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Think Angel Investing = Seed Investing? You're Missing Out.

Angel InvestorSecondary MarketVenture CapitalInvestor

Atish Davda   December 18, 2014

Imagine you are a public market investor. Your entire portfolio holds only penny stocks. You’re hoping for one of those investments to break through and return several times the investment, to make up for all the other losses. By the way, if you do pick winners, you won’t be able to touch your money for nearly a decade.

This strategy works if it’s a small part of your larger portfolio, but for most new venture – nearly all crowdfunding – investors, it comprises the entirety of their venture investments (successful seed stage companies take nearly a decade to see exit).

Now, imagine paying someone a finders’ fee and carried interest for putting together that portfolio of penny stocks. That’s the equivalent of “funds” and “syndicates” products available on crowdfunding websites that focus exclusively on early stage investments. Such asset class concentration (and fee structure) is rarely seen in the public market, but is all too common in the private, venture market.

Angel Investing (Online)
As equity crowdfunding grows, mindshare (and portfolio-share) taken up by angel investing has never been larger. According to Forbes, in 2013 the world saw over $5.1B of capital deployed via crowdfunded platforms – that is 89% higher compared to that in 2012.

While impressive at a high level, even a cursory investigation into this figure reveals a terrifying trend. Investors using these crowdfunding platforms are creating heavily concentrated portfolios, putting all their eggs in one basket. The basket is the asset class of early-stage (pre-Series B) venture backed technology companies.

So, if you are one of the investors who believe that angel investing equals seed investing, you’re missing out.

The Case for Diversification
As Wall Street Journal reports, 95% of new businesses fail to meet their projected return on investment, and it is widely accepted that nearly 80% fail to return much altogether. By comparison, Crunchbase’s data suggests only 3% of companies that have raised $90M+ fail, and over 80% are still operating including in public markets.

With such a stunning difference in success rates, it is clear late-stage VC backed companies have different risk profiles than do early-stage ones. Investors should be aware of diversification avenues available to them: later stage venture backed investments.

“But, I don’t have millions to invest. Can I still invest in later stage venture backed companies?”

Yes! Platforms, like EquityZen (disclaimer: I’m affiliated), that allow you to invest in secondary offerings in companies past their Series B financing offer a valuable means of diversifying your venture portfolio. In the public market analogy, it is like adding some blue chip, growth, and value names to your portfolio of penny stocks.

Please read the remainder of this piece on Inc.com...  

Will Angels Lose Their Wings?

Angel InvestorVenture CapitalSECRegulationAccredited Investor

Shriram Bhashyam   July 02, 2014

The SEC is due to review the definition of accredited investor ("AI") this summer. The results of that review could lead to big changes, including raising the bar for qualifying as an accredited investor, which would disqualify many current angel investors from investing in startups. In this post we anticipate what the SEC will be looking at when it revisits the accredited investor criteria. Note: this post is based on a our recent white paper (available below) that goes into greater detail on this topic.

Most startups raise capital through private placement transactions pursuant to the SEC's Regulation D ("Reg. D"), and in practice, investor participation is limited to those who qualify as an AI.  So, angel investors must generally qualify as AIs. The Dodd-Frank Act requires the SEC to review the AI standard this summer and every four years thereafter.

In our latest white paper, we anticipate what the SEC will consider in its pending review, which will be a strong indicator of changes to come for the AI standard.  Currently, for an individual investor to qualify as an AI, she must either have $200K in income each of the last two years (or $300K with her spouse), or have a net worth (excluding the value of her primary residence) in excess of $1 million. These thresholds were established in 1982 and have remained largely unchanged since then. What might the SEC look at?
  • Whether the income and net worth thresholds should be adjusted, for example by indexing for inflation. By some measures this would decrease the number of qualifying investors from the current 8.5 million to 3.7 million, dramatically limiting the pool of investors available for startups to raise capital from.
  • The SEC ought to also consider other proxies for investor sophistication. Income and net worth are rather blunt instruments for determining investor sophistication. For example, why not allow relevant certified professionals, such as CPAs and CFAs, to automatically qualify as AIs?
Here are a few more interesting data points from our white paper:
  • Most private placements are conducted pursuant to Rule 506 of Reg. D. An SEC study based on Form D filings made in 2009 and 2010 reveals that of issuers claiming a Reg. D exemption, 55.4% issued securities under Rule 506, 21.1% issued securities under Rule 504, and 19.4% issued securities under Rule 505.
  • The accredited investor standard has been relatively untouched since its adoption in 1982 as part of Reg. D. Since its adoption in 1982, the accredited investor standard has been twice amended. In 1988, the joint income threshold of $300,000 was introduced. The standard was last amended in 2011 (taking effect in 2012) pursuant to Dodd-Frank Act, which required that the value of one's primary residence be excluded from the calculation of net worth.
Check out (and download) our full white paper here.

We'll be closely watching progress on this review and the subsequent report to Congress, as it can have vast ramifications for the startup and VC ecosystem. Stay tuned.