Occasionally, we republish blog posts, press releases and other commentaries of interest to the greater Washington business community. This piece by John Backus, founder and managing partner of New Atlantic Ventures, an early-stage venture capital firm based in Reston and Cambridge, Mass., is adapted from an Aug. 28 post on the firm’s blog.

Entrepreneurs, angel investors and venture capital funds have always lived in a symbiotic ecosystem, where each depended on the other for success.

Relative power in the ecosystem changes over time: The bubble in the 1990s benefited entrepreneurs and VCs disproportionately, as winners were often determined by the size of their funding round. The tech implosion of 2000 gave the power back to the VCs, who too often used a heavy hand in trying to “save” companies through the down times. But starting around 2006, the power moved back to the angels. The rise of Web-based businesses drove this move, as companies could now be started with less capital. Entrepreneurs didn’t need VC-scale money to start their companies, and angels could see a company get to market without too much cash.

So I asked myself, sitting here in 2012, would I rather be an angel or a traditional VC? I gathered some data from the National Venture Capital Association and the University of New Hampshire to answer the question, and the data surprised me.

The angels and the seed funds have a math problem. Angel-funded companies are being born and funded at a rate that can’t be absorbed by institutional VC.

For every early-stage company that receives venture funding, there are 40 angel-funded companies. VCs have the pick of the angel-funded litter. Said another way, only 2.5 percent of angel-funded companies will ever raise venture capital. What happens to the rest? Most crash and burn. Some are acquired for their talented teams. Some become good lifestyle businesses. And a few have nice exits without ever having to raise an institutional venture round.

The University of New Hampshire conducted a nice bit of research on the angel market, noting that in 2010 angels invested $20 billion in 61,900 companies (that is $323,000 per company).

That $20 billion is almost three times the money that goes into early-stage venture deals ($7.4 billion), and almost 1.5 times the money that goes into late-stage venture ($15.8 billion). 

But the amount of money a company receives at the various stages tells the real story about a company’s potential for success. The average angel round ($323,000) is dwarfed 14 times by the average early-stage VC round ($4.6 million) and late-stage rounds, at $8.3 million are almost twice the size of early-stage rounds.

My conclusion? We are in an angel bubble that will keep inflating when crowdfunding meets Main Street in 2013 after the Securities and Exchange Commission puts in place rules that allow start-ups to sell equity stakes to pools of small investors.

Eventually the bubble will burst. Not tomorrow. But soon. Mark my word. Perhaps in 2014?

And when the bubble bursts, even more companies will come looking for institutional grade venture capital. I like where I am, investing as an early-stage VC. I am also the biggest fan of the angels and incubators. They make my job easier. So thank you — and keep it up!

John Backus blogs regularly at navfund.com/blog and is @jcbackus on Twitter.