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Angel Investing and the Bubble
Jeff Sohl Jeffrey Sohl, Ph.D.
Center for Venture Research
University of New Hampshire
Durham, NH

Business ventures depend upon two major sources of private equity capital: business angels and venture capital funds.  However, for high growth ventures, business angels represent the oldest and by far the largest source of seed capital.  Indeed, their importance as a funding source after the “bubble” further increased as venture capital companies shifted focus away from start-up firms in favor of more mature ventures.

But in what ways did business angel investing increase in importance, and how might the 2000 investment bubble and subsequent 2001 downturn have changed investment resiliency and vulnerability? To help answer these and other questions, the University of New Hampshire Center for Venture Research (CVR) conducted a business angel survey, collecting data on investor characteristics such as stage preference, due diligence procedures, valuations and deal size, and participation by women entrepreneurs and investors.   CVR sent a comprehensive questionnaire to 174 known private investor clubs, angel alliances and matching networks in the US.  Of these, 126 were confirmed to exist and 47 surveys were returned (37% response rate).   Respondents were diverse with respect to characteristics such as geographic location and organizational structure, so the sample appears to adequately represent the disbursement of angel activity in the US. 

Survey Highlights

During the expansion up to 2000 many experienced investors altered fundamental screening and due diligence methods, but retreated back to them during the contraction of 2001.  Additionally, many new, and perhaps less sophisticated, investors entered the angel market during the dramatic upswing.  Many joined “angel portals” such as formal matching services that match entrepreneurs with investors through a data base, angel groups that meet regularly to review opportunities (angel alliances), or organizations that facilitate the angel investment process by organizing meetings or events that bring together both angel investors and entrepreneurs.

From 2000 to 2001, angel portal membership increased by 21%, and from 1998 to 2001 increased overall by 32%.  But there was also an increase in the portion of members not making an investment (latent investors).  These angel portal members comprised 36% in 2000 and 41% in 2001, greater than in 1998 when latent investors comprised 32% of portal members.  Clearly, many high net worth individuals were attracted to the early stage equity market, but they did not convert their interest into direct participation. 

Business angels continued strongly to prefer to invest in seed and startup stages of emerging entrepreneurial ventures.  In 2000 and 2001, 64% and 68%, respectively, of angel portal investments were made in the seed and start-up stage of entrepreneurial ventures. 

Yield rates declined significantly, dropping from 23.3% in 2000 to 10.79% in 2001.  A yield rate is the percentage of investment opportunities brought to the attention of investors by the angel organization that result in an investment. 

Due diligence (time between the first angel/entrepreneur meeting, and receipt of investment funds) increased markedly.  Compared with 2000, angel portal members spent in 2001, on average, 25% more time (increasing from 3 to 4 months) investigating potential business proposals.  However, venture capitalists and corporate investors spent, on average, five and six months to close a deal in 2001. 

The total and average dollars invested by an individual investor, per deal, declined significantly, about 50%, from 2000 to 2001, but average equity received per deal remained essentially unchanged: 

Individual Investor Characteristic



Total $ Invested/year



Average $ Invested/deal/investor



Average Equity Received/deal



In 2001, angels remained committed to face-to-face interaction, with 70% of the portals relying on some form of high-touch mechanism as their primary matching method.  Specifically, 38% of the portals utilized venture forums (entrepreneurs making presentations to groups of investors) and 32% relied on personal networking among angels to both source deals and enact the investment decision.  Only 11% of the portals indicated using the Internet as the primary matching method, and none considered their organization to be an Internet-only operation.

Women investors: in 2001, 12% of the groups reported an investor membership base that comprised at least 20% women.  Seven percent of angel portals were made up of at least half women members and one organization reported a 98% female membership. 

On the demand side, women-led ventures comprised approximately 12% of all investment opportunities brought to the attention of investors in 2000 and 2001.  The number of women-led investment proposals presented to investors increased by 25% percent from 2000 to 2001, compared to an increase of 29% for all investment proposals. Yield rates for women-led ventures in 2000 were 11.3% and in 2001 were 9.8%.  This compares to the overall yield rates of 23.3% and 10.8% for 2000 and 2001, respectively. 

In 2001, angel investments represented a diversified market portfolio of high growth industries, but retail made up only 1% of investments:  

Sector Preference










Life Sciences




Other Technology






From 2000 to 2001 membership in angel portals rose with latent investors representing an increasing percentage of entrants.  Angel investment valuations declined and women-led financing lagged behind the overall market.  Angel investors, reacting to the post-2000 decline, adopted measured approaches to the investment process such as more careful due diligence and an increased scrutiny of investment opportunities.  Finally, as 2001 ended, business angels were still the most significant source of seed capital for business ventures, showing the strength and resiliency of the U.S. angel investment market. 

For a detailed report on this or other surveys, contact Dr. Jeffrey Sohl at the University of New Hampshire Center for Venture Research (603.862.3341 or [email protected])

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