How has the downturn affected angel investors?

The question above popped up during a talk I had with an entrepreneur trying to raise capital for his web 2.0 business.

And there have been some changes that could well make a difference to you if you are in the capital raising game.

Here are three key factors that have emerged.

1. Valuations are down

There have been some disasters out there and averages are really educated guesses. From the blogs and articles I’ve been reading we’re looking at about a 50% reduction in valuations.

This has had a much bigger impact on venture capital companies than it has on angel investors. Angel investors can get reasonable returns from smaller levels of investment (in the hundreds of thousands).

As well, they can call on their networks to put companies together to improve the valuation and expand their markets. They can also more easily syndicate with other angel investors.

Start ups in web 2.0 type businesses generally need much less investment before they are cashflow positive. Investors love that. Particularly angel investors. They can put in a few hundred thousand and get a return. So that’s a niche that will do better than others in this downturn.

2. More opportunities for angels

Right now VCs are focusing on making sure that their existing investments are as secure as possible. They are spending more time on the “managing” of their existing investments. As well, it is now much harder for VCs to raise funds for equity investment.

So VCs are worried about their financing risk moving forward. They won’t invest if they think that future funding for further expansion just won’t be there.

That has opened up more investment opportunities for angel investors.

3. Angels can buy at the right price

Because most angels operate within strong networks they are able to spot companies that might not be “on the market” that could add a technology advantage or marketing advantage to their existing investee companies. They can offer interesting strategic combinations to their investee companies.

Angels also have more time to help with the management side of the business. That’s a great advantage in these tough times. Angels can keep a very close eye on the management team and spot trouble before it escalates into a big problem.

Because angels can offer alliances and time to help budding entrepreneurs they can often negotiate a better price for the company.

To sum up…

Angels and VCs have different agendas and it depends what you want from an investor before you make decisions about where to go for money. The downturn has favoured angels.

Of course, angels will have all the problems that everyone is experiencing in these times. However, they are better placed to get through these times and pick up some great investment opportunities.

If you are not actively talking to angels then perhaps you should get to some of those functions and re-activate your angel network.

Till next time.

Gail Geronimos, is the founder of Achaeus, which helps entrepreneurs develop their businesses and she has just started a new site www.pitchingtoinvestors.com with tools and tips about how to develop killer presentations to raise capital.

To read more Gail Geronimos blogs, click here.