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An investment trend could hurt startup health IT firms

Posted by: Stephanie Baum on November 10, 2011

Although investment in technology companies, including health IT, has been improving with the economy, one trend emerging in a shifting investment landscape is that venture firms are approaching angel investor groups to co-invest at the growth stage of startups.

The trend has the potential to reduce the amount of investment capital available to startup health IT and technology companies in the region.

Michael Harrington of Fox Rothschild’s Exton, Pennsylvania office describes it as “investing upstream.”

Harrington’s practice concentrates on representing early and growth-stage technology, life sciences and clean tech companies.

Some venture capital firms are approaching angel investor groups with term sheets to invest with them in technology companies at the series A stage, said Harrington. These investments would mean an angel investment group may contribute one-quarter of an investment at the $1 million series A round, for instance. These investments tend to be allocated to companies that are more mature and have demonstrated they can generate revenue and represent less risk from an investor standpoint.

Angel investor groups historically invest in smaller amounts at the $150,000 to $250,000 bracket while a venture capital firm would typically invest millions.

“We have a very strong angel investment community,” said Harrington. “Unfortunately, this trend is drying up early stage capital in the region.”

Mid-Atlantic Angel Group Executive Director Karen Griffith Gryga acknowledged that the recession has impacted the types of investment decisions the angel investment group makes. “Focusing on companies that are more mature is kind of a natural thing that happens. We are still early stage investors and we’re still investing in companies with little revenue with one or two people [in them].”

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