By: Todd Saxton, associate professor of strategy and entrepreneurship
In April, I attended the 10th annual Angel Capital Association meetings in San Diego. The conference draws mostly angel and early-stage investors, along with entrepreneurs, economic developers, professional service providers, consultants and even a few academics. Its growing attendance mirrors the growing importance of angel investing to nurturing innovation.
Angels account for nearly 90 percent of all seed and early-stage equity funding.
The event’s crowd has swelled to more than 600 over the past decade.
A brief definition — ‘angels’ are individual investors in privately-held start-ups. They’re often entrepreneurs themselves, sometimes providing mentoring or even managerial expertise along with their investments, and must meet personal wealth standards ($1 million in net worth or $200,000 in annual income) to be accredited by the SEC.
The entrepreneurial market is always dynamic, so it’s appropriate that even these rules are in flux. Some of the meeting’s most lively discussions involved regulatory trends towards crowdfunding of start-ups, tapping into the collective power of more modest investors.
To its most optimistic advocates, crowdfunding will replace or dwarf traditional angel investing and venture capital, deploying billions and billions (nod to Carl Sagan) of new dollars to promising ideas. To the pessimists, it’s a recipe for disaster, setting a generation of entrepreneurs up for a bust.
Over the past few years, two major pieces of legislation — the Dodd-Frank Act and the ‘Jumpstarting Our Startups’ (JOBS) Act — have imposed new rules on the traditional capital markets while opening the door to crowdfunding on a state-by-state basis. Technological platforms that can help organize and inform smaller investors have helped move crowdfunding from possible to practical for a growing number of entrepreneurs.
There are several categories of “crowdfunding.” Sites like Kiva allow individuals to donate or loan money to social ventures and not-for-profits to support a good cause. Platforms like Kickstarter and Indiegogo enable ventures to “pre-sell” products or use other rewards to attract the needed dollars for launch. Crowd investing, the smallest category, is a vehicle for accredited and, in some states, non-accredited investors to invest for equity. Indiana has been progressive, allowing individuals to invest up to $5,000 in a venture for a small ownership position.
Because of mixed state-level adoption, uncertainty about returns and regulatory direction, and the potential for fraud, perspectives differ widely on the future of crowd investing. I believe that democratization of the investment process has great potential, with informed investors making educated decisions. This means that intermediary organizations such as the Venture Club of Indiana or VisionTech, and companies like Indy-based Localstake, will play a critical role in realizing the potential for boom and boon to entrepreneurs and investors.
A related development is the revised RegA standard, dubbed ‘RegA+, was signed in late March. Unlike its predecessor, A+ will not require state-by-state approval. It will allow ventures to raise up to $50 million in funds from both accredited and non-accredited investors in public markets — a class of filing often referred to as a mini-IPO (Initial Public Offering).
This would allow ventures to secure much-needed growth capital, replacing or supplementing the “B round” that many venture capital firms are now moving away from. Locally, successful high potential ventures like FAST Biomedical and Diagnotes, among others, could benefit from such a development — but the details of who the “market-makers” will be are just starting to evolve.
Another positive note is stalled momentum at the Federal level for further restricting the income criteria of an “accredited investor.” This could have decimated the ranks of angel investors by 60 percent to 70 percent, making equity investing truly a pastime for the ‘one percent.’ Fortunately, this does not look like it will come to pass. New regulations may move towards some kind of competency criteria, but the ranks of angels are unlikely to have their wings clipped.
These issues are among a broad array of trends that are reshaping the entrepreneurial sector — and change is needed. While venture and angel investment is on the rise, the Kauffman Foundation notes that start-up rates have been steadily falling. Venture capitalists have grown increasingly cautious, and many companies face a financial chasm between initial angel funding and traditional VC deals.
New opportunities like crowdfunding and RegA+ financing can help address these challenges, and mobilize more local resources for Indy’s own growing entrepreneurial ecosystem. It’s an exciting time to be involved in launching and supporting homegrown enterprises — join the Venture Club of Indiana on June 18 for a night of networking and live music, and be part of the boom, baby!
Learn more at www.ventureclub.org.