Private Equity Venture Capital and Angel Investment

Prepared by

Dinchi Navdiwala

Private Equity Venture Capital and Angel Investment

Executive Summery
This research project, which contains an in-depth study of venture capital and angel investment in India with focus on history, structure, stages and current scenario of investment in India. This report gives a brief overview of current scenario of venture capital and angel investment in India and why there is a need of growth in India. It also provides the details about the stages of funding, features and top investors. It also gives light on future of these funding. This study is mainly based on secondary data sourced from Internet portal and newspapers & magazines. Secondly, benchmark survey data are collected from TSJ/ Venture Intelligence India and used for graphical representation. Data collected and shown in this report are related to investment and by the end of 2011.

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Private Equity Venture Capital and Angel Investment

Table of contents
1. Introduction of Venture Capital: ............................................................................ 4 2. History of Venture Capital ...................................................................................... 6 3. Venture Capital in India .......................................................................................... 9 3.1. Current Scenario of Venture Capital in India ..................................................... 10 4. Stages of Venture Capital Funding ..................................................................... 11 5. Features of venture Capital.................................................................................. 12 6. Top six venture capital companies in India ........................................................ 14 6.1. Top Cities Attracting Venture Capital Investment ................................................... 16 7. Need for growth of venture capital in India ........................................................ 17 8. Future of Venture Capital in India ....................................................................... 18 9. Introduction of Angel Investment ........................................................................ 19 10. Types of Angel Investor ....................................................................................... 21 11. Five Reasons Why Angel Investors Matter To the Economy ............................ 27 12. Trends in Angel Investing in India ............................ Error! Bookmark not defined. 13. Global Market - USA and Europe Angel Investments ........................................ 29 13.1. 13.2. Angel Investing in the United States ................................................................ 29 Angel Investing in Europe ................................................................................... 30

14. References ............................................................................................................ 32

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Private Equity Venture Capital and Angel Investment

1. Introduction of Venture Capital:

Venture capital is money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors. Venture capital is an important source of equity for start-up companies. Professionally managed venture capital firms generally are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists themselves. Venture capitalists generally:

Finance new and rapidly growing companies Purchase equity securities Assist in the development of new products or services Add value to the company through active participation Take higher risks with the expectation of higher rewards Have a long-term orientation

When considering an investment, venture capitalists carefully screen the technical and business merits of the proposed company. Venture capitalists only invest in a small percentage of the businesses they review and have a long-term perspective. They also actively work with the company's management, especially with contacts and strategy formulation. Venture capitalists mitigate the risk of investing by developing a portfolio of young companies in a single venture fund. Many times they co-invest with other professional venture capital firms. In addition, many venture partnerships manage multiple funds simultaneously. For decades, venture capitalists have nurtured the growth of America's high technology and entrepreneurial communities resulting in significant job creation, Page 4

Private Equity Venture Capital and Angel Investment economic growth and international competitiveness. Companies such as Digital Equipment Corporation, Apple, Federal Express, Compaq, Sun Microsystems, Intel, Microsoft and Genetech are famous examples of companies that received venture capital early in their development.
(Source: National Venture Capital Association 1999 Year book)

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2. History of Venture Capital

The concept of venture capital is not new. Venture capitalists often relate the story of Christopher Columbus. In the fifteenth century, he sought to travel westwards instead of eastwards from Europe and so planned to reach India. His far-fetched idea did not find favor with the King of Portugal, who refused to finance him. Finally, Queen Isabella of Spain decided to fund him and the voyages of Christopher Columbus are now empanelled in history. The modern venture capital industry began taking shape in the post World War II years. It is often said that people decide to become entrepreneurs because they see role models in other people who have become successful entrepreneurs. Much the same thing can be said about venture capitalists. The earliest members of the organized venture capital industry had several role models, including these three: American Research and Development Corporation, formed in 1946, whose biggest success was Digital Equipment. The founder of ARD was General Georges Doroit, a French-born military man who is considered "the father of venture capital." In the 1950s, he taught at the Harvard Business School. His lectures on the importance of risk capital were considered quirky by the rest of the faculty, who concentrated on conventional corporate management. The Second World War produced an abundance of technological innovation, primarily with military applications. They include, for example, some of the earliest work on micro circuitry. Indeed, J.H. Whitneys investment in Minute Maid was intended to commercialize an orange juice concentrate that had been developed to provide nourishment for troops in the field. In the mid-1950s, the U.S. federal government wanted to speed the development of advanced technologies. In 1957, the Federal Reserve System conducted a study that concluded that a shortage of entrepreneurial financing was a chief obstacle to the development of what it called "entrepreneurial businesses." As a response this a number of Small Business Investment Companies (SBIC) were established to Page 6

