It’s amazing how many entrepreneurs think venture capital funds are the primary source of funding for seed and start-up companies.
VCs only fund 400 to 600 seed or start-up companies per year in America.
Angel investors fund about 16,000 seed / start-up companies per year in the US - about 27 times more.
Scott Shane makes an important contribution to our understanding of entrepreneurship, angel investing and venture capital in his new book Fool’s Gold published earlier this year. Scott is the A. Malachi Mixon III Professor of Entrepreneurial Studies, Department of Economics, Weatherhead School of Management at Case Western Reserve University.
Fool’s Gold is based on solid academic research and debunks several myths about early stage company financing.
Scott references National Science Foundation data that showed US VCs funded 612 seed or start-up companies in 2004 (pg 115). This was 23.7% of the total 2,578 US VC deals that year. That is in the same range as the PWC Moneytree number of 424 seed/start-up investments by US VCs in 2007.
Angels fund many more companies and a larger percentage are at the seed and start-up stage.
In 2003, the Federal Reserve did a study on Small Business Finances. The Fed data estimates that angels fund about 50,700 companies each year in America.
The Center for Venture Research (CVR) has been conducting research on the angel market since 1980. The CVR is a multidisciplinary research unit of the Whittemore School of Business and Economics at the University of New Hampshire. They report that 55,480 entrepreneurial ventures received angel funding in 2008 – in the same range as the number above from the Fed study.
In an email to Scott I asked: “On page 114 you reference data from the Entrepreneurship in the United States Assessment study that says 35.5% of angel investments are in pre-revenue companies. I appreciate that ‘pre-revenue’ is not precisely the same as seed/start-up, but if we take those as roughly equivalent, would you agree that angels invest in about 35% x 50k = 16k seed/startup companies per year?
And that if angels fund about 16,000 seed/startup companies per year and VCs fund about 600, then angels fund about 27 times more seed/startup companies per year?
Scott responded: "I think that 27:1 is about right for the ratio of angel to VC seed and start-up stage investments."
This is very good news for entrepreneurs and the economy. There has been a lot written about the traditional venture capital model being broken and the reduction in venture capital financing all around the world. With VCs financing only about 4% of seed and startup-up companies, the decline of traditional venture capital funds shouldn’t be a serious problem for early stage companies - or the next phase of growth in the global economy.