But what about considering where crowdfunding and angel investing intersect? Can these two forms of startup fundraising co-exist peacefully or might crowdfunding pose a threat to angel investors?
In short, it’s too early to say, but angels shouldn’t be too quick to regard crowdfunding as entirely benign. It’s not hard to imagine crowdfunding increasing competition for good deals and reducing angel investors’ access to quality dealflow.
Crowdfunding has been enjoying its moment in the sun thanks to the recently passed federal JOBS Act, which, in part, opens up the market for crowdfunding and makes it more attractive to both entrepreneurs and investors.
Many specific details of the JOBS Act are still to be determined, and much of the legislation won’t take effect until next year. But we do know that the JOBS Act permits companies to raise up to $1 million through crowdfunding over a 12-month period in exchange for issuing equity or debt to investors.
There are plenty of other details to the law, including that companies must source crowdfunded investments through brokers or funding portals like Kickstarter, RocketHub or WeFunder. But for angel investors, the big question about crowdfunding revolves around whether it’ll essentially allow a select group of entrepreneurs to go directly to the public and bypass formal angel funds and networks.
Todd Federman, executive director with the North Coast Angel Fund in Cleveland, said that he views crowdfunding as a positive for angels in that it figures to increase the universe of startups that could represent investment targets for angels. (North Coast recently invested in SoMoLend, a debt-based crowdfunding platform.)
“I see crowdfunding as complementary to angel investing, with the caveat that I have no idea how this will play out,” Federman recently said at a panel discussion on crowdfunding.
Angel groups like Federman’s typically invest between $500,000 and a few million in companies, he said. And even though startups are permitted to raise up to $1 million through crowdfunding, it’s anyone’s guess how many companies will actually be able to max out their crowdfunding amounts.
So by that logic, angel investing and crowdfunding are, in fact, complementary: Angels will largely focus on companies that need more than about $500,000, while startups that require or are only able to obtain smaller amounts of cash will go the crowdfunding route.
But it may not be that simple, according to Sean Peppard, a business attorney with Ulmer & Berne in Cleveland. Peppard said he largely shares Federman’s view, but ran through a couple scenarios in which crowdfunding could represent a threat to angel investors.
“It depends on how robust the crowdfunding industry becomes,” Peppard said. “If mechanisms are developed to make it easy and workable, then potentially people wouldn’t turn to angels. They’d turn to crowdfunding sites instead.”
For one thing, crowdfunding holds the potential to be much quicker and easier (and also less painful) to startup entrepreneurs. When fundraising, entrepreneurs typically must do endless amounts of shaking hands, knocking on doors and presenting to investors. Certainly there’s a value to entrepreneurs in doing that to build up their networks, but what if they could simply post company information on a crowdfunding website and have investors come to them?
Then there’s the potential problem of “cherry-picking,” according to Peppard. Startups in particularly hot areas that capture the public’s imagination – think social networking – could have such an easier time raising cash through crowdfunding that they’d eschew angels altogether. In this scenario, angel investors would essentially be frozen out of potential dealflow in the hottest sectors.
Of course, how things play out in the real world is rarely neat and tidy, so while it’s easy to conjecture on crowdfunding, we’re still likely years away from knowing exactly how it’ll change the investment landscape.
But angels would be wise to at least view crowdfunding with a critical eye before embracing it wholeheartedly.
“The risk to the angel business model is that the way they traditionally find companies will go away because crowdfunding will replace it,” Peppard said. “But if crowdfunding is more limited, it won’t pose a real risk to angels.”