Investing in start-ups by wealthy 'angels' rises 10.8%

Wealthy individual investors known as "angels" pumped about $25.6 billion into US entrepreneurial ventures in 2006, a 10.8 percent increase over the prior year, according to a report released yesterday by the University of New Hampshire's Center for Venture Research.

Last year's angel investment total topped the $25.5 billion laid out by venture capitalists in 2006, as reported by the MoneyTree survey in January, signaling a resurgence of angels in private equity financing at a time when venture firms are moving toward later-stage deals.

"In many fields, it costs a lot more to launch a company than it did in the past," said George McQuilken , a Portsmouth, N.H., angel investor and co founder of eCoast Angel Network, a group of investors backing start-up companies. "The venture capitalists have pretty much withdrawn from early-stage investing, so the angels have to do it."

UNH's venture research center, which has been tracking the angel activity since the early 1980s, said last year's sharp increase marked a post-2000 high for angel investment. A total of 51,000 businesses raised angel funding from 234,000 individuals in 2006, the center reported.

The average deal size for angel investments climbed 7.5 percent, meanwhile, to about $500,000. That compares to between $7 million and $8 million for the average venture capital investment.

"We see a pretty sustainable growth rate for the angel market," said Jeffrey Sohl , director of the venture research center and a professor of entrepreneurship at UNH's Whittemore School of Business & Economics.

Though angel investing is on the rise, Sohl said he was troubled by a shift toward later-stage deals by wealthy investors that, while less pronounced, parallels the shift in the venture capital industry.

Forty-five to 55 percent of angel deals are seed or start-up investments today, down from 80 percent in the 1990s, said Sohl. "If that number drops further, that would be a big concern," he said, "because we already have a seed gap and it could get wider and deeper."

He was referring to the difficulty faced by many small entrepreneurs seeking to raise the initial money enabling them to grow their businesses to the stage where they can attract larger sums from venture capitalists. This has been the traditional role played by the angel investors, typically successful entrepreneurs themselves who join the boards of start-ups they back and provide strategic guidance.

While software start-ups drew the largest share of angel investment in the 1990s and earlier this decade, especially in high-tech hubs like New England and Silicon Valley, more funding has been flowing to life sciences start-ups in recent years. Healthcare companies accounted for 21 percent of angel deals last year, followed by software and biotechnology with 18 percent each, and retail -- a category including e-commerce and Internet start-ups -- with 8 percent.

Angel investors, unlike venture capitalists, put up their own money. Because there are no public records of angel deals, the UNH venture research center relies on data from angel investing groups that have sprung up across the country to swap information and collaborate on deals. There are more than 20 angel groups in New England alone.

The angel groups, and a national organization formed a few years ago, have enabled individual investors to become a larger force in the field of private equity, said McQuilken, who has backed Massachusetts start-ups like Groove Mobile of Bedford, which sells music downloads through cellphone carriers, and IAM Technology Inc. of Lexington, which makes Web messages more secure.

At the same time, some 60 percent of the members of angel groups are "latent investors" who haven't put their money to work in the past 12 months, Sohl said. That suggests the potential for even higher levels of angel investing in coming years, he said.

Robert Weisman can be reached at weisman@globe.com.