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Opportunity Rises for Angels as VC Investments Fall

Venture capital investments nationwide hit a 12-year low in the first quarter of 2009. VCs invested just $3 billion in 549 deals, and all major industry sectors and stages of company development experienced significant declines, according to the MoneyTree Report. VCs in Los Angeles/Orange County invested $207 million in 39 deals in Q1, down from $289 million and 53 deals in Q4 2008, and $451 million and 61 deals in the first quarter of 2008. It? a tough environment for cash strapped entrepreneurs. But the down economy is proving to be a window of opportunity for local angel investors ?high net worth individuals and groups who invest up to a couple million dollars in seed and early stage companies. ?e?e seeing at least a 50 percent increase in deals choosing us over VCs for various reasons,?says John Dilts, founder and president of Maverick Angels in Westlake Village. The group has 25 members who screen and invest in companies monthly. The economy has forced many VCs to slow their investment pace and focus on existing companies that are not able to exit their portfolios because of the shuttered IPO window and weak acquisitions market, said Mark Heesen, president of the National Venture Capital Association, in the MoneyTree Report. While many angels remain cautious, the downturn has resulted in higher quality entrepreneurs looking for early stage capital, says Dilts. Some have raised previous rounds of capital and developed their companies to the point of generating revenue. Company valuations have also dropped, which is an appealing point of entry for angels. ?s angels we?e seeing higher quality deals and lower valuations,?says Dilts. ?e fill a unique void in the emerging growth finance universe. We provide speculative capital.? Power.com is one company that might have gone straight to VCs in years past, says Dilts. The founder recently presented at Angel Mavericks?monthly ?rena?meeting. Power.com developed a technology that allows users to log-in to multiple social networking, e-mail and IM accounts from one central location. It had raised a $7.5 million series A round of venture capital and was looking for $500,000-$1 million in bridge financing from angels and VCs before doing another venture round. ?apital is scarce these days, but companies are still getting investments,?said Steven Vachani, CEO of Power.com. The market has affected valuations so it? less appealing for entrepreneurs to go for those larger rounds of venture capital. ?t? almost as if we?e doing a series A again,?he says. ?ow is a great opportunity for angels because a good company is a good company and they can get in at a great price for a business that? in high growth.? Peter Cowen, a member of Tech Coast Angels, is seeing an increase in deals with companies that are more mature. Valuations are lower and the terms are better for investors, said Cowen. Entrepreneurs are also drawing from a larger pool of talent when building their companies. ?ngels are less in fear now,?said Cowen, adding they were in a relatively deep hibernation, focusing on existing companies and less on new deals, through the fourth quarter of 2008 and part of the first quarter of 2009. The Center for Venture Research at the University of New Hampshire reports that angel investments were $19.2 billion in 2008, 26.2 percent less than the $26 billion of investments in 2007. But while funding amounts decreased during that period, the number of deals only decreased 2.9 percent. Internet, digital media and business services businesses that can be sold off for $30 million to $60 million is another emerging segment, says Cowen. Some VCs shy away from these smaller deals because they?e looking to get in at the $5 million level, which means a company would have to exit for substantially more. ?ngel deals going to VCs are not such a clear-cut path anymore,?said Cowen. ?here are more niche opportunities. It? a really good time for angel investors, one of the best I?e seen in years.? The VC trend certainly extends to angels, said Heather McCormick, member of Pasadena Angels. There? less capital to go around. Some angels are weary to invest because the recession has dealt a blow to their portfolios. And some are supporting existing portfolio companies for a longer period of time. And in general, the bad economy has forced a renewed emphasis on performance fundamentals, she says. Investors are looking for companies that are a little further along and likely to reach profitability earlier. ?hat said, we are doing new deals,?says McCormick. ?t? a challenging time for existing portfolio companies. On the other hand it? an opportunity for those whose business is innovation. After the dot-com bubble burst, many great companies were created during that period.?

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