Angel Investing In 2010 Shows Signs Of An Inflating Bubble

Angels were particularly active last year – perhaps more than previously thought – with a strong rise in dollars placed and an expansion in overall deal size.

The rising deal size is among the most interesting observations from a report the University of New Hampshire’s Center for Venture Research released Tuesday.

The study found angels invested $20.1 billion in 2010, an increase of 14% from the $17.6 billion of 2009. It is interested to note that at this level, angel dollars are only slightly off the $21.8 billion venture capitalists invested over the same 12 months.

The big difference is that angels funded 61,900 companies, up 8.2% from 2009. VCs placed their investments in 3,277 deals.

The university’s report lists 265,400 active angel investors, a slight increase from 2009. More importantly, it found average deal size rose 5.4 percent.

“It appears a cautious optimism to investing is taking hold,” says Jeffrey Sohl, the center’s director. “These data indicate that angels have significantly increased their investment activity and are committing more dollars resulting from higher valuations.”

What makes this more interesting is that it is likely the result of a relatively small percentage of the investors working with Internet companies, since a lot of angel deals are small and more regionally focused.

And it parallels with another trend the study came across:

“Angels again reduced their investments of seed and start-up capital, with 31 percent of 2010 angel investments in the seed and start-up stage, a decrease of 4 percent from 2009,” according to a university press release. “Angels also exhibited an increased interest in post-seed/start-up investing with 67 percent of investments in the early and expansion stage, an increase from 2009. New, first sequence, investments represented 41 percent of 2010 angel activity, also a decline from the last year of 6 percent.”

“This decrease in seed/start-up stage and first sequence investing is of concern,” said Sohl.

The report found healthcare investments made up the largest share of the total, or 30 percent, followed by software (16 percent), biotech (15 percent), industrial and energy (8 percent), retail (5 percent) and IT services (5 percent).

Mergers and acquisitions made up two-thirds the angel exits, and bankruptcies took 27% of companies. Almost half of exits were profitable, and annual returns from acquisitions and IPOs were between 24% and 36%, the study found.