Angel investors flee as seed and startup bubble begins to deflate

New data released today by the University of New Hampshire’s Center for Venture Research found that angel investors put much less money into startup deals during the first half of 2010 than they did in 2009, a direct refutation of the widely held notion in Silicon Valley that seed valuations have been rising.

The report saw both deal size and overall number of seed investments drop to levels not seen since the beginning of the decade.

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So has the seed bubble finally burst? The new data suggests it may be well on its way to doing so.

Although a handful of closely watched deals have reaped major seed-round rewards — overshadowing more anemic growth elsewhere and giving rise to national news coverage of events like Angelgate — those few instances don’t tell the whole story, Jeffrey Sohl, director of the UNH Center for Venture Research at the Whittemore School of Business and Economics and an author of the report, told VentureBeat.

“Valuations for seed have certainly been falling according to our data, which make sense because everyone’s net worth is dropping and the economy has certainly grabbed a lot of net worth from angels’ portfolios,” said Sohl.

He added that while a number of “super angels” may have been in the spotlight for deal size and type over the last year, the vast majority of angels have been sitting on the sidelines as they wait for the overall economic climate to recover.

In the first half of 2010, 65 percent of membership in angel groups were “latent” angels, or individuals who have the necessary net worth but have not made an investment — an increase of non-participation from 2009 of 54 percent and 36 percent from 2008.

The study, “The Angel Investor Market in Q1Q2 2010: Where Have All the Seed Investors Gone?”, concluded that total investments in the first half of 2010 were $8.5 billion, a decrease of 6.5 percent during the first two quarters of 2009.

That lead to a 9 percent decline in total dollars as investors “lost their appetite” for seed funding.

“These data indicate that while angels remain committed to this investment class, they do so with a cautious approach to investing. Angels are committing fewer dollars in more deals, a result of the lower valuations,” said Sohl.

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“Without a reversal of this trend in the near future, the dearth of seed and start-up capital may approach a critical stage, deepening the capital gap and impeding both new venture formation and job creation,” he said.