Private Equity Venture Capital and Angel Investment "leverage" their private capital by borrowing from the federal government at belowmarket interest rates. Soon commercial banks were allowed to form SBICs and within four years, nearly 600 SBICs were in operation. At the same time a number of venture capital firms were forming private partnerships outside the SBIC format. These partnerships added to the venture capitalists toolkit, by offering a degree of flexibility that SBICs lack. Within a decade, private venture capital partnerships passed SBICs in total capital under management. The 1960s saw a tremendous bull IPO market that allowed venture capital firms to demonstrate their ability to create companies and produce huge investment returns. For example, when Digital Equipment went public in 1968 it provided ARD with 101% annualized Return on Investment (ROI). The US$70,000 Digital invested to start the company in 1959 had a market value of US$37mn. As a result, venture capital became a hot market, particularly for wealthy individuals and families. However, it was still considered too risky for institutional investors. In the 1970s, though, venture capital suffered a double-whammy. First, a red-hot IPO market brought over 1,000 venture-backed companies to market in 1968, the public markets went into a seven-year slump. There were a lot of disappointed stock market investors and a lot of disappointed venture capital investors too. Then in 1974, after Congress legislation against the abuse of pension fund money, all high-risk investment of these funds was halted. As a result of poor public market and the pension fund legislation, venture capital fund raising hit rock bottom in 1975. Beginning in 1978, a series of legislative and regulatory changes gradually improved the climate for venture investing. First Congress slashed the capital gains tax rate to 28% from 49.5%. Then the Labor Department issued a clarification that eliminated the pension funds act as an obstacle to venture investing. At around the same time, there was a number of high-profile IPOs by venture-backed companies. These included Federal Express in 1978, and Apple Computer and Genetech Inc in 1981. This rekindled interest in venture capital on the part of wealthy families and institutional Page 7

Private Equity Venture Capital and Angel Investment investors. Indeed, in the 1980s, the venture capital industry began its greatest period of growth. In 1980, venture firms raised and invested less than US$600 million. That number soared to nearly US$4bn by 1987. The decade also marked the explosion in the buy-out business. The late 1980s marked the transition of the primary source of venture capital funds from wealthy individuals and families to endowment, pension and other institutional funds. The surge in capital in the 1980s had predictable results. Returns on venture capital investments plunged. Many investors went into the funds anticipating returns of 30% or higher. That was probably an unrealistic expectation to begin with. The consensus today is that private equity investments generally should give the investor an internal rate of return something to the order of 15% to 25%, depending upon the degree of risk the firm is taking. However, by 1990, the average long-term return on venture capital funds fell below 8%, leading to yet another downturn in venture funding. Disappointed families and institutions withdrew from venture investing in droves in the 1989-91 periods. The economic recovery and the IPO boom of 1991-94 have gone a long way towards reversing the trend in both private equity investment performance and partnership commitments. In 1998, the venture capital industry in the United States continued its seventh straight year of growth. It raised US$25bn in committed capital for investments by venture firms, who invested over US$16bn into domestic growth companies US firms have traditionally been the biggest participants in venture deals, but non-US venture investment is growing. In India, venture funding more than doubled from $420 million in 2002 to almost $1 billion in 2003. For the first half of 2004, venture capital investment rose 32% from 2003.

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3. Venture Capital in India

Venture capital was introduced in India in mid-eighties by All India Financial Institutions with the inauguration of Risk Capital Foundation (RCF) sponsored by IFCI with a view to encourage the technologists and the professional to promote new industries. Consequently the government of India promoted the venture capital during 1986-87 by creating a venture capital fund in the context of structural development and growth of small-scale business enterprises. Since then several venture capital firms/funds (VCFs) are incorporated by Financial Institutions (FIs), Public Sector Banks (PSBs), and Private Banks and Private Financial companies.

