By H. Randall Goldsmith
I came across a quote recently from Tim Draper, a legendary investor and a founder of Draper Fischer Jurvetson, a venture capital firm that has backed successes such as e-bay, Hotmail, and Skype. He said, "We are looking for uniqueness. I like companies that are taking long odds at an extraordinary outcome…companies that set out to change the way we live."
Not every opportunity meets that criteria, but it is the quest of every investor. Along the way, angel investors discover companies with a compelling business proposition based upon a significant market opportunity that could generate an attractive return on investment, and they are seeking an initial investment. In considering these opportunities, it is important to note that angels are critical to the U.S. capital structure. Angel investors invest virtually the same amount of capital per year as do venture capital firms. The primary difference is they invest in 10 times as many deals. Angel investment opportunities provide much of the pipeline for venture capital firms. One in ten of these angel investments will qualify for venture capital funding. With proper guidance, assistance and access to critical funding at the right time under the right terms, the success rate can be much higher within a state or region.
To put it in perspective it is much a factor of numbers. Each year in the U.S. as many as 700,000 new business establishments are created with funding coming primarily from friends and family. In fact 67% of all new establishments do not launch with outside investment capital. Of this number of new establishments, it is estimated that approximately 5% will evolve into high-performance entrepreneurial growth companies. These companies are the one’s most likely to be in need of outside investment. It’s at this point where angel investments become so important to driving the new economy in a community or state.
In an attempt to stay abreast of the investment environment, I have distilled some key facts from a variety of surveys, reports, and research papers over the past few weeks. I would like to share them with you here to provide insight into how important entrepreneurship and capital are to our economic future.
Throughout history the U.S. competitive advantage has been a combination of research and technology development, entrepreneurs and risk capital. What has been the "secret sauce" in the past is being discovered throughout the world. China, India, Korea, Singapore, and Scandinavia are gaining or have passed us in global competitiveness. Tim Draper says, "Investors today are more focused on China and India today than the U.S." This poses a situation where local angel investments are more critical than ever. If we are to maintain our competitiveness or intend to increase our local regional competitiveness, it comes down to local appetite for risk. If there are no local investment opportunities, opportunities go where they can find the investors. In today’s world, deals and capital are mobile. Regions that fail to present access to a pool of high-risk, patient, investment capital cannot support nor attract the emerging "innovation intensive" companies that will shape their future.
* Sources: Angel Capital Association, National Venture Capital Association, Center for Venture Research