Crowdfunding vs Angels – Circle the wagons!

Editorial by Nicole Gravagna, Director of Operations for the Rockies Venture Club

Maybe it’s the landscape here in Denver. The gorgeous sunsets these last few days have been just the kind if backdrop that the protagonist should ride away into at the end of the day. And until today, I thought all was settled in the land of investors. Then an article like this guestpost on Venture Beat comes across my desk. Is this a new take on the old Cowboys vs Indians?  Crowdfunding vs Angels? Is Ryan Caldbeck (CEO of CircleUp) suggesting that we circle the wagons?

Caldbeck writes that with the new JOBS Act and crowdfunding rules, heads of angel groups will have to make adjustments to stay competitive. His argument seems to lie in the premise that online crowdfunding platforms like his will have such great dealflow that our angels will stop coming to investor meetings, instead choosing to do all their investing online. As one of these “heads of angel groups” I’ll have to beg your pardon.

Angel investing is notoriously inefficient. This part, Caldbeck has correct. Angels are simply high-wealth individuals who want to get involved with startups for a variety of reasons; for the most part, they are not trained investors. The individual nature of angel investing cannot be expressed enough. Sometimes multiple angels pool capital into LLCs to create a little fund for each investment, but generally, angels tend to make decisions to invest on their own accord. Crowdfunding will be no different. Investors will still make their own decisions to fund a company or walk away. No one is going to request a conference call with 99 other potential backers around the world to decide whether they will invest. Similarly, due diligence efforts can only be shared so much before you begin to wonder if you trust your money to someone else’s ability to dig up dirt on a would-be investment. I’ll make the argument that crowdfunding is just as individualized and inefficient as angel investing. Both crowdfunders and angels do their own due diligence and make their own decisions.

Caldbeck’s point that, for angels, getting strong dealflow can be a time consuming nightmare is also well taken. I am personally responsible for creating the eddies of dealflow for the Rockies Venture Club and I’m totally thankful that I have 27 years of local name recognition for my organization to fall back on. If I were to walk into a BDNT meeting, grab the microphone and boast to entrepreneurs that I am now accepting applications for companies to pitch to Nicole (vs pitch to the Rockies Venture Club), it wouldn’t go over so well. Few individuals have the quality dealflow that established angel groups can claim. For angels in towns lacking an angel group, I can see how crowdfunding sites will drastically improve the number of quality investment opportunities. However, in places like New York, Denver, Pasadena, Nashville, Philadelphia, Buffalo, Puget Sound, St. Louis, Las Vegas — I digress.

Is the promise of dealflow really the reason that angels come to angel group meetings? If so, then crowfunding sites may have the silver bullet and nationwide angel groups will soon be landing in the dust like the cowboy with a slow draw. Now, I’ve spent the last year facilitating two meetings per month of the RVC Investor Forum, and I have the sneaking suspicion that dealflow is not the only reason that we find ourselves around the boardroom table.

Why are we really there? Let’s go back to the part about how angels are high-wealth individuals who want to get involved in startups for a variety of reasons. Many of our angels are entrepreneurs who “made it”. Their last company had a great exit and now they want to invest in other startups. These folks are often young (sub retirement age), still starting companies of their own, and want to see what the other side of the negotiation looks like. They are not trained investors.

How does one learn angel investing, anyway? Angels learn to invest through formal or informal mentorship by other angels.

Where does an angel meet other angels? At angel group meetings.

At Rockies Venture Club, we quickly noticed that angels need to meet face to face with other angels so that they can learn what works, what doesn’t work, and how to get through the difficult and awkward parts of being an angel investor with dignity intact. We’ve taken this a step farther and have been creating courses for angels to learn the tricks of this wild avocation. (The next angel course will be Jan 22: Identifying and Designing a Good Deal)

I’ll relate a story to illustrate how an educated angel is invaluable. Recently a company came through our program and when it was time to negotiate terms, we quickly determined that prior funding terms made this deal very unattractive. If we had only neophyte angels in the group, the deal would have languished on our “watch” list until the founders decided to go get big corporate jobs. Fortunately, we had a highly experienced angel who took the deal by the reigns and re-negotiated old terms with the stakeholders. A big percent of zero is a lot less attractive than a smaller percent of a great exit and, after a few months, I’m happy to say that the deal is closed. Our less experienced angels have been learning from our highly experienced angels. The result is that our companies close deals at a rate of 22%. Are crowdfunding sites going to bring backers together to learn from one another as trusted friends and colleagues?

Frankly, Ryan Caldbeck, I don’t hear the cowboy showdown music starting after all. When the JOBS Act dust settles and crowdfunding is no longer a media buzzword, angel groups and crowdfunding sites will find there is little competition between them. Crowdfunding sites will have their place in cyberspace and angel groups will still have face to face meetings for those of us who actually like to shake hands.

 

2 replies
  1. James Lester
    James Lester says:

    Very interesting article. I am very interested in the potential conflicts that may arise when a start-up gets crowdfunded on an equity or debt based and then seeks additional rounds from Angels or VCs. Depending on how the equity is structured I think angels may be discouraged from investing in a potential company that already has a few hundred ‘shareholders’. Do you or any other angel investors have thoughts on this area?

    Reply
    • Nicole
      Nicole says:

      We are very concerned about the high likelihood that companies are going to raise crowd capital just to ruin their cap tables for future angel and VC rounds. I can guarantee that angels are less attracted to companies who have a few hundred shareholders. That said, a well-structured crowdfunding raise could lump all of those early shareholders into an single shareholder package with a single representative and have a much cleaner looking deal. Entrepreneurs will have to be savvy.

      Reply

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