The Indian Venture Capital Industry (IVCI) is just about a decade old industry as compared to that in Europe and US. In this short span it has nurtured close to one thousand ventures, mostly in SME segment and has supported building

technocrat/professionals all through. The VC industry, through its investment in high growth companies as well as companies adopting newer technologies backed by first generation entrepreneurs, has made a substantial contribution to economy. In India, however, the potential of venture capital investments is yet to be fully realized. There are around thirty venture capital funds, which have garnered over Rs. 5000 Crores. The venture capital investments in India at Rs. 1000.05 crore as in 1997, representing 0.1 percent of GDP, as compared to 5.5 per cent in countries such as Hong Kong.

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Private Equity Venture Capital and Angel Investment a. Current Scenario of Venture Capital in India

IT & ITES Manufacturing 27.2% 23.5% Real Estate Healthcare & Lifesciences 12.0% 7.9% 2.1% 7.1% 12.1% 0.5% 6.8% BFSI* Shipping & Logistics Travel & Leisure Eng. & Construction Food & Beverage Other 0.8%

Source: TSJ/ Venture Intelligence India

* Banking, financial services & insurance

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Private Equity Venture Capital and Angel Investment 4. Stages of Venture Capital Funding The Venture Capital funding varies across the different stages of growth of a firm. The various stages are:

:
1. Pre seed Stage: Here, a relatively small amount of capital is provided to an entrepreneur to conceive and market a potential idea having good future prospects. The funded work also involves product development to some extent. 2. Seed Stage Financing is provided to complete product development and commence initial marketing formalities. 3. Early Stage / First Stage: Finance is provided to companies to initiate commercial manufacturing and sales. 4. Second Stage: In the Second Stage of Financing working capital is provided for the expansion of the company in terms of growing accounts receivable and inventory. 5. Third Stage: Funds provided for major expansion of a company having increasing sales volume. This stage is met when the firm crosses the breakeven point. 6. Bridge / Mezzanine Financing or Later Stage Financing: Bridge / Mezzanine Financing or Later Stage Financing is financing a company just before its IPO (Initial Public Offer). Often, bridge finance is structured so that it can be repaid, from the proceeds of a public offering.

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5. Features of venture Capital

The main attributes of venture capital are as follows:

1. Equity participation: Actual or potential equity participation through direct of

shares, option or convertible securities. The objective is to make capital gains by selling off the enterprise becomes profitable.

2. Long term investment: venture financing is a long term illiquid investment it is

not repayable on demand. It requires long term investment attitude that requires the venture capital firms to wait for a long period, say 5-10 years to make profits.

3. Investment in high-risk, high-returns ventures: As VCs invest in untested,

innovative ideas the investments entail high risks. In return, they expect a much higher return than usual. (Internal Rate of return expected is generally in the range of 25 per cent to 40 per cent).

4. Expertise in managing funds: VCs generally invest in particular type of

industries or some of them invest in particular type of businesses and hence have a prior experience and contacts in the specific industry which gives them an expertise in better management of the funds deployed.

5. Raises funds from several sources: A misconception among people is that

venture capitalists are rich individuals who come together in a partnership. In fact, VCs are not necessarily rich and almost always deal with funds raised mainly from others. The various sources of funds are rich individuals, other investment funds, pension funds, endowment funds, et cetera, in addition to their own funds, if any.

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6. Diversification of the portfolio: VCs reduce the risk of venture investing by

developing a portfolio of companies and the norm followed by them is same as the portfolio managers, that is, not to put all the eggs in the same basket.

7. Exit after specified time: VCs are generally interested in exiting from a
business after a pre-specified period. This period may usually range from 3 to 7 years.

8. Participation in management: The hands on approach of continuing

participation of the venture capitalist in the management of the entrepreneurs business helps him to protect and enhance his investment by actively involving and supporting the entrepreneur. More than finance the venture capitalist gives his marketing, planning and management skills and technology to new firm. Venture capital also differs from development finance .A development bank safeguards its interest through collateral and substantial stake in ownership and control through a nominee director. It does not play an active role in the management of the company. A company obtaining funds from its holding or parent company will be fully owned or managed by the holding company.

