Five Angel Investing Trends for 2007

The landscape for start-up financing has changed considerably over the past few years as both the availability of financing and the cost of various options were affected by various trends in the industry. And those trends will continue to wield influence in the financing arena during the coming year. To help you stay up to date, here's a look at some of those trends and how they can help you get money to fund your business.

1. Angel investing will continue to grow. In the late 1990s, angel investing came out of the funding closet and entered the financing mainstream when technology companies appeared to provide supernatural returns on investment. It seemed as if everyone knew someone who knew someone who was an early investor in an Internet start-up that cashed out just in time. Today, there are about 250,000 angel investors in the U.S. investing in approximately 50,000 small companies each year. Next year, you should expect that angel investing will continue to grow in popularity.

This growth may be fueled in part by tax incentives and behavioral attitudes related to how investing patterns are changing. In 2007, Congress will debate a bill recently introduced by Senators John Kerry (D-Mass.) and Olympia Snowe (R-Maine) that will provide a tax credit for high net-worth individuals who make private investments.

Regardless of whether these tax incentives make it into law, I believe that the investment behavior of high net-worth individuals has fundamentally evolved to the point where they regard start-up investments as a viable part of most investment portfolios -- financial advisors and attorneys now frequently screen and recommend start-up deals for their clients. The bottom line is that angel investing is here to stay.

2. Valuations and investment terms can't get much better. If you're in doubt that we're living through another start-up financing bubble, consider the following statistic provided by the Center for Venture Research: The yield rate on angel investments (the rate at which investments presented to angels result in funding) increased from 10% in 2003 to 23% in 2005. (At its historical peak in 2000, the yield rate was also at 23%.) Either companies are becoming more worthy of funding, or the bubble is back. Pre-launch startup valuations involving first-time entrepreneurs have climbed to more than $5 million, rather than their post-bubble levels of $1 million to $2 million. You should expect them to stabilize at $2 million to $3 million in the near future.

3. Business credit scores will supplement personal credit scores. For those seeking debt financing, credit cards continue to be the most popular source of capital. In the past, credit-card issuers have traditionally made financing decisions for small-business applicants based largely on the personal credit score of the business owner.