Rob Day | November 28, 2008 at 10:17 AM

Angels are more important than you think

I’m referring, of course, to angel investors—individual investors who put money into startups, typically at a pretty early stage.  Here on this site, and even more so in the media, the heavy focus is on venture capital inventments from institutional investors.  But that ignores the critical role angels often play in getting the VC-backed startups off the ground in the first place.

As the attached Center for Venture Research survey results show (note: link opens pdf), angels are a major player in the financing of entrepreneurs in the U.S.  In the first half of this year, CVR estimates that 23,100 startups received funding totaling over $12B.  Compare this to the $14.9B and nearly 2,000 venture deals tracked by Moneytree in 1H08.  Roughly comparable amounts, but more than 10x the investments—as reflecting the CVR survey’s conclusion that 46% of angel investments were in seed and start-up stage.

Let’s make this more specific to cleantech—the CVR study indicated that 10% of the angel investments in 1H08 were made into “Industrial/Energy”.  So we can roughly estimate that about 2,000 cleantech startups received angel funding during the first half of the year, of which about half were seed or startup stage.  Meanwhile, E&Y tracked 29 seed and first round VC investments into U.S. cleantech companies during 1H08.  I would argue that most VC-backed seed rounds are left stealth and unreported, so the E&Y figures are undoubtedly low.  But even still, the difference in number of investments by each type of investor is significant.

Now, many of these angel investments will be made into enterprises that look very different from the technology development efforts typically backed by VCs.  Anyone who’s perused the listings at Investors’ Circle, for example, will know that a majority of the investment opportunities posted with that angel group are for service or retail or other efforts not related to proprietary technologies.

But even still, the number of angel investors backing technology development efforts is impressive. In our portfolio at @Ventures, for example, more than half of our cleantech portfolio of startups were first backed by angels during their formative seed stage. And in my conversations with various angels here in the Boston area, it’s clear that there are many individual investors on the prowl for game-changing inventions.

We’ll talk another time about the special challenges facing such investments at such an early stage, and how some sophisticated angels go about addressing those challenges.  But regardless of the investment profile, it’s clear that angels are an important—arguably, more important than VCs—source of financing for bringing cleantech innovations to market.

Reported deals from the past week:

• Indian green power project developer Orient Green Power has raised a $55mm round of financing, with $35mm from lead investor Olympus Capital Holdings Asia, and $10mm each from Shriram EPC and Bessemer Venture Partners.

• Indian solar power project developer Azure Power has raised a Series A (amount undisclosed) from Helion Venture Partners and Foundation Capital.

• French solar project developer Solairedirect has raised a EUR20mm round of financing from existing investors Demeter Partners, Schneider Electric Ventures, and TechFund, with the addition of a group of mutual insurance companies.

• Israel-based LED developer Oree has raised a $4mm venture loan from SVB and Kreos Capital.

• Emissions management software developer Clear Standards has raised a $4mm Series A from Novak Biddle Venture Partners and Kinetic Ventures.

• ISE Corp., which provides hybrid drivetrains for heavy vehicles, has raised a $17.5mm Series D round of financing from Siemens Venture Capital, Macquarie Clean Technology Fund, DTE Energy Ventures, and existing investors NGP and RockPort.

• SunEthanol has changed its name to Qteros, and raised a $25mm Series B, co-led by Venrock and existing investor Battery.  New investors BP and Soros Fund Management, and existing investors Long River Ventures and Camros Capital also participated.

• Danotek Motion Technologies has raised $14.5mm from CMEA Ventures, StatoilHydro Ventures, and GE Energy Financial Services.

• Here’s a rare announcement of a seed angel round of financing—for Green Away Plant Control.

• Project Frog, a green modular building developer, announced an $8mm Series B led by RockPort.

• Laser developer Raydiance announced a $20mm Series D—apparently they’re now going after some applications in solar (wafer sawing?).

• ReGen Power Systems, with an external combustion engine for waste heat capture, has raised a $5mm round of financing from 21Ventures and Quercus Trust.

Other news and notes:  In the category of “no kidding” analysis comes the Cleantech Group’s forecast of a shakeout followed by continued growth in the sector…  Here’s an interesting argument for the “evergreen fund” format in venture capital…  Merrill Lynch says cleantech is the Sixth Technology Revolution...  Finally, congrats to Michael!

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