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6. Top six venture capital companies in India

Some of the details regarding these top venture capital companies are given below: Aavishkaar India Micro Venture Capital Fund: Aavishkaar India Micro Venture Capital Fund shortly called as AIMVCF is a fund created for the purpose of promotion of development in semi-urban and rural areas of the country. The mission of the fund is based on the premise that promises medium and small enterprises will help drive positive changes in the underserved areas of the nation. DHFL Venture Capital Fund: This company offers advisory, consultancy and managerial services to venture capital management, venture capital undertaking and venture capital funds pertaining to Indian Real estate. This company is promoted by the Dewan Housing Finance Corporation Limited and the company came into existence in the year 2006. The fund is registered with securities and exchange board of India. iLabs Venture Capital Fund: The present name of iLabs Venture Capital Fund is Peepul Capital LLC and this company partners with several companies and help those companies to grow through entrepreneurship and extensive operative experience. This company holds the pride of being one of the early entrants of the private equity space in the country. IFCI Venture Capital Funds Limited: IFCI Venture Capital Funds Limited was promoted as a Risk Capital Foundation in the year 1975 by a society that offer financial assistance to the first generation technocrate entrepreneurs and professionals for setting up their own venture with the help of soft loans. India Infoline Venture capital Fund: This company is a part of the popular India Infoline Group that comprises of several holding companies. This company is one of the leading players in the Indian financial service space and it offers execution and advice platform for the whole range of financial services covering products like gold bonds, investment banking, loans, fixed deposits, insurance, asset management, wealth management, etc Page 14

Private Equity Venture Capital and Angel Investment Kerala Venture Capital Fund: Kerala Venture Capital Fund has more than 10 years of experience in this industry and this company was conceptualized by the Kerala State Industrial Development Corporation Limited and the SIDBI. This company is dedicated to investing in enterprises in industries with significant prospects of growth and profitability and in enterprises in high technology sectors like tourism, biotechnology, information technology, etc The investment of this company primarily focuses on the state of Kerala with special focus on the above-mentioned sectors to earn a good return for the investors. Apart from these companies, there are also other top players in the venture capital sector in India and they are Kotak India Venture Fund, Felicitas Venture Capital Trust, Industrial Venture Capital Limited and Intelligroup Venture Fund.

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a. Top Cities Attracting Venture Capital Investment

City Mumbai Delhi/NCR* Bangalore Chennai Hyderabad Pune
* National Capital Region

No. of Deals 69 41 40 22 17 10

Value(US$M) 1,780 395 1,525 354 492 1,114

Source: TSJ/ Venture Intelligence India

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7. Need for growth of venture capital in India

In India, a revolution is ushering in a new economy, wherein entrepreneurs mind set is taking a shift from risk adverse business to investment in new ideas which involve high risk. The conventional industrial finance in India is not of much help to these new emerging enterprises. Therefore there is a need of financing mechanism that will fit with the requirement of entrepreneurs and thus it needs venture capital industry to grow in India Few reasons for which active Venture Capital Industry is important for India include:

Innovation : Needs risk capital in a largely financial system

regulated, conservative,

legacy

Job creation: Large pool of skilled graduates in the first and second tier cities

Patient capital: Not flighty, unlike FIIs

Creating new industry clusters: Media, Retail, Call Centres and back office processing, trickling down to organized effort of support services like office services, catering, transportation

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8. Future of Venture Capital in India

Whopping investments of over USD 8.5 billion is expected in Indian from Venture Capitalists in next five years in at least five identified areas such as :
Biotechnology and Life Sciences Logistics Clean technology Film Production Education

The dynamics in emerging venture capital markets differ from those in developed venture capital markets. The emerging private equity markets focus primarily on growth capital investments through minority equity participation. Emerging venture capital markets, although not without challenges, present a host of opportunities Venture capital returns are predicated on scarcity of risk capital. It has been all too abundant. That will change. Many good businesses will be left helpless and the rest will shut down the remaining VCs will invest in them and both the entrepreneurs and VCs will get rewarded as the survivors gain market share and become successes in the economic recovery.

