H.R. 2930 appears to be just another US Congressional Bill winding its way through the system. Yet I can imagine most Professional Angel Investors recognize (or should) the bill and its potential impact on their livelihood. The House has already passed it with a 95% majority. It’s now on to the Senate and possibly the White House.
If the bill passes (watch the latest Congressional Bill Progress), you can say good bye to the Professional Angel Investment Community as we know it today.
H.R. 2930 or the “Entrepreneur Access to Capital Act,” would provide companies the ability to raise up to $1 million (US) to fund projects and companies. The bill will ease fund raising restrictions and regulations on both companies and investors. So if you are a start up in need of an early round of financing, you no longer need to ask friends and family, you can ask friend of friends or their extended network for seed capital.
And that’s where companies like Kickstarter will have an advantage over Angel Investors.
Let’s face it, the Professional Angel community is insular. They invest in each others deals, they invest in similar types of deals, and they invest in who they know. Why? Because it’s safe and they have a legitimate need to protect their client’s capital. But that has led to a lack of investment diversity and has created an investment “group think” that is limiting the potential of the community.
Conversely, sites like Kickstarter and IndieGoGo enable people with a diversity of knowledge, skills and experience to fund projects and receive rewards for helping entrepreneurs. It’s called crowdfunding and it allows almost anyone to give money to an entrepreneur to complete a project.
In some aspects it’s like American Idol. Because it enables anyone to vote (by making a prescribed monetary pledge) and become a fan of a project (by following it). At the end of 30 days if the pledges don’t meet the minimum requirement as set by the entrepreneur, then the money is refunded to the investors. If the project funding goals are met, then the project moves forward, but with an important added fan base.
Today on crowdsourcing sites, project funding ranges between $100 – $8000 and pledges a fraction of that amount. But if H.R. 2930 passes, you can bet crowdfunding sites like Kickstarter will quickly move into the business of helping entrepreneurs raise Angel levels of capital ($100,000 to $1 million) .
So why will the Professional Angel Investment community die? Because, if entrepreneurs are given a choice between raising funds through an opaque, arduous and slow Professional Angel route versus a much more efficient, diverse and knowledgeable path, the latter will win ever time.
To further emphasize the point, I’ve also prepared a summary table which differentiates the options:
|Traditional Angel Funding||CrowdFunding|
|Investors||Individual professional investor or a small team||Potentially hundreds of micro-investors|
|Business Network||Limited to Angel’s network||Extended to all of the investors network|
|Pre-Launch Buzz||Usually nothing||Tremendous buzz potential|
|Community||Relies on company to create one||Built in seed community from investors and followers|
|Strategic Coaching||Usually very good||Over time will improve, but nothing structured now|
|Process: Access to capital||Usually slow to very slow||extremely fast|
|Process: Transparency||Usually very opaque||Transparent to everyone involved.|
I understand the value, knowledge and relationships that most Professional Angel investors bring, but in the future, that value will be crowdsourced as well. More on this below.
Case Study: KickStarter
First, I know the founder of Eye Interactive and he sent me an invite email to participate. Second, I could tell that Eye Interactive’s new game was creating buzz from my personal network which provided me with social proof (due diligence). Third, his first game Zombi Samurai reached #3 on the charts making it one of the most successful games in the last few months.
I asked Jason Seldon, Eye Interactive’s founder why he decided to raise funds from Kickstarter versus taking a more traditional route through Angel’s or friends and family. Seldon responded, “I believe Kickstarter’s value goes way beyond their stated value proposition of being a new way to fund creative projects. In addition to helping individuals and small businesses fund these creative endeavors, I believe it is also a way to generate tremendous pre-release buzz for a new product and to build a fan base prior to launch.”
Seldon continues, “It gives early adopters a unique sense of ownership over a new product. In our case, project backers actually get their names in the game credits. So it really encourages a deep connection with consumers. In a sense, you are building a street team comprised of all of your project backers prior to product launch. These individuals can then serve as brand ambassadors to help make your newly launched product a success.”
What the Crowdfunding Critics Have to Say
If the bill passes, the first objection you’ll hear from critics in regards to crowdfunding sites is the opportunity for scam artists to commit fraud and place unsophisticated investors at risk of losing their capital.
My reply to objection # 1 is twofold. First as we’ve seen with Wall Street, even sophisticated systems that are heavily regulated are subject to fraud. In this case, several hundred billion. Second, because sites like Kickstarter do their own background checks, make the process transparent, and allow potential investors to see who has invested (social proof), the risk is mitigated by a number of check points. I’m not saying it’s fool-proof, in fact I am positive we’ll see fraud at some point, but the benefits of crowdfunding far outweigh the potential for fraud.
The second objection I hear is that new start-ups will lose the coaching and networking opportunities from a professional Angel investor. In the short run, I agree with this objection. But in the near future, crowdfunding sites will overtake those basic functions and eventually crowd source the networking, intelligence and strategy aspect the Angels provide today. More, crowdfunding sites like Kickstarter will enable virtual teams to sign on (think eLance meets Kickstarter) to help start-ups fill talent quality gaps.
Who else will H.R. 2930 benefit?
For example, if the Social Customer Relationship Management (SCRM) start-up Nimble wanted to quickly raise a round of capital, Angel’s List could convert Nimble’s followers to investors by offering them a chance to participate in their next round of funding. If the new bill passes, I suspect Angel List will provide a swipe your credit card platform to participate.
As a quick aside, I’d like to touch on is the rich analytics and statistical information these crowdfunding sites can potentially track. Imagine giving start-ups the ability to see how many page visits, clicks, and conversions they’ve had to their page. More, who is referring potential investors to the page? Which segments of social networks seem to be supporting the idea the most? What is the sentiment of start-ups product?
That information could be used for a variety of purposes from improving the business idea to increased transparency.
So let’s review…
- The Professional Angel community will quickly lose its wings if H.R. 2930 passes. You can bet on it.
- Sites, like Kickstarter, IndieGoGo, Angel List, and Bolstr will offer superior services through the crowd sourcing of funding, talent and the ability to organically build a fan base.
- These crowdfunding sites will eventually offer superior access to intelligence and strategy than professional Angels provide today.
- The crowdfunding process is much more transparent but potentially more dangerous than traditional Angel financing.
Ok, now tell me what you think…