The New York Times recently had an extremely well-done article called "The New Rules of Angel Investing." I agree with everything in it as it accurately portrays what I am seeing in the market.
Here's are some snippets from the article:
Angels are still financing deals, but at lower valuations and with more specific milestones. They have grown more picky and less tolerant of risk.....There has been a sea change in risk sensitivity; the more self-sufficiency a company demonstrates, the less risky it appears.....Entrepreneurs should find ways to finance their own growth: working without salary, moonlighting, seeking grants, running lean operations and focusing on an aspect of the business that can generate revenue.
Over the past year, I have also noticed the changes the article points out. Angels will still invest, but more and more, only at realistic valuations and when they see a clear path to profitability. Many angels have been burned over the past year through the economic meltdown in their private company investments. Valuations went down; cram-down rounds occurred; VCs went pay-to-play...it got ugly at times. That said, many investments that were made are still good and above water. Capital efficient companies that have weathered the storm by conserving cash and/or getting to (or close) to profitability are doing well and are likely to be rewarded. And those that are still early-stage, loss-making companies can still get funded and are getting funded....but the rules (and valuations) are not what they were a year or two ago. Passive angels (what's the price?) are more and more becoming active (I'll tell you what the price and terms are). For angel returns, this is not a bad development. For companies, reality may not be a bad thing as well. We all know, that above everything, cash is king and capital is good.
