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Survey: Angels will keep investing, but conservatively

Angel investors still expect to keep investing in early stage startups despite the COVID-19 coronavirus pandemic but are likely to be more conservative in doing so, according to a recent survey performed by the Angel Capital Association.

“There’s less investing going on,” said Rick Timmins, board member of the Kansas City-based association. “Angel groups are going to be much more conservative with their dollars and where they write checks.”

The association conducted the survey as part of its Angel Funders Report, a three-year project collecting angel investment data, which was scheduled to release its third and final annual report in June.

“It’s the key definitive source of angel investment trends and information around the country,” Timmins said.

Due to the “black swan” — that is, an unpredictable or unforeseen event with extreme consequences — nature of COVID-19, the group developed a questionnaire of 35 questions that it sent to 58 angel groups around the country in late April, Timmins said. The survey had a response rate of more than 70 percent, which is high for such a survey.

The association is made up of 300 angel investor groups, comprising up to 14,000 individual angel investors, Timmins said. While this is just a small fraction of the estimated 300,000 angel investors in the U.S., the organization does include the overwhelming majority of the major angel investor groups, he said. Many angels invest only sporadically in projects from friends and family, he explained.

Survey results

The good news is that, by and large, angel investors said they expected to continue participating in angel investment groups and investing in startup companies, Timmins said. They also reported that the companies in their portfolios were working with the angels to deal with the current economic situation, such as by asking for federal loan program application help, mentorship and cash flow analysis, he said.

Of the portfolio companies, 86 percent had applied for Paycheck Protection Program loans from the federal government, 71 percent had reached out for a bridge loan and 80 percent had laid off employees.

Survey respondents indicated that they would be more likely to continue investing in portfolio companies, however, rather than new companies, Timmins said. Moreover, they are likely to be investing less money overall, he added.

“63 percent said they’re going to invest less,” Timmins said. “When your Morgan Stanley portfolio goes down, that makes you want to tighten your belt a little and get a little more conservative.”

Similar to 2008

Ultimately, the effect of COVID-19 on the angel investment community looks much like that of the Great Recession of 2008, and the same is likely to be true for venture capital investors, Timmins said.

“In the 2008 timeframe, venture capital investing fell 40 percent compared with the previous several quarters,” Timmins said. “It took almost seven quarters to get back to even.”

The drop in investing that already had been seen in the first four months of this year is similar, he said: “It’s a very telling statistic that mirrors 2008-2010.”

In addition, it’s likely that valuations of startups will decrease.

“Half of them are saying valuations are going down,” Timmins said. “That exact metric happened in 2008-2010.”

While the survey was national, its results are likely to be applicable to states as well, according to Kevin Learned, co-founder and partner of Loon Creek and Sage Growth Capital.

“Our experience from the last two major economic downturns (about 1999, 2009) and initial data on this downturn indicate that early stage capital will be less available; angels will support their existing portfolio companies to the detriment of making investments in new companies; valuations will drop 30 to 50 percent and entrepreneurs should assume capital will be hard to come by and manage their cash accordingly,” he said.

Most important: “Angel capital will be a trailing indicator,” Learned said. “Capital availability will lag [until] an improvement in the economy.”

— Sharon Fisher, BridgeTower Media Newswires