The Angel Investment Crunch

Are we losing accredited angel investors?

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Scott Shane
Scott Shane

Business angels invest their own money in private companies run by someone other than a friend or family member. And accredited angel investors are the portion of these investors who meet Securities and Exchange Commission requirements for having either high net worth ($1,000,000 or more) or high income ($200,000 plus for single people and $300,000 plus for married couples).

Many people believe that accredited angel investors are an important source of early-stage financing for high-growth technology companies. Most angel groups are composed solely of accredited investors, and accredited angels are the ones that anecdotal evidence suggests provide pre-venture capital financing for many companies that ultimately go public or get acquired by public companies.

Because accredited angel investments are an important source of financing for high-potential technology companies, it's important to consider what has happened to this capital source during the financial crisis. Recent indicators suggest a significant decline in accredited angel investment activity in the near future, if we haven't seen that decline already.

Accredited angel investors use their own money to finance companies. Therefore, if these investors have less money, then they will make fewer, or smaller, investments. And the data show that accredited investors have lost a lot of capital recently.

In a recent article, the Wall Street Journal reported that the number of U.S. households with a net worth of at least $1 million (not including one's home) fell from 9.2 million in 2007 to 6.7 million in 2008, and the number of households with investable assets of $1 million or more fell from 5.2 million to 4.4 million from 2007 to 2008. According to the article, the population of millionaires is now at the same level as in 2003-2004.

A 27 percent decline in the number of millionaire households and a 15 percent decline in the number of households with investable assets of $1 million or more almost certainly reduce the amount of accredited angel investment. Leaving aside the remote possibility that angel investors are much more savvy investors than other wealthy people, allowing them to preserve their capital through the financial crisis, the financial crisis has very likely led to a reduction in the number of accredited angel investor households.

This reduction has almost certainly tightened the market for capital from accredited angel investors. Some people who became accredited angel investors between 2004 and 2007 are no longer accredited investors. And those who are still accredited investors have less money to invest. As a result, there is almost certainly less money available from this source of financing, adversely affecting entrepreneurs' efforts to finance the kinds of companies that accredited angel investors back.

Scott Shane is A. Malachi Mixon III professor of entrepreneurial studies at Case Western Reserve University. He is the author of The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By, among other books.