The economic recovery plan of the new Administration will be massive and favour investments in productivity-enhancing growth sectors like information technology and energy technology

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9. Introduction of Angel Investment

Angel investors are individuals who invest in businesses looking for a higher return than they would see from more traditional investments. Many are successful entrepreneurs who want to help other entrepreneurs get their business off the ground. Usually they are the bridge from the self-funded stage of the business to the point that the business needs the level of funding that a venture capitalist would offer. Funding estimates vary, but usually range from $150,000 to $1.5 million. The term "angel" comes from the practice in the early 1900's of wealthy businessmen investing in Broadway productions. Today "angels" typically offer expertise, experience and contacts in addition to money. Less is known about angel investing than venture capital because of the individuality and privacy of the investments, but the Small Business Administration estimates that there are at least 250,000 angels active in the country, funding about 30,000 small companies a year. The total investment from angels has been estimated at anywhere from $20 billion to $50 billion as compared to the $3 to $5 billion per year that the formal venture capital community invests. In fact, the potential pool of angel investors is substantially larger. There are about two million people in the United States with the discretionary net worth to make angel investments. The Center for Venture Research at the University of New Hampshire which does research on angel investments has developed the following profile of angel investors: The "average" private investor is 47 years old with an annual income of $90,000, a net worth of $750,000, is college educated, has been self-employed and invests $37,000 per venture. Most angels invest close to home and rarely put in more than a few hundred thousand dollars. Informal investment appears to be the largest source of external equity capital for small businesses. Nine out of 10 investments are devoted to small, mostly start-up firms with fewer than 20 employees. Nine out of 10 investors provide personal loans or loan guarantees to the firms they invest in. On average, this increases the available capital by 57%. Page 19

Private Equity Venture Capital and Angel Investment Informal investors are older, have higher incomes, and are better educated than the average citizen, yet they are not often millionaires. They are a diverse group, displaying a wide range of personal characteristics and investment behaviour. Seven out of 10 investments are made within 50 miles of the investor's home or office. Investors expect an average 26% annual return at the time they invest, and they believe that about one-third of their investments are likely to result in a substantial capital loss. Investors accept an average of 3 deals for every 10 considered. The most common reasons given for rejecting a deal are insufficient growth potential, overpriced equity, lack of sufficient talent of the management, or lack of information about the entrepreneur or key personnel. For the business seeking funding, the right angel investor can be the perfect first step in formal funding. It usually takes less time to meet with an angel and to receive funds, due diligence is less involved and angels usually expect a lower rate of return than a venture capitalist. The downside is finding the right balance of expert help without the angel totally taking charge of the business. Structuring the relationship carefully is an important step in the process. In order to protect their investment, angels often ask the business to agree to not take certain actions without the angel investors approval. These include selling all or substantially all of the company's assets, issuing additional stock to existing management, selling stock below prices paid by the investors or creating classes of stock with liquidation preferences or other rights senior to the angel's class of security. Angels also ask for price protection that is anti-dilution provisions that will result in their receiving more stock should the business issue stock at a lower price than that paid by the angels.

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10. Types of Angel Investor

a. Guardian Angels: (Primary target of this study) General Description: These angels are active investors who guide and coach the management team to help them grow the company. They usually work with a limited set of start-ups. Guardian angels can invest significant amounts of time in the company, especially after they have developed confidence in the entrepreneur Objectives: They have strong non-economic reasons to work with

entrepreneurs, besides achieving high economic returns

Geographic Focus: Page 21

Private Equity Venture Capital and Angel Investment They invest within a 1 to 2 hour driving radius. Investment Amount: These angels invest substantial amounts in a limited number of start-ups. They often average $100,000150,000 per company Number of Investments per Year: Guardian angels invest in a limited number of companies, (typically 24 per year), primarily in the seed stage Due Diligence: Guardian angels rely on their network to source and screen opportunities. They conduct their own due diligence and consult experts to supplement their expertise Post-Investment Involvement: They usually take Board seats and provide guidance and coaching to the management team. They help recruit other Board members, members of the management team and, next round investors such as venture capitalists. They provide assistance in other areas based on their expertise Performance: These angels usually experience high rates of return. Many said they have recently achieved greater than 40% ROI Potential Issues with Later Stage Investors: Later stage investors often want guardian angels with strong business credentials to remain on the board

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Private Equity Venture Capital and Angel Investment b. Professional Entrepreneur Angels: General Description: These angels have entrepreneurial experience but are investing outside their area of expertise. They may have limited angel-

investing experience. They are usually followers and invest based on recommendations of other angels they trust and whose expertise they respect. Angels in this category may be Guardian Angels for other ventures Objectives: These angels primarily seek high rates of return by investing in start-up companies outside their area of expertise, (e.g., investing in an unfamiliar industry). They may also wish to build their expertise in angel investing Investment Amount: Varies Number of Investments Due Diligence: They rely on the lead angel to conduct the bulk of the due diligence, structure the terms and conditions, provide support to the start-up after investing, and monitor the progress of the startup. They conduct some limited due diligence on their own, especially if they are trying to build their angel experience Post-Investment Involvement: Their involvement with the start-up is usually limited though they may provide market research and other information. They may periodically review the progress of the company

