But…wait a minute…we are in the middle of a financial crisis!

November 20 2009 No Commented

But…wait a minute…we are in the middle of a financial crisis!

So why is the middle of a pretty deep recession a GREAT Time to be an Angel? When many of us dust off our checkbooks these days to fund new ventures, we get some flak at home. The line goes something like this: “We just saw our net worth decline by 30% and you want to write a check for a highly risky new venture? Are you crazy?” (Our spouses have already figured out that all startup ventures are high-risk investments.)

Yet we see seed and startup ventures being funded all over the world, in good times and bad. According to the Center for Venture Research, in the first half of 2009 US angels invested in slightly more new ventures (~24,000 or so) for somewhat less money (totally $9 billion or so) than in the first six months of 2008.

It is my experience that we angels tend to see higher quality deals during a recession. Why might that be? It surely is more difficult to get an investor’s attention during a recession, so perhaps entrepreneurs who aren’t quite ready or whose product is still half-baked get frustrated early and don’t look for money. And, some highly experienced business persons sense that their jobs are at risk anyway during a recession, so why not go for it? Perhaps downsized businesspersons with great entrepreneurial potential start businesses during down cycles. And, some wannabe entrepreneurs recognize that a recession is the best time to start a business, with the thought that investors will likely want to exit at the heights of the next business cycle. I suspect the good deals that we angels see during the bottom of the business cycle are the result of a combination of all these factors, and more.

Angels are funding seed and startup ventures during this recession because high quality deals are available and prices (valuations) are down. More about that next time.

Bill Payne is the 2010 BNZ University of Auckland Business School Entrepreneur In Residence. www.billpayne.com