COVID-19 Could Cool Angel Investment

While there were fewer angel investors in 2019, angel investing actually increased 3.2% from 2018. But the pandemic is expected to send such investments spiraling in 2020, according to the Center for Venture Research at the University of NH.

Angel investment activity will likely resemble the post-2000 decline and the Great Recession, say Jeffrey Sohl, the center’s director, and researchers Wan-Chien Lien and Jianhong Chen.

During 2008-09, the angel market funding declined for two years with the steepest decline—more than 26%—taking place between 2007 and 2008. The biggest effect, according to the researchers, was the drop in seed and startup stage investing during 2009 and 2010.

Angel investing was a mixed bag in 2019. During 2019, angel investments totaled $23.9 billion but funding was spread among fewer investors and fewer recipients. While 63,730 entrepreneurial ventures received angel funding in 2019, that was down 3.6% from 2018. The number of active investors was 323,365, which was 3.3% lower than in 2018. Despite that, the average angel deal size in 2019 was $374,225.

“A few key metrics for the angel market in 2019 indicated that the market fundamentals may not be as secure as to withstand shocks to the market, especially one as fast and as pronounced as the COVID-19 crisis,” the researchers state.

“Combining angel investing data from the first quarter of 2020, data on previous external shocks to the angel market and key metrics in the 2019 angel market points to the potential for significant impacts for angel investors, and the entrepreneurs they invest in, as 2020 unfolds.”

Of course, this also doesn’t take into consideration that the U.S. also fell into a recession as of February, slightly predating the worst of the COVID-19 economic hit.

With regard to future investing, it’s likely angel investors will have diminished capital. “Since angel investors are high net worth individuals, given the correction in the public equity markets, the angels’ net worth will likely have declined and so will the pool of capital they deploy for angel investments,” the researchers state. “It is expected that total dollars invested in 2020 will decline. However, if past events offer any guide, the total number of investments will hold steady.”

And angels may be more cautious, making them less likely to invest in the seed and start-up stage businesses, which “could lead to significant, and lasting, repercussions throughout the risk capital ecosystem,” the researchers state.