Pepperdine Private Capital Markets Survey: As Banks say “Bah! Humbug!”, Private Businesses Look to Friends and Family, Angels

John Paglia
John K. Paglia, PhD

As if torn from a page in Charles Dickens’ A Christmas Carol, private business owners say that banks continue to exhibit much stinginess, extending meager or no credit.  Instead, private businesses say they have better funding prospects with friends and family and increasingly Angel investors now and in the months ahead.

Financing through friends and family continues to outpace bank financing

  • Though down from 56 percent of 559 entrepreneurs polled in the spring, 38 percent of private businesses say they tap into friends and family as a lending source vs. 25 percent who say they have bank financing.
  • The findings, based on 188 interviews from Sept. 1-17, suggest that private businesses are more likely to tap informal sources of funding to meet their financing needs.
  • Funding from Angel investors are filling in financing gaps, providing seed funding and venture capital.

Angels are increasingly bringing investments to the tableand getting a bigger slice

  • Angel investors are seeking out start-ups in which to invest in greater numbers. Nearly 76 percent of respondents reported making at least one follow-on investment in a previously funded business. Almost 21 percent of respondents expect to make two investments over the next 12 months, followed by 16 percent making three.
  • Respondents indicate that roughly 48 percent of their investments were made within 30 miles of their office, so it is wise for entrepreneurs to target Angel investors in the region.
  • In general, Angels are seeking a high return on their investment. Regarding new investments, Angel investors are seeking 10X on seed capital, followed by 8X on start-up/early stage.
  • Venture Capitalists are also increasingly relying on Angels to bring investments to the table. The VC community has increased its level of risk aversion and is now focusing on safer opportunities.  In three to five years, some Angels who have wisely invested stand to enjoy tremendous upside when they go public or sell their business.

The Angels are listening

  • Angel investors can be a good funding source, especially when traditional sources refuse to lend. Angels, however, don’t usually write blank checks. They want to hear what the management team has to say with 88.8 percent reporting that interviewing management teams was very important. They also do their due diligence conducting a lot of research with 53.8 percent saying that reviewing business models is also very important.
  • In the last iteration of the study conducted in summer 2010, almost 94 percent of Angel investors said that being actively involved in learning about each company they invest in is important or very important.
  • Respondents ranked the importance of various deal attributes and the results show that 26.7 percent of respondents believe that deals with no VCs involved are the least important, while 65 percent believe that top-tier management teams are the most important.
  • Angels usually want to be involved in the company in some way, such as serving on the board, and will likely want a say in major decisions. Many Angel investors are former business owners who want to help people like themselves. This guidance can help in building a sustainable company as well as in finding funders for the next round of capital or a possible buyer.
  • In the last survey 84.4 percent of respondents said they would offer assistance with future financing or exit transactions, while 67.2 percent said that they would offer team building and recruiting services. Strategic advice topped the list, however, and was reported by 96.9 percent of respondents.

Opportunities exist; businesses need to know where to look

This batch of Fall 2010 data from the Pepperdine Private Capital Markets Project illustrates the old adage; when one door closes another opens. While banks have restricted their lending, other investors have jumped at the opportunity to invest in several industries. When looking to raise capital always look at all types of investors. As we have seen with bank lending, restricted Angel investors have looked to capitalize. The vast world of private capital is always changing, with tools such as the Private Capital Markets Survey investors and businesses can better understand and adapt to the market conditions.


Dr. John Paglia, the Denney Academic Chair and former Julian Virtue Professor, is an associate professor of finance and senior researcher of the Pepperdine Private Capital Markets Project. He holds a Ph.D. in Finance, an MBA, a B.S. in Finance, and is a Certified Public Accountant (CPA), Accredited in Business Valuation (ABV), Chartered Financial Analyst (CFA), and is an Accredited Senior Appraiser in business valuation (ASA).

Connect:

To participate in the survey or to learn more, e-mail privatecap@pepperdine.edu


Author of the article
John Paglia, PhD, Associate Professor of Finance
John Paglia, PhD, Associate Professor of Finance
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