'Angel Groups' Provide Funding Option for Business Start-Ups; Focus On Venture Capital An 'Achilles Heel' For Entrepreneurs, says Angel Capital Association.

KANSAS CITY, Mo. -- Angel investment groups, formed by individual angel investors banding together, are emerging as an attractive seed-stage funding alternative for start-up companies, according to an analysis of new data on small business financing.

Commenting on the latest findings of small business financing from the 2003 Global Entrepreneurship Monitor (GEM), Marianne Hudson, executive director of the Angel Capital Association (ACA), a program of the Ewing Marion Kauffman Foundation of Kansas City, said, "Angel investor groups are filling an important funding niche between informal investors of family and friends and formal venture capital. These groups promise to enhance the flow of capital to entrepreneurs."

Angels are typically high-net-worth individuals and "cashed out" entrepreneurs interested in mentoring other entrepreneurs. In the past several years, an increasing number of individual angels have joined together to form angel groups in order to pool resources and investment expertise. The number of such angel organizations has tripled since 1999, numbering nearly 200 in 2003.

The Kauffman Foundation, which focuses on advancing entrepreneurship, sponsors both the Angel Capital Association and the GEM study.

According to the GEM study, of the $18.2 billion in classic venture capital invested in 2003, only $304 million was invested in seed- and start-up-stage companies. This represented the lowest amount of seed-stage venture financing since 1980.

"An emphasis on venture capital is an 'Achilles heel' for entrepreneurs seeking to finance their start-up businesses, diverting vital energies from their companies at a critical time," said Hudson. "Many entrepreneurs waste valuable time by prematurely seeking seed capital from formal venture capital firms. While formal venture capital is important to our economy and is once again beginning to flow, only a very small percentage of entrepreneurs receive VC funding."

The GEM study found that informal investors provide the lion's share of funding for small business startups in the United States, amounting to $108 billion in 2003, or almost one percent of the Gross Domestic Product. This capital helped finance some 3.5 million start-up businesses last year. Furthermore, from 1999 to 2003, the prevalence of informal investors in the United States was almost five percent, which means that five out of every 100 adults in the United States invested privately in someone else's business during the past three years.

While much informal investment is supplied by family and friends, a growing component of the informal investor market is the so-called angel investor. ACA estimates that up to 90 percent of outside equity capital for seed/start-up companies comes from angel investors.

The latest estimates from the Center for Venture Research show that angels provided $18.1 billion in start-up financing in 2003, up from $15.7 billion in 2002. The Center also estimates that there are between 250,000 and 400,000 active angel investors in the United States, with a projected 1 to 5 million potential angels.

However, as important as the angel sector is to entrepreneurs in financing their businesses, it is largely neglected by researchers.

To address this knowledge gap, ACA is working with the Kauffman Foundation to design a confidential survey of angel groups and individual angels to get insight into regular deal flow in the angel community. A secondary aspect of the research program is to gain greater understanding of the number of individual angel investors in the country, where they are located, and how much they invest, among other things.

"We've heard from many ACA members that developing a robust database is critical for the advancement of the angel field," said Hudson. "This data will also be helpful to entrepreneurs, policy makers and the entities that help entrepreneurs start and grow their businesses."

The Angel Capital Association was formed in January 2004. It is the preeminent North American association of angel investor groups. ACA's mission is to advance angel investing by supporting the development of successful angel groups, sharing best practices and industry data, building public awareness, and establishing professional standards. Currently, 60 angel groups throughout the United States and Canada are members of the organization.

The Ewing Marion Kauffman Foundation of Kansas City works with partners to advance entrepreneurship in America and improve the education of children and youth. The Kauffman Foundation was established in the mid-1960s by the late entrepreneur and philanthropist Ewing Marion Kauffman. Information about the Kauffman Foundation is available at www.kauffman.org.