Traditionally, the angel investor community has been comprised of a small set of well-connected individuals located in a few hub cities across the country. With the advent of online equity crowdfunding, this limited group is expanding and a new type of angel is emerging. Below are 5 ways that equity crowdfunding has changed angel investing.
Angel Investing – The Evolution:
1. Increased Access to Deal Flow
Prior to the rise of online funding portals, there were several hurdles limiting an investor’s deal flow. For one, an investor needed to be close to one of the country’s few innovation hubs (e.g. San Francisco, New York City, Boston, etc.) to reach entrepreneurs coming out of those regions. Unless they had strong personal or professional ties to established startup communities, investors outside these regions lacked direction when looking for startup investment opportunities. In addition, under the old rules of private placements (Rule 506(b) of Regulation D), companies were prohibited from advertising their raise, requiring that they rely on their existing networks and warm introductions, further containing investment opportunities within the existing startup community. Under Title II of the JOBS Act (Rule 506(c) of Regulation D), companies can now engage in “general solicitation” allowing them to advertise their raise and theoretically reach any accredited investor, regardless of location. This change in policy has allowed equity crowdfunding platforms to consolidate deal flow from around the country onto an easily accessible online platform, democratizing access across geographic and social lines.
2. Fresh Perspectives
Historically, investors have only diversified within the traditional asset classes (stocks, bonds, commodities, and currencies). Those who invested in private deals typically restricted investments to local real estate and small businesses. Startup investing was limited to investors with a pre-existing network and a history of activity in the startup space, often as both an entrepreneur and an angel investor. Equity crowdfunding is opening early-stage investing to individuals who haven’t spent as much time in the tech ecosystem. These angels can provide entrepreneurs with fresh eyes to judge their efforts and give feedback entrepreneurs may not have received from the traditional startup community. Furthermore, many of these new angel are successful professionals from various backgrounds who are able to use their career experiences to be true value-add investors, providing insightful advice, making strategic introductions, and leveraging their networks for the startups in which they invest.
3. Easier Evaluation
Even if investors had a strong network and access to entrepreneurs, they had to evaluate deals through the time-consuming process of meeting individual companies one-on-one. In addition, there has been no easy way to access the key documents and financials of a potential investment. Online equity crowdfunding platforms have streamlined this laborious process, allowing angels to engage with entrepreneurs online and consolidating a company’s business plan, legal documents, and financial information in one place. As a result, angels can now quickly conduct due diligence on multiple investment opportunities. Because angel investors review multiple startups across a variety of sectors, a new investor can now quickly gain an understanding of the startup investment landscape and feel more confident in evaluating potential investments.
4. Easier Diversification
Traditionally, angel investors placed relatively large bets on a small group of startups. This trend was driven by inadequate access to startups across verticals, limited exposure to high-quality deal flow, and the need for startups to achieve their fundraising goals from the small number of active angels in their community. Today, via equity crowdfunding platforms, angel investors can access multiple startup investment opportunities in a variety of industries. Also, because entrepreneurs fundraising through equity crowdfunding platforms have access to a larger group of potential investors, they can potentially achieve their fundraising goals with lower investment minimums and a larger number of investors. Angel investors can therefore diversify their startup investment portfolio by making smaller investments in a larger number of companies in various industries.
5. More Transparency
Dialogue between angel investors was historically limited. Geographic barriers and insular communities prevented communication between different angel groups. As a result, angel investors were limited to the viewpoints present in their immediate networks and were seldom exposed to outside ideas. Equity crowdfunding platforms break down these communication barriers and create online communities of investors. These serve as forums for investors from different backgrounds to discuss potential investments. Investors can share investment insights and learn from each other’s varied perspectives and experiences.
As newcomers to the field, today’s angels are bringing fresh perspectives to startup investing and contributing valuable knowledge, networks and capital to entrepreneurs. As their sophistication and experience grows, startup companies only stand to benefit from this new face of angel investing.
This post was written by James Han on September 15, 2016
Angel Investing – The Equity Crowdfunding Era