Every Time a Bell Rings…

Today’s angel investors fill a critical role for innovative, emerging companies.  However, new angels are challenged by a lack of access to systematic and proven criteria for selecting winners.  Combine this with the need to assemble a portfolio of investments and new angels often have poor results with early investments and some never return.  Today’s investing environment combined with new approaches and structures offer new angels a great way to get in (or back into) the game.

The dramatic shift in start-up economics and the massive economic downturn as made the cost of entrepreneurship much lower than previously seen.  With new technologies emerging everyday the ability of anyone to with a good idea to create a brand, product and company is multiplied.  Cloud computing and open sourced software code make the costs of developers and infrastructure a fraction of what they once were.  Social platforms and new communication channels make the cost of marketing and advertising tiny compared to the Super Bowl ads of the internet bubble days.  And with jobs disappearing, more and more weekend entrepreneurs are making the leap to full-time business builders.

These new start-ups have a new mantra too.  The lean start-up approach preaches capital efficiency, rapid iterations and speed to proof of concept.  This approach while not right for every start-up should give all potential angels comfort.  No more 6-month build outs and no more “trust me”.  Milestones and rapid moves to monetize make progress visible and achievement measurable.  Combined with the new economics these seed stage companies are requiring small amounts of capital and building big value (or failing fast but that’s another post).

Finally, the new breed of incubator/accelerator has created “batch” investing.  By selecting and funding a number of start-ups at once these seed-stage greenhouses are creating an instant portfolio. Investors can now get instant diversification and at a lower price point than a typical single investment only a few years ago.

Small companies build economic value in multiple ways and not just for investors Now is the time for former angels to re-think how they are making their investments and for new angels to step up to the plate.

What About the Beverly Hillbillies?

Senator Dodd’s Restoring American Financial Stability Act of 2010 has brought to the surface one of my favorite discussion “grenades”. Grenades are discussion topics that I like to use when bored with the current conversation because they tend to bring out very strong (and often uninformed opinions). I think this sort of spirited debate (I take whatever side opposes my drinking partner) is fun, most of my friends think I am an terrible instigator. While I stay clear of the “nuclear grenades” of religion, abortion, and Rush Limbaugh, I do like a few economic and finance topics. One of my favorites is the definition of accredited investors. I like this because the discussion forces us to take a look at an uncomfortable assumption. In the case of accredited investors that assumption is, “if you are rich, then you are smart.” Full stop.

Clipping Wings
Dodd’s enormous bill, making him the talk of the Senate locker room, contains two small sections that have raised the eyebrows of many in the business of starting and financing companies. The first messes with Regulation D and would create a complicated mess of state-by-state rules and regulations that would limit the ease and ability of doing any angel funding across state lines. The second, aimed to adjust the standards by which accredited investors are defined. The adjustments were to inflation adjust the $200K income standard and to raise the net worth bar and exclude the value of one’s primary residence. While the income adjustment has been modified by amendment (passed just last night) the exclusion of the primary residence in the net worth calculation remains. While this will certainly have some impact on the available angels it will certainly be less than the 75% reduction in accredited investors projected by the Kaufmann Group based on the original bill.

I have held both the NASD Series 7 and 24 licenses as well as the required state licenses. I have watched “Boiler Room” many times. I know that “Blue horseshoe loves Endicott Steel”. I get the need for oversight. However, I find it hard to feel comfortable saying that if you are rich, then you are smart and can therefore take part in a sector of investments that has created jobs and financial return. If you are not rich, then pick the funds for your 401K and let a smart manager take care of it. How has that worked out for you?

Send Me an Angel
In a time when we need more, not less, investment in innovation we must have this uncomfortable discussion. Wealth is not the right proxy for accreditation any more than being able to get a mortgage is a gauge of whether or not you should buy that house. While I am not a libertarian, I hate reinventing the wheel and the best thing I have seen written on this discussion is from Jeff Joseph, angel investor, venture catalyst, financier and libertarian-leaning CEO of Prescient Advisors and Managing Partner of Prescient Capital Partners and author of the VenturePopulist blog. Can’t wait to use Jeff’s lottery example next time I throw this grenade.

Additional info on the bill and potential impact can be found on the Angel Capital Association website and a nice piece in BusinessWeek by Scott Shane.