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Private Equity Venture Capital and Angel Investment Performance: Moderate. Returns not as high as Guardian Angels but potentially not as low as some Financial Angels (Based on responses from Guardian Angels investing outside their industry of expertise)

Potential Issues with Later Stage Investors: In most cases, these angel investors are patient investors with a good understanding of start-up milestones and growth stages

c. Operational Expertise Angels: General Description: These angels are or have been senior executives in major companies in the start-ups target industry. Usually, other angels approach Operational Expertise Angels for due diligence insights and confirmation of the deal quality Objectives: These angels invest for non-economic reasons as well as for economic returns Due Diligence: These angels do their own detailed due diligence. They will also involve other trusted and known resources to understand unfamiliar markets or technologies

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Private Equity Venture Capital and Angel Investment Post-Investment Involvement: These angels usually provide active support to the company (e.g.: take Board seats if offered, provide customer and other strategic partner introductions, and provide other operational structuring and guidance to the company) Potential Issues with Later Stage Investors: Having these angels on the Board is usually perceived to be positive by later stage investors

d. Financial Return Angels: General Description: Financial return angels are high net worth investors who have little relevant entrepreneurial experience and who invest in companies in which they have little industry experience. Usually these angels are high net worth individuals who have made money through the stock market, real estate, inheritance, and through professional

occupations not related to starting up companies (such as doctors, dentists, lawyers, accountants, engineers, consultants, brokers, etc.) Objectives: These angels are investors looking for high rates of return by investing in start-up companies and do not desire to be actively involved with the start-up Investment Amount: Often <$50,000 per investment

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Private Equity Venture Capital and Angel Investment Number of Investments per Year: The number of investments varies, depending on risk profile, deals available etc. Quality deal flow can be uneven because brokers, accountants or lawyers supply deals to these angels on an ad hoc basis Due Diligence: Usually these angels use attorneys and personal accountants to review paper work and perform limited due diligence. Their networks usually do not include venture capitalists or industry experts that could greatly aid due diligence. Post-Investment Involvement: The value-add to the start-up company is usually limited to financial support. Some Financial Return Angels will provide general business and guidance support depending on their background. They may also provide access to friends and associates. Their interactions with the company are varied and dependent on the individuals temperament. Potential Issues with Later Stage Investors: Later stage, professional investors are less likely to invest in deals that have too many financial return angels in the previous rounds. These investors are less aware about the ups and downs of Startup Company investing and they can become impatient or spooked when the venture experiences a downturn. Usually these angels do not protect themselves adequately when structuring terms and conditions

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11.

Five Reasons Why Angel Investors Matter To the Economy

1. Angel Investors Create Jobs: These investments created 165,000 American jobs in 2011, or 2.5 jobs per angel investment.

2. Investments Are UpBy A Lot: The short version is that more people are putting more money into more businesses. In other words, the market for this particular type of aggressive, high-risk investment has grown. Last year, angels invested $22.5 billiona 12 percent increase from 2010. And the number of people in the game has increased by 20 percent. Last year, 318,480 people pumped money into 66,230 ventures. And they were willing to put more cash into each deal. Thats good news, since angel investment seriously contracted when the economy tanked in 2008 and 2009. In 2010, activity picked up, and last year, it gained more steam. It appears that optimism in angel investing is taking hold

3. After Two Years, Angels Are Taking More Risks: This is good news for earlystage entrepreneurs. The years 2009 and 2010 were lean years for start-ups. In 2010, only 31 percent of angel funding went to seed and start-up projects, while 67 percent of funding went to early and expansion-stageand somewhat safer investments. Heres another way to look at it: The investors whose signature move is taking aggressive, well-reasoned risks werent taking many risks. But last year, the overall angel investment portfolios balance shifted, with 42 percent of capital going to seed and start-up companies, while only 55 percent went to companies in early and expansion-stages.

