size was also up to EUR 3.1 million, from EUR 1.2 million in the same quarter of last year.
Capital investment in information services companies increased 600% over the second quarter of 2005, to EUR 189.4 million, while deal flow nearly doubled to 30 deals. The segment was also home to the quarter’s largest deal: EUR 66.1 million investment in Betfair (United Kingdom), an online betting provider.
Deal flow to communications companies grew 80% over last year to 27 deals, and the capital investment here increased to its highest level in two years: EUR 135.7 million. Among the largest deals here was a EUR 23.3 million later round for CoreOptics (Germany), a fiberoptic equipment provider. Meanwhile, software deals were off by more than half, with only 47 posted in the second quarter, and capital was down by 29% to EUR 160.5 million.
Total venture capital investment in the business, consumer and retail category doubled to EUR 80.1 million; although deal flow was relatively flat across all the segments. As a result, the median deal size for the category more than doubled to EUR 2 million. Of note, seed- and first-round financings accounted for 71% of the deal flow in this category.
Unlike in the U.S., where health care brought in record-breaking investment levels in the second quarter, venture capital activity for the European health care category slowed from a year ago, with 50 deals and EUR 238.3 million invested there, decreases of 40% and 38%, respectively. But the category was home to some of the largest financings in Europe this quarter including the EUR 27 million later-round in U3 Pharma (Germany), a developer of new cancer therapeutics.
On a geographic basis, deal flow in France declined with 40 deals, down 19 from the same quarter a year ago, but capital investment was up slightly to EUR 157.5 million. Activity in Germany, which faltered for several quarters, was relatively stable with 24 deals, bolstered by a steady level of information technology financings. Capital also remained steady at EUR 117.1 million. The United Kingdom remains the most active country in Europe but deals were down 31% from a year ago, to 64. Capital investment , however, was up 27% to EUR 326.6 million. Deal flow in the Netherlands increased by three deals to eight, and capital investment rose 29% to EUR 21 million.
The investment figures included in this release are based on aggregate findings of VentureOne’s proprietary European research and are contained in VentureSource. This data was collected by surveying professional venture capital firms, through in-depth interviews with company CEOs and CFOs, and from secondary sources. These venture capital statistics are for equity investments into early-stage, innovative companies and do not include companies receiving funding solely from corporate, individual, and/ or government investors. No statement herein is to be construed as a recommendation to buy or sell securities or to provide investment advice.
Source: VentureOne
China VC Update
China’s venture capital flow doubles Venture capital investments in Chinese mainland firms hit a twoand- a-half-year high in the second quarter due to a significant rise in first-round deals and mounting interest in information-technology firms, an industry report said yesterday.Venture capital firms poured a combined US$480.1 million into 54 mainland deals in the three months ended on June 30, double the investment amount in the same quarter of 2005, according to a report by Dow Jones VentureOne and Ernst & Young.
“With China’s emergence as a source for new technology and services, investors have taken notice and are demonstrating this by providing them with the economic support necessary to compete in the global marketplace,” said Bob Partridge, China leader of Ernst & Young’s Venture Capital Advisory Group.
“The increased early stage deal flow in China this quarter ... lays the groundwork for continued investment in the region.”
Twenty-nine first-round deals worth US$180.7 million were conducted in the quarter, a 61 percent gain in deal flow and a 69 percent increase in investment from a year ago.
The median size of a first-round deal was US$4.3 million, up from US$3.6 million in 2005.
Information technology remains the biggest venture-backed industry in the mainland. Investment in that segment jumped 176 percent from a year before to US$313.6 million in the quarter, according to the report.
Within the sector, Internet-related information services companies attracted 23 deals valued at US$180.7 million, a more than fivefold increase in investment, it said.
Two of the quarter’s biggest venture-capital deals also fell into the segment: the US$30 million second-round investment in HiSoft Technology International (Dalian), a provider of IT outsourcing services, and the US$30 million second-round investment in Worksoft Creative Software Technology (Beijing), a software outsourcing provider.
“Information technology remains the beneficiary of the majority of investment activity in China, as it does in the US and Europe,” said Steve Harmston, director of global research for VentureOne. “But it is also interesting to see pockets of activity in business and consumer services, health care and even in alternative energy occurring in China.”
