According to the Angel Capital Association, there are between 10,000 and 15,000 people who belong to Angel groups throughout the U.S. A recent Wall Street Journal article suggests the number of businesses that have received funding in 2011 have increased by 4% over 2010. Nearly $9 billion went into Angel investing in the first half of 2011, and a study from the University of New Hampshire’s Center for Venture Research suggests 39% of this capital is going into start-up or seed investments. This is up dramatically from 2010 when only 26% of funds went into the earliest stage investments.
 
This is good news for entrepreneurs who have tapped out their own resources and the patience and money from friends and families. However, there are a couple of downsides to be aware of. First, it seems that most of this money is being allocated to technology investments. And second, there is a reduction of funds available from the Venture Capital companies that represent, for many Angels, the next stage of funding—as the companies they invest in need additional capital.
 
With the overall slowdown in the IPO market, the VCs have been holding on to their investments for longer and spending on maintaining their existing portfolio of companies rather than shopping for new deals. And, it has become much harder for VCs to raise money. Traditional sources of capital—companies, pension funds etc.—are looking much harder at the track record of the venture firms. The amount of money allocated to so-called alternative investments has been shrinking. In this environment, only those funds with very successful track records will find it easy to attract new money. One notable exception is TSG Consumer Partners, which recently closed its sixth fund with more than $1.3 billion in committed capital. According to news reports, TSG was turning investors away based on its very successful track record of investing in high-growth, middle market branded consumer businesses, including many very successful food and beverage brands.
 
Angel investors have mixed feelings about many VCs. They often see their own position in a company seriously diluted when VCs come into a company and the Angels do not have the additional capital to maintain or increase their shareholding. This is less painful when a company has a significant increase in valuation at the time of the new financing. But, in the current climate, many companies have to be content with flat or even down rounds when valuations either remain constant or decrease and the original investors see the paper value of their holdings shrink—sometimes dramatically.
 
At least one Angel group has taken steps to solidify its position by forming a fund that can invest alongside the individual angels or it can invest in follow-on investing rounds. Golden Seeds was originally founded in New York City to invest in women-owned and women-managed businesses. They now have affiliate branches in Boston, San Francisco and Los Angeles.
 
The idea of an Angel group having a fund to invest alongside its own angels is intriguing and could form an interesting model for the future of seed or early-stage investing.
 
Steve Allen of Nutrition Capital Network (http://www.nutritioncapital.com) a business that brings together entrepreneurs and investors discusses the financial side of the dietary supplement and functional food business. He can be reached at sallen@nutritioncapital.com.