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Start-ups finding ignition trouble

Venture capital, even from angel investors, has become scarcer.

February 23, 2009|Alana Semuels

The brutal economy has slowed venture funding to a tortoise's pace, and start-ups looking for money are finding themselves out of luck.

For some companies, the answer had been to turn to angels -- individual investors who might be able to cough up a few thousand dollars to keep your doors open. But now it appears that even angel investing is slowing.

Angels typically focus on getting companies off the ground and invest much less than established venture capital firms.

The Tech Coast Angels, which invests only in Southern California companies and is the largest network of angel investors in the United States, plans to announce today that it invested 11% less in 2008 than the previous year.

The group and its affiliated investors pumped $75 million into start-ups, down from $85 million in 2007.

But there's a little silver lining: There were 15 first-time investments and 16 follow-on rounds from the group's members in 2008, up from 12 first-time deals and 14 follow-ons a year earlier.

The competition is getting tougher. There were more than 200 applications for the group's last Fast-Pitch competition, in which start-ups try to impress investors with their business plans. That's more than twice the usual number, said Al Schneider, president of the group's Los Angeles network.

Despite the shrinking funding numbers and increased competition, the group intends to continue funding start-ups, Schneider said. Because there are about 300 individuals involved in the network, they are less hard-hit than venture capital firms that had all of their eggs in a few baskets.

"People recognize that the best time to invest is when there is a bit of panic in the market," he said. "We're very much open for business."

What do the Tech Coast Angels look for in a start-up, now that they're being pickier with their investments? A company that has impressive intellectual property, a management team that's proved itself and a competitive advantage, Schneider said. Also, one that isn't going to require a lot of capital soon.

Plus, he said, company executives have to be willing to listen to the angels' advice.

In other funding news, Dow Jones VentureSource said last week that venture capitalists were investing more money outside the United States, especially in Israel and China. They put $13.4 billion into 1,416 international deals in 2008, a 5% increase over the $12.8 billion they invested in 2007.

Venture capitalists invested 15% less in Europe in 2008 than they had in 2007, and 34% less in the Netherlands, 33% less in Sweden and 24% less in the United Kingdom.

But China pulled in $4.2 billion in 2008, up 50%.

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alana.semuels@latimes.com

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