The word being bandied around these days is crowd funding platforms (Kickstarter & IndieGogo) and is expected to ramp up the usual entrepreneur’s ability to get funding through this new opportunity. Whilst this avenue seems to be a good alternative to angel investing, it is doubtful that it will kill the need for angel groups.
Traditionally entrepreneurs who require funding tap family, friends, high net worth individuals to fulfil their needs before they go on to bigger sources of funding. According to Wikipedia, angel investors contribute over $20 billion annually to entrepreneurs in the U.S., while the latest figures on crowd funding show about $9.5 billion collected in 2014. Both figures are impressive. But to think that crowd funding will take the place of angel funding is something that David S Rose, one of the most active investors in New York thinks unlikely.
His advice to entrepreneurs and investors is sound and he says and I quote ‘skip the hype and recognize the fundamental truths of the startup industry, before joining the crowd, or joining angels’.
It is a fact that most startups fail. Statistics say that this failure rate is higher than 50%. To start with crossing the ‘valley of death’, the time when a startup is being funded usually by friends and family is a path strewn with the skeletons of ‘has-been’ startups. The reason is usually running out of money or not getting funded. Investing in startups has to be looked at like any other investment, approach with care, do your research and know that it is a low odds game.
There is no angel investor or professional venture capitalists who can be sure that a startup is going to be a success. Investing in startups is a numbers game. The ‘portfolio approach’ which counts on hitting on a couple of big winners, while the others return very little is how angel investing and venture capitalists look at this sector. Unsuccessful startups tend to fail early and big successful exits tend to take a long time to develop. This means investors need to spread their investments across a long period of time and across a large number.
Thus every serious investor reserves a certain amount of his investment capital for subsequent rounds of funding, which allows them to stay the course to success, even with dilution. Investing can be satisfying, if not always lucrative. For the rest of us, it is keeping up with technology, a give-back to entrepreneurs, and building a legacy.
As our government looks to new way to raise taxes and the compliance issues with crowdfunding in our country much in a ‘gray’ area it will be a long time before crowdfunding can be a serious alternative to angel investing.
Investors of all types who fund entrepreneurs, starting with friends and family, have always been all about creating win-win situations. The investor wins only when the startup wins, and today's angels can only cover a small percent of funding requests. We have a long way to go, in this new era of the entrepreneur, before angel investors aren't needed.
Reference: Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups