Jeffrey Sohl
Brian Perry
19-Apr-07
Over the past twenty years Jeffrey Sohl has been regarded as the leading expert and voice of venture capital and angel investment in the United States. As the Director of The Center for Venture Research, he shares some of his insights and views on VC and angel investment.
Jeffrey, as Director of the Center for Venture Research at the UNH Whittemore School of Business and Economics, and having spent nearly the past two decades researching & advocating in the field of angel and VC investing, what would you say are the greatest changes over this period in the deal flow of early-stage investments?
The angel market has undergone many ebbs and flows over time. When I first started conducting research on angels many people did not have understanding of who they are or what they do. Today, the angel market has certainly increased in visibility but this increased awareness has not necessarily translated into a better understanding of the market. The contributions that angels make to the entrepreneurial economy and to job creation are astounding. Angels are the largest source of seed and start-up capital for high growth ventures but, to a large extent, they are still one of the most underutilized resources in today’s business world
Based on your observations and research, have you been able to distinguish any differences in the way angel investing is conducted in the UK vs. Silicon Valley (USA)?
In some ways the UK is far ahead of the US, especially in the appreciation of angels and their contribution to regional economic development. The UK also leads the US in the support of research into understanding this critical market. One of the marked differences is that in the US angels tend to invest larger amounts, expect higher growth rates and higher returns than their UK counterparts.
There has been a great deal of interest lately in “Green” Investments. Do you personally see these investment opportunities as any more exciting or potentially lucrative than more traditional types of industries or investments? We actually conducted research nearly a decade ago on the potential for increasing angel investments in the environmental sector. That research indicated that while angels can accept, and seek to manage, the inherent risk in early stage investing, the regulatory risk was a potential hurdle. In this sense, regulatory risk is the changing regulations that could have a serious effect on an environmental investment. If the investment is targeted to address a specific environmental regulation, and that regulation is substantial changed, such an external risk cannot be managed and thus adds to the overall risk of the investment.
As you are aware, starting out as an angel investor is not something for the feint hearted. There are various views on how active and how many deals one must be prepared to get involved with. What are your views on these statistics and law of averages to achieve success (large returns!)?
As we advise investors – invest a prudent portion of your portfolio in angel deals and invest what you feel comfortable losing. We also suggest, as most angels do, to invest in groups of 4-6 investors, both as a strategy to mitigate the personal risk exposure and to achieve some sector diversification. What you do not want to do as an angel is to invest in one venture and assume that you will get an excellent return. With angel investing, a reasonable number of deals may result in total loss of the investment, others in meager returns, and a few with substantial returns commensurate with the risk exposure.
There has been more talk lately of why women have not been more historically involved in angel investing. Is there an increase in women establishing angel groups and taking part in more deals?
We have just completed a series of three research projects on women angels and women entrepreneurs seeking angel capital. Women angels represent approximately 10% of the US angel market – by market I mean those in established groups and those outside of established groups. As more women become successful entrepreneurs and cash-out of their businesses, these individuals have the greatest potential to become the next generation of women angels. Our research indicated that while there are a low percentage of women that seek angel capital, when these women entrepreneurs do present their business concept to angels, they have a higher chance of receiving angel capital than do male entrepreneurs. In a current research study I am conducting with Dr.Becker-Blease we are testing two theories as to why women angels tend to invest at lower rates than male angels. The first theory deals with the overconfidence of male investors and the second with why women angels invest less frequently than men. Our preliminary findings indicate that women angels have a significantly lower acceptance rate than do men angels. Also, women angels are more inclined to invest in ventures sponsored by women entrepreneurs and because of the pattern documented in our earlier research this would predict that women angels invest less than men.
Are we anywhere near the level we should be at to support the entrepreneurial community and their quest for earlystage capital?
No and we are not even close. There is a substantial need to increase the availability of early stage risk capital. There has been a proliferation of all of these angel entities in the US and the UK. Unfortunately, many are under the mistaken impression that the more angel groups, VC firms and ancillary services, the more angel investing will occur. This misses the fundamental point that to encourage more angel investing we need to provide opportunities for high net worth individuals to understand the central mysteries of angel investing and, at the same time, work on generating quality deal flow.
Hate to bring it up but the bubble burst before, do you see any signs this will repeat itself anytime soon? If it does, how much will that affect the typical angel deals vs. the larger VC ones?
Based on the several metrics that we use you to measure the health of the angel market, I see a reasonably disciplined market that should experience sensible, and sustainable, growth over the next few years. Of course, markets occasionally have a tendency to undergo unchecked growth and that often results in overheating in some sectors, but at this time we do not see any indications of such behaviour.
