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Thursday, January 05, 2012

Venture Capital and Angel Investment in 2012

Among the most formidable challenges for entrepreneurs is gaining access to the capital needed to start up, grow, build, innovate, and create jobs. That's the case in the best of economic times, so it's even more daunting in a bad economy - as we have seen over the past four years or so.

Two critical sources of small business funding are venture capital and angel investment.

Venture capital comes from formal firms or partnerships that raise capital from large institutional investors. Venture capital has become harder to come by in recent years, especially for start ups and very young, small businesses. Venture capital is most likely to be available for established businesses.

Meanwhile, angel investment tends to be more informal compared to venture capital. Angel investors invest their own money in entrepreneurial firms. They can be people that entrepreneurs know, including, for example, local professionals and business associates (such as suppliers, customers, and even employees), or they can be non-affiliated investors, reached through advertising, business brokers/matchmakers, networking, via the Internet, etc. Many angels tend to be entrepreneurs themselves.

So, what's the outlook for venture and angel investment in 2012?

In mid-December, the National Venture Capital Association and Dow Jones VentureSource released the results of a survey of venture capital professionals (VCs) and venture-backed CEOs. In general, the tone of the survey was less than positive, to say the least. Among the key findings were:

• Among VCs, 32 percent expect to see venture capital investment levels rising in 2012, while 36 percent see overall levels decreasing. Meanwhile, 45 percent of CEOs predict increases in 2012, with 25 percent expecting decreases. "Both groups are less bullish than they were in last year's Venture View survey when 58 and 51 percent of CEOs and VCs expected investment increases respectively."

• In 2012, "there will be a seed and early stage funding shortage according to 58 percent of VCs. CEOs anticipate a difficult funding environment as well with 67 percent predicting that raising follow-on money will be equally or more difficult in 2012 than in 2011. Still, 75 percent of the CEOs plan to raise money in the coming year."

• "On the venture capital side, fundraising is expected to continue to be difficult with 73 percent of VCs predicting total commitments to remain the same or decline in 2012."

As for angel investment, the University of New Hampshire's Center for Venture Research offered the following in October 2011 in terms of its most recent assessment of the state of the angel investment market: "The angel investor market in Q1,2 2011 showed signs of stabilization since the 30% market correction in the second half of 2008 and the first half of 2009. Total investments in Q1,2 2011 were $8.9 billion, an increase of 4.7% over Q1,2 2010... A total of 26,300 entrepreneurial ventures received angel funding in Q1,2 2011, a 4.4% increase from Q1,2 2010, and the number of active investors in Q1,2 2011 was 124,900 individuals, virtually unchanged from Q1,2 2010... While the market exhibited a stabilization from Q1,2 2010, when compared to the market correction that occurred in 2008, these data indicate that the angel market appears to have reached its nadir in 2009 and has since demonstrated a slow recovery."

Looking ahead, as reported in the December 15 Wall Street Journal, "Jeffrey Sohl, director of the Center for Venture Research, says he expects start-up investing by angels to remain solid in 2012."

But as noted in a December 29 FoxBusiness report, the issue of uncertainty serves as a restraint: "While angel capital deals continued at a consistent pace this year, there was still hesitation in the marketplace. ‘We are stuck in an environment with volatility,' warned Greg Hext of Chapman, Hext, & Co. in Texas, ‘If the [entrepreneur's] equation has too many unknowns, then we are not comfortable investing.'"

But some key unknowns extend to broader issues beyond the control of entrepreneurs and investors.

Over the past four years, problems of raising costs and creating uncertainty across the economy have been government generated. Both venture capital and angel investment - and therefore, entrepreneurship, economic growth and job creation - would benefit tremendously from a public policy environment that not only removes uncertainties in terms of taxes and regulation, for example, but shifts policymaking in a pro-growth direction of substantive and permanent tax and regulatory relief.

In 2012, we still face questions regarding how capital expenditures will be treated from a tax perspective, and whether or not entrepreneurs, investors and the economy are going to get socked by major tax increases at the end of the year, when elected officials should be working together to implement pro-growth changes on the tax and regulatory fronts that would spur risk taking and economic growth.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

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