Bank financing for small business, of course,  still is way down. And it's unclear what impact President Obama's recent proposals for boosting lending will have.   So, it's not happy news to learn about reports of declines in another source of small-business funding, angel investments.

These investments, from wealthy individuals or groups of such people, have been an important source of money for a small but important group of startups--businesses with a high growth potential.  But research shows that the approximately 300 angel groups in this country are considering a smaller number of startups for investment at every stage of the process. That's according to  data from Scott Shane, a professor at Case Western Reserve University and noted entrepreneurial specialist writing in BusinessWeek. 

Specifically, the angel investment process includes  four stages. First, entrepreneurs submit business plans. Then some of those who make the grade go to the next step, when a screening committee invites them to present their plans to the larger group.  Next,  angels do due diligence on some of those startups.  And, finally, a smaller number actually receives funding.

 The research shows that, from 2007 to 2008, the share of companies that went through the first three stages stayed about the same, though there was a decline in the share of startups that made it to the last stage and got money.  (The study looked at about 17,000 plans submitted from 2007 to 2009). But, from  2008 to 2009, angels were pickier at every phase, that is, about 50 percent fewer startups made it to each step compared to the previous year.

Obviously, this isn't great for startups looking for money from angels.  But, the number of companies that receive such funding is a tiny portion of all entrepreneurs.  The larger problem, really, is what it means for the economy as a whole.  The firms that are angel-eligible are usually the kind of businesses likely to have substantial growth--tech, web, medical device companies and so on.  While some of the rejects may go on to bootstrap or find money elsewhere, in this climate, it's quite possible they won't find any and will just give up.  What's more, angel-funded companies are usually a gateway to venture funding, the next step in the line, so it means a more paltry pipeline for VCs.

The result, then, is the likely loss of a significant boost to overall economic growth over the next five to ten years. Ultimately, that might have an even longer-term impact than the dearth of bank loans.