Fiberstar Inc., a small company that converts orange juice pulp into a line of food ingredients and other products, is no longer a startup. Founded a decade ago, it has a customer base of loyal multinationals and annual revenue of more than $5 million.
The company might seem an unlikely candidate now for funding from angel investors, who typical provide startups with commitments of less than $1 million.
But Minneapolis-based Fiberstar, which in the past has relied exclusively on angel investors for private equity, is soliciting angels to help raise up to $10 million for working capital and new production facilities to keep up with increasing demand.
“Our goal is to continue to raise funding from angel investors and angel groups,” says Dale Lindquist, Fiberstar’s president and CEO. “We’ve respected the investment that they’ve made and as management we’re trying to protect it.”
“It’s very unusual for a company to go as far as we have working solely with angels,” he adds.
It’s becoming less unusual, says Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire. Investing in more established companies is just one of several signs that angel investors are seeking a higher degree of comfort as they look for safer bets in a volatile economic climate, he says.
“The angels are doing post-seed and more later stage work than they normally would,” says Sohl.
In a highly unpredictable economy, when credit markets are tight and traditional sources of capital such as bank debt have dried up or become increasingly difficult to obtain, angel investors are taking on more prominence as a source of alternative financing.
Total angel funding during the first half of 2008 has been surprisingly steady, rising 2.1% to $12.4 billion, compared to the same period in 2007, according to first half data released by the center last month.
Sohl points out that the numbers also show that angels, who typically take preferred stock or other equity in exchange for their investment, are exhibiting increasingly cautious behavior.
Thel number of deals funded in the first six months—some 23,100 according to data collected by the center—has fallen 3.8 percent. Meanwhile, the average size of each deal is up 8%, and along with it, the number of investors behind it. The center notes that the total number of angels participating in the first half grew 2.l% to about 143,000, investing either individually or as part of angel groups. Fiberstar, the food and beverage company, has 152 angel investors.
“What this is telling us is that the angels are spreading out their risk a little more,” says Sohl.
Marianne Hudson, executive director for the Lenexa, Kan.-based Angel Capital Association, notes that she saw this trend begin to take hold last year. Her organization, comprised of more than 170 angel groups, saw average deal size in 2007 rise 10% to $266,000. At the same time, Hudson, whose members self-report their investing results annually, saw the average number of investors in angel organizations rise to 55 from 44.
And while Hudson expects that trend to continue in the current economy, she sees another important signal of skittishness among her member groups: the increased use of loosely formed syndicates to jointly fund deals.
“We are seeing more and more angel investor groups co-invest with each other,” she says. “The angels are minimizing their risk.” —Deborah L. Cohen, Reuters