Last week, the SEC removed the 80 year-old ban on advertising for startups seeking equity funding.
For the past 80 years, angel investing in startups has been limited to a 19th century-sized circle of family, friends and acquaintances. As a result, matching angels to startups resembled a very small dance floor in a very small town. The world of startup fundraising was totally divorced from the 20th Century media onslaught of radio, TV, Internet, modern advertising – the whole digital revolution. Nearly an entire century of communication progress has bypassed the angel/startup investment space. With the SEC’s ruling, startup capital can finally join the flow of information and ideas and begin moving at digital speeds across the globe.
There are two key changes afoot with the ruling. First, startups can now reach angels beyond their local community. Second, the number of active angel investors will increase with better access and visibility into startup investment opportunities.
How many angels can dance on the head of this startup investment pin? This is no mere philosophical exercise – the answer to this question has significant economic consequence. There are currently about 225,000 angel investors who invest $20 billion annually in US startups. While that may seem like a lot, there are another 8 million accredited investor wallflowers just flitting around on the sidelines. Even a slight increase in the number of angels from 3% to 4% would add 80,000 new angels and increase the startup investment pool by 30% or $7 billion annually.
The removal of restrictions on advertising will allow startups to expand their reach from hyper-local to global overnight. For many communities outside New York and California the opportunity will be dramatic. For example, in the NE Ohio community there are about 200 angel investors. I am one. Local startups will soon enjoy at least a 1,000-fold increase in available angel investors.
The impact on potential angel investors will be equally dramatic. In the last 15 years I have only invested in half a dozen startups (not including the three I founded), despite both strong interest and willingness to do more. The free flow of information will allow local angels to become aware of distant opportunities and make informed investing decisions outside their local regions.
Additionally, there is strong financial incentive for the 8 million accredited investors to diversify their holdings with some high risk/return angel investments. With epic low interest rates and stock markets at all time highs, investors are searching for alternative investments. According to the Kaufman Foundation, angel investing delivers a stellar 27% IRR.
So how big will this get? Without going into the detail of our specific methodology, we project the new open market for angel investing will more than double to $45 billion by the end of 2017, in slightly more than four years. Angels and entrepreneurs should get ready to spin your partners – your dance card is about to fill up.
