Angel Investors and Equity Crowdfunding

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It’s often been said that when equity crowdfunding became available to the general public, the big losers in the investment world would be the angel investors. It’s even been suggested by more than a few that crowdfunding would completely the need for angel investors at all. Just like 2012 Mayan calendar crisis and the Y2K craziness, what has happened so far hasn’t come close to what was predicted.

That’s the good news. Here’s the bad news. There are still concerns that angel investors need to take seriously to make sure crowdfunding doesn’t one day take over for good.

$25 Billion vs. $300 Million – You Decide

In 2014, angel investors provided about $25 billion in equity investments. In comparison, crowdfunding brought in about $300 million, or just over 1% of total equity dollars. The impact here is minimal. Maybe it’s because equity fundraising is still in its infancy, so let’s take a look at the total crowdfunding figure: $7.5 billion.

That’s right. From debt to rewards to equity, the total amount of crowdfunding money contributed by the general public and accredited investors in 2014 was still less than 33% of what angel investors provided just in equity.

The problem here is that 2014 figures don’t account for the general public. Private companies only just recently received the rules needed to open up equity crowdfunding to the general public. Falling into two tiers, up to $50 million can be raised from investors that are non-accredited and have income caps on the amount that can be invested: 10% of their net worth or current income.

With 300 million people in the US and growing, all it would take is for every person to donate $0.50 to a new startup for a company to raise more than $150 million. That’s some serious potential that may indeed cause a dent in the possibilities of the average angel investor.

Here’s Why Angel Investors Are Still Safe

Despite all of the dire warnings, angel investors are going to be safe from equity crowdfunding because of the actual value of the returns crowdfunding can provide. Let’s say that a 20% return comes in on an investment. The angel investor exits from a $1 million investment with an extra $200k. Not too bad. For the non-accredited crowdfunding investor making $45k and carrying student loan debt, their max investment on a single Tier 2 would be $4,500. Upon their exit, we’re talking $900.

The reality is this: equity crowdfunding benefits the business because they don’t have to sacrifice lots of equity in return for cash. There is almost a 20 percentage point difference between crowdfunding equity and angle investor equity.

Investors are going to find out what they’ve found out numerous times before. When an acquisition is made or there’s a solid return to cash out, the limitations of the non-accredited investors make it difficult for them to bring in a return. Now those caps are going for Tier 1 equity crowdfunding, but those campaigns are generally local in nature and the returns smaller anyway.

Crowdfunding Is Just a Bunch of Hype and Nothing More

To the angel investors, crowdfunding is a nice idea. It lets people get some skin in the game for the first time. Maybe some are worried about mid-level non-accredited investors who could pump in six figure investments here and there, but those folks will be few and far between. The only real benefit that crowdfunding provides is a limit on the amount of risk that is being assumed. It’s not as risky to invest $4,500 as it is to invest $1 million.

It might feel just as risky to the non-accredited investor, however, and that may serve to further limit what they get out of returns.

We’ve already seen the dissatisfaction of crowdfunding backers on the sale of Oculus. That dissatisfaction will only continue to grow as more investors realize in hard money how much their return happens to be. Once the novelty wears off, there’s a good chance that the angel investors are going to be unaffected by crowdfunding.

The hype about investing is nice to see, but in the end, hype goes away. Angel investors, on the other hand, are here to stay.