Growing Wings: How Angels are Widening the Investment Pool
In my post last week, I looked at the transformation underway in the early-stage investment sector, looking at how the rise of angel investing has many benefits for both entrepreneurs and the cities and states that reap economic rewards from successful new ventures. We continue the conversation this week by looking at future trends in the investment field that might influence ways in which national, state and local policymakers are trying to encourage and support angel investors.
Angel Trend 1: More Angel Groups and Networks
Angel investors have traditionally acted on their own accord. However, angels who group together gain many benefits through pooling resources and forming a focal point for entrepreneurs seeking funding and expertise. It is therefore no surprise that networks are proliferating. As they do, the angel investment profession is developing more knowledge, skills and networks of individual members. Their ability, for example, to do more extensive due diligence than individual angels translates into stronger, and more successful investments.
Angel Trend 2: More Emphasis on Exits
The most common and attractive exit for angel investors is a merger or acquisition. In the past, later-stage investors – i.e., venture capital firms – took the lead in facilitating an exit for the early-stage investor. This is no longer the case. The traditional VC industry is itself transforming and many angels are now finding that the best exit is to grow the company to a sustainable stage. With this shift, many are now structuring their investments with the stated objective of exiting within five years. This trend is likely to accelerate.
Angel Trend 3. More Accelerators, More Demo Days
Accelerators represent a small fraction of Angel deal flow. However, this is likely to increase with the rapid growth of accelerators and as more Angels and Angel Groups build relationships with local hubs and startup community actors.
Angel Trend 4: More Angels, More Cross Border Groups
In the words of John May, “Ideas travel first and fastest. Technologies and techniques are usually next, then come pioneering individuals, and last comes capital.” Well, the angel genie is now out of the bottle. Transnational platforms such as GBAN are creating a common lexicon among angels. Technologies and techniques are traveling from developed markets to emerging markets and, increasingly, vice versa. Pioneering individuals and angel groups are now beginning to invest in multiple countries.
Angel Trend 5: Increasing Influence on Public Policy
Many governments around the world are using policy levers to encourage angel investment, as noted by the co-authors of Angels Without Borders. For example, during the GEC, we learned about recent policy initiatives in Colombia, Turkey and South Africa, which involve co-investment funds, tax incentives, investment matching grant programs, investor training and readiness programs, and direct funding for incubators and other matchmaking services. While each of these require more study to determine their effectiveness, such diverse initiatives yield practical knowledge and insights relevant to our policymakers when they consider new rules to incentivize early-stage investments. This is one of the reasons why Maria Contreras-Sweet, the Administrator of the U.S. Small Business Administration, led a ministerial-level meeting during the GEC. As policymakers seek ways to reduce the obstacles that angel investors face, angels themselves can point them in the right direction.
One vital point to note is that public agencies clearly see angels and angel groups as critical sources of information for making informed decisions. Engaging with those who put their own money into new businesses, who have personal experience as an entrepreneur and an investor, and who know what policy reforms would make the most difference in boosting angel activity in their community, will ensure government resources are well allocated. The Global Business Angel Network (GBAN) led a GEC session following the Ministerial on how policymakers can more effectively increase the number of angel investors.
Angel Trend 6: In Comes the Crowd
Another new development that deserves attention by policymakers is the effect of new digital platforms, which are increasing access to traditional angel deals to the population at large. Recently, the SEC’s approved Title III of the 2012 Jumpstart Our Business Start-ups (JOBS) Act, which allows equity crowdfunding. This policy initiative could substantially affect angel investing. Before Title III approval, crowdfunding investors, who invest small amounts on an individual basis, were not eligible to receive an equity stake in the venture, so their motivation for backing a startup was for the chance to receive products, perks or rewards. The SEC’s approval changes this. It will change other things as well.
As I discussed in a previous post, the opportunity to receive an equity share will expand the pool of potential investors in startups, widening the geographic reach and the variety of investor backgrounds. According to the Kauffman Foundation’s State of the Field, the general solicitation of equity capital has the potential to create a pre-seed capital market, i.e. a market for even earlier stages of the product development than that of the current angel investments.
Angel Trend 7: Geographic Reach and a New Gravitational Equilibrium
The impact of the JOBS Act on angel investors, and the startup sector more broadly, could be profound. Technology has already expanded the geographic reach of angels and angel groups although the extent of the impact has been muted by the advantages of investing locally. The vast majority of angel investors continue to invest in local startups. The reason for this is due in large part to angels exposure to local entrepreneurs, and the ease of conducting due diligence on a local investment, which geographic proximity to the business makes this easier, as does quick access to local networks and familiarity with local markets. Moreover, experts tell us a great many angels are motivated by the desire to give back to their own community – and proximity aligns well with this, as it enables them to generate local value by leveraging local connections.
As angel investing adapts to change, locality is likely to be impacted. However, these changes are unlikely to overcome the strong gravitation pull of the local ecosystem. Despite access to deals outside of their local community, proximity will continue to play a significant structural role in angel investors’ decision making. How the SEC’s decision opening the way to a new class of early-stage investor will affect this remains to be seen. But, because angels have an outsized impact on their local community – as I described last week, because the startups they support are more likely to succeed, they result in job creation and economic growth – policymakers must keep a close eye on the impact crowdfunding is having on the startup sector.
Angel Trend 8: Skyrocketing Demand for Angels
As I mentioned above and last week, recent studies provide proof that angels increase the likelihood of startup success. As evident at the GEC, leading policymakers are reacting quickly by reducing the obstacles that angel investors face, and by planning new initiatives that aim to enlarge the pool of angel investors. More policymakers are learning how best to incentivize angel investments from those who know best: angels themselves. Next month sees the United State’s leading angel conference – the Angel Capital Association annual meeting – in Philadelphia, on May 9 to 11. If policymakers want to look at some fresh ideas for increasing access to early stage capital, I encourage them to join me there.
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