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Private Equity Venture Capital and Angel Investment 4. And Optimism Aside, Angel Investing Is Still Really Risky: Investors can leave a company for any number of reasons. Last year, nearly a quarter of angels saw the door when their investments went bankrupt. Meanwhile, 54 percent of investors left when their company merged or was acquired by another business. And, when angels left companies, they only got out with a profit about half the time. Meanwhile, annual returns for angels exits (mergers and acquisitions, notes and IPOs) were between 18 percent and 28 percent, and however, these returns were quite variable.

5. High-Tech Is Still The Hot Investment: Last year, nearly one-in-four angel investments went toward software, while one-in-five went into health care and medical equipment, and media trailed the pack. Heres the full breakdown of the deals: Sector Software Health Care Percent of deals 23% 19% Industrial / Energy 13% 13% Biotech IT services 7% 5% Media

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12.

Global Market - USA and Europe Angel Investments

a. Angel Investing in the United States The US being the most hit by the crisis, saw an overall rise in number of companies that received Angel funding in 2009, with the total dollar amount of investment falling by 8.3% over 2008 to USD 17.6bn. 57,225 entrepreneurial ventures received Angel funding in 2009, a reserved 3.1% increase from 2008 whereas the number of active investors in 2009 remained unchanged at 259,480 from 2008. A decline in the deal size by 11.1% as compared to 2008 indicates that while Angel investing activity has not significantly decreased, the overall commitment is of lesser dollars, backed by lower valuations and a cautious approach to investing. Overall significant changes have been taking place in the critical seed and start-up stage investment landscape. Angel investment in the seed and start-up stage was 35.0% in 2009, a 10.0% y-o-y decrease. With the increase in interest in post-seed/startup investing first round investments represented only 47.0% of 2009 Angel activity. The decline in interest is reflective of the difficult economy and little or no support for Angels, or the companies they invest in, from the various legislative initiatives enacted to stimulate the economy. The trend of Angels moving away from seed and start-up capital is increasingly deepening the capital gap. With Angel investments contributing significantly to job growth, the lack of funding can cause serious damage to venture formation as well as job creation within the economy. Another point to note is that while the number of angle organizations and individual members of these organized Angel groups are increasing, there seems to be a growing number of individuals who have the necessary net worth, but have not made an investment called latent Angels. These latent Angels have been increasing at an alarming rate to reach 65.0% of the membership in Angel groups in Q1Q2 of 2010 from 54.0% in 2009 and 36.0% in 2008. The growing numbers of latent Angels indicate that although attracted to Angel networks, these individuals are not active and are in general Page 29

Private Equity Venture Capital and Angel Investment indicative of the lack of seed capital, supporting the need for research to move the latent Angel to the active investor. In the investment sector space, in 2009 Software accounted for the largest share of Angel investments at 19.0%, followed by Healthcare Services/Medical Devices and Equipment the sectors trend being similar to that in 2008. b. Angel Investing in Europe Based on a study conducted by the European Business Angels Network (EBAN), the market consisted of 334 networks in 2009 with an estimated 75,000 Angels in the region. Around 3.0 - 5.0mn was invested in the European business Angel market. In 2008, the more mature Angel markets such as the United Kingdom (except Scotland), Sweden, Germany, Belgium, Italy and the Netherlands experienced a decrease in the number of Angel networks. The fall in the number of networks is largely attributed to the gradual professionalization of the industry, where the less performing networks cease to operate after the first few years. According to the EBAN Statistics Compendium 2009 study, business Angels in the European region have been going strong in spite of the financial and economic downturn and are known to play a crucial role in financing high-growth, innovative startups.

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Private Equity Venture Capital and Angel Investment As of 2009, ICT and software remained the predominant sectors of investment for Business Angels across Europe. However, investors have been making investments in different sectors including health related and environmental companies. As a result of the current challenges and the importance of nurturing investee companies, Angel investors have been focusing on local deal flow. This has led to a decrease in the number of investments outside of the networks region/country. The European region recorded a slightly higher average deal size in 2008. This is assumed to be indicative of investments made in existing portfolio companies or companies that traditionally should have had access to other sources of capital but had to be followedup by Angels as a result of lack of market alternative.

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13.

References

http://www.managementparadise.com/hrite/documents/1466/venture-capital/ http://www.managementparadise.com/tingly/documents/294/venture-capital/ http://www.scribd.com/doc/20750325/REPORT-on-Venture-Capital http://en.wikipedia.org/wiki/Angel_investor http://www.niftydirect.com/10-trends-in-angel-investing-in-india/

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