It’s Tuesday, September 16th, 2008. Wall Street has changed forever. And so has angel financing.

The sale of Merrill Lynch, the AIG cash squeeze, the bankruptcy of Lehman Brothers and the Goldman Sachs earnings drop will extend far beyond those on Wall Street. Make no mistake, a crisis which began with residential real estate will hit technology entrepreneurs from Silicon Alley to Silicon Valley. If you are an early-stage entrepreneur or thinking of becoming one, you need to understand the impact these events will have on your capital raising plans.

The biggest impact will be felt by those seeking angel financing. Angels tend to invest when they “feel” wealthy. They tend to be passive investors who are excited to be associated with fresh, non-traditional investment opportunities. In some respects, this type of investment activity is a high-stakes hobby. Many angels tend to conduct less diligence than institutional investors and they also tend to offer less support. They invest in this manner because they can afford to invest in this manner.

Following this week’s structural changes on Wall Street there are fewer people who can afford to invest this way. In fact, one day in to our new Wall Street order, I’ve already heard of angels pulling out of deals. A tremendous amount of wealth was destroyed, a huge number of jobs lost. Angels tend to invest when they feel wealthy and nobody is feeling wealthy this week. Not be alarmist, but we’re still witnessing the first order of magnitude impacts. In the near term, this impact will be felt greatest in the greater New York area. It will smack real estate markets. And then brace yourself for much smaller Wall Street bonuses going to many fewer people this year.

In an environment where nobody is “feeling” wealthy, where should an entrepreneur seek capital?

• Push to meet with an institutional investor instead of a hobbyist. And then ask them about their backers. Are they backed by stable institutions such as endowments & retirement plans or are they also backed by “wealthy” individuals. Find a stable institution backed by stable institutions.
• Find a fund that is right-sized for the capital you want to raise. If you read my previous bullet point, you may think that I’m saying it’s time to hit Sand Hill Road and raise a typical VC round. I’m not. If your business only needs $500k, raise $500k. Your first round of capital is the most dilutive you will ever raise. Don’t be pressured into taking more than you need.

This is why I’m so excited to be part of First Round Capital. We’ve been doing this for awhile. If you have a great idea and you have been thinking about pursuing traditional angel financing, give us a call. We’d love to work with you.