Blog post LinkedIn Kiki Tidwell
If angel groups are not using crowdfunding platforms to their advantage, they are going to miss the boat.
The topic I would like to put on the table front and center is that angel investing as we know it, is being disrupted right before our eyes by online platforms. If angel groups think that their model of sitting back and waiting for companies to come pitch to them, and then taking a month or so of due diligence to come up with at best 3-5 angels investing at $25,000 per angel, then think again. Entrepreneurs are raising money where the money is – from online platforms which provide a venue to raise significant amounts in short amounts of time.
The Massolution 2015 CF Report, estimated that $34.4 Billion was raised globally online in 2015 through all types crowdfunding sites, up from $880 million in 2010 (www.crowdsourcing.org). The Report’s authors predict that this exponential growth will continue. They count 375 crowdfunding platforms in North America across all segments – from real estate to donation to reward-based to lending to equity to royalties, 1250 worldwide. Specifically for North American equity raise platforms they estimate that $2.56 Billion was raised, with an average campaign size of $175,000. $160 million went into 441 seed stage companies on AngelList in 2015.
Institutional capital is starting to inject hundreds of millions of dollars on these platforms to invest in these online deals. Chinese-funded CSC Upshot Ventures has allocated $200 million to invest in AngelList companies in an index way. AngelList’s Maiden Lane Fund allows an investor the ability to invest $25,000 across a diversified large number of AngelList companies. Which has the better chance of success – $25,000 bet on one company (usual angel minimum) or 100 bets with the same $25,000?
Venture capital has been waking up to what has been happening. VCs are increasingly joining in crowdfunding sites to syndicate their deals. OurCrowd said in an Angel Capital Association webinar that 78% of their deals have a VC investor and that the majority of their companies are raising over $1 million per round, up to $15 million. Crowdfunder has a significant number of VC-led deals on its platform and has just announced a multi-million dollar index fund to allow an investor to invest in a pool of their vc-led deals.
Are angel groups going to become obsolete when returns are being made in index funds on crowdfunded platforms and not on individual company selection? Angel groups already working hard to attract new members. Investors invest where they believe they can make money. But increasingly, angel groups may not be getting a look at the best companies in deal flow. The entrepreneurs are going to the platforms for easier, faster money. AngelList only allows a maximum 30 day raise. Some syndicators on AngelList have 2500 backers to any deal the syndicator puts up, because these backers believe that a certain syndicator is getting them the best deal flow. Some syndicators like Gil Penchina are actually making backers compete to get into their best deal flow through accumulating points on executed tasks requested from the syndicator. The entrepreneur has the choice of traveling to and presenting in an angel pitch meeting to maybe 50 investors versus now having a lead angel direct 2500 backers to look at his/her company online. Are angel groups becoming the dumb money for second tier companies?
As a longtime angel investor, I absolutely agree with the research data (Angel Research Institute) that undertaking substantive due diligence on a company will increase my chances of successful investing. We also can add significant value to a company post investment by serving on boards, making connections for the entrepreneur, and sharing our experience and expertise. Some longtime angels bristle at the crowd of investors “throwing darts” online without much due diligence. But angels and angel groups can actually be a vital part of the online platform ecosystem– why not let the crowd of investors throwing darts follow our lead and invest in companies that we have done our due diligence on, are on the boards of, truly support? If a company can raise additional easy funds on a platform after or while we are investing, they get the best of both worlds. Our signal that we have done our due diligence and are investing helps a company with visibility on platforms, we get additional capital in a round to supplement our dollars, and we, as traditional experienced angels, actually help our companies progress to milestones.
Many angel groups struggle with geographic isolation in terms of membership recruitment, deal flow, and follow-on funding. Online platforms are now enabling us to jump over geographic boundaries and develop communities of investors across the country, or world. There are estimated to be 8 million accredited investors, 2900 family offices, 500,000 qualified purchasers in the U.S.. However, the clean tech investors in Boston are not very connected to our Element8 clean tech deals in Seattle. Now there are platforms which can enable us, deal by deal, to signal interest in a particular opportunity, indicate that we are undertaking due diligence on it, share due diligence tasks, soft circle investment interest, and alert other investors of an actual investment commitment. Not only will smaller or less active investors benefit from the work of more active investors, but there will be potentially more investment in great companies as previously ‘silo’ed’ investors can learn about deals that good investors are looking at– while the deal is open for investment. Let’s use this new disruptive medium to our advantage.