Just the facts, ma’am
Angel investors play a vital role in funding the cost of scaling young companies. The overall amount angels invested in companies grew slightly – 2% – from $24.1 in 2014 to $24.6 in 2015, according to the Center for Venture Research. However, the number of male investors shrunk 3% from 234,000 in 2014 to 228,000 in 2015. The number of women angels shrunk even more – 7% – from 83,000 in 2014 to 77,000 in 2015. Women represented 25% of all investors in 2015 – about the same overall percentage of investors they represented last year.
Unlike investing in public companies, which involves only money, investing in private companies is active: In addition to money, accredited angels frequently provide their expertise and connections to accelerate an early-stage company’s growth. For women angels, it can also be a pathway to getting a seat on a corporate board. Accredited angel investors are people who are deemed wealthy enough to be able to afford to lose their investment.
In 2015, 29% of founders seeking funding were women and 24% of all angel backed companies were founded by women. Female founders pulled back from raising money while their male counterparts marched forward.
· The number of male founders who sought funding increased 14% while the number of female founders who sought funding decreased 16%.
· The number of male founders who sought and received funding increased 3% while the number of female founders decreased 20%.
I struggled to understand why the number of female angels and founders dipped when I’m seeing so much activity on both sides of the funding equation. Women may not be the canaries in the coal mine but, rather than perish at the hint of hazardous conditions, women are taking time to regroup.
The outsized valuations of companies like Uber and Airbnb are having a chilling effect on all private companies raising money. “What happens in one part of the market affects all parts of the market,” said Deborah Jackson, founder and CEO of Plum Alley, an investing platform that gets capital to the most promising women entrepreneurs. “You now have mutual funds chasing big returns in a few ‘unicorn’ companies and it’s driving up their value. Unicorns are private companies with valuations in excess of a billions dollars. It’s a reflection of supply and demand, not real company value.”
Most arrows point up
Angels, and more specifically women angels, will return. Women increasingly have the wherewithal to invest. Women currently control 51%, or $14 trillion, of personal wealth in the U.S. and are expected to control $22 trillion by 2020, according to Financial Concerns of Women, a report by BMO Wealth Institute.
There are 8.7 million people who are wealthy enough to be accredited angel investors, 11% have dabbled in angel investing and 3% are active on an annual basis, according to Spectrem, academic studies, 2013. With the increased volatility and mediocre returns of public companies, interest overall is deepening in investing in private companies with the potential of much greater returns, said Jackson. That upside comes with greater risk so investors need to evaluate whether they can handle the risk. If you are a potential angel, ask yourself nine questions before making your first investment.
Angel investing is an illiquid asset class. When you invest in private companies you buy and hold for a long time – 5 to 7 years or more, points out Jackson. For this reason, angel investing is well suited for 401Ks and IRAs, which are not needed until you retire.
In the meantime, what’s happening and will it get better?
Cultural norms still need to be overcome
Women have been brought up to think that they’re not good with numbers and money. The truth is, women have always controlled household spending and managed the family budget. They control the spending decisions on food, healthcare, vacations, home technology products, bank accounts, cars, housing … the list goes on and on. “Women have what takes to understand a balance sheet,” said Jackson.
Women’s interest is being aroused and satisfied in many ways
For the longest time, angel investing was a boys club that few people understood how to join. TV shows like ‘Shark Tank’ are familiarizing women with angel investing. Importantly, the growing number of angel groups are demystifying investing, educating and connecting angels to entrepreneurs, and sharing the due-diligence process. Books specifically encouraging women to become angel investors are also now available – Impact With Wings: Stories to Inspire and Mobilize Women Angel Investors and Entrepreneurs.
“There has been a greater effort on the part of angel groups to reach and engage women,” said Alicia Robb, CEO and Founder of Next Wave Ventures and a senior fellow at the Kauffman Foundation. Astia and Golden Seeds have been around for a while. They specifically connect investors to opportunities to invest in women-led companies. Over the past five years, they have been joined by organizations that also provide formal education programs, such as 37 Angels, Female Funders andPipeline Angels (expanding from 21 cities in 2015 to 33 in 2016).
Recent additions include Plum Alley and Rising Tide Fund. Plum Alley sources and vets the most promising women-led private investment opportunities to make it easier for accredited angel investors to invest. Investors can be involved in the process as much or as little as they like. The Rising Tide US Fund I is a joint venture between Next Wave Ventures and Portfolia, an equity crowdfunding platform that presents consumer product company investment opportunities to accredited investors. The Rising Tide fund sources and vets companies through an investment committee of fund members, which are all actively participating in several different angel groups across the country. Up to one hundred investors commit at least $10,000 each.
Research finds that women are more risk averse investors. “Allowing smaller investments in a diversified portfolio de-risks an investment,” said Robb. Women ‘learn-by-doing:’ Due diligence for Rising Tide Fund is led by the investment committee, but the other members may participate in the process as much or as little as they like.
By far the #1 reason for joining Rising Tide was networking with other women investors. Jackson specifically mentioned how much fun the women were having meeting each other and investing together.
Crowdfunding centralizes, streamlines, simplifies and shortens the process of raising money
Crowdfunding aimed at accredited investors (made possible by Title II of the JOBS Act) is in its infancy but is gaining traction. Only about $600 million was raised this way in 2015, according to Break New Ground: The Americas Alternative Finance Benchmark Report. Several reasons have contributed to equity crowdfunding’s slow start:
· It is sometimes confused with rewards-based crowdfunding, which is done on platforms such as Indiegogo and Kickstarter, and don’t require giving up a piece of your company. And, with the addition of Title III, Title IV and intrastate crowdfunding, it’s even more confusing.
· There is a steep learning curve.
· Misconceptions abound. Not just among entrepreneurs but lawyers and accountants who specialize in working with small business. I have addressed the most common misconceptions.
The objections to equity crowdfunding are fading because the advantages can move you past its disadvantages.
· Publicly raising capital widens the pool of potential investors from just people you know to any accredited investor.
· It shortens the length of time needed to raise money, and both centralizes and streamlines the fundraising process. Raising money offline can take seven to 12 months, sometimes even longer. On average, it takes four to six months on crowdfunding sites, according to Luan Cox of Crowdnetic.
Equity crowdfunding is proving its merits to:
· Venture capitalists. CSC Venture Capital has created a fund to invest via AngelList.
· Corporate venture capitalists. General Mills has created a fund to invest via CircleUp.
· Innovation centers in corporations, such as J&J and Merck, are providing scaling expertise to entrepreneurs raising money on CircleUp and Portfolia.
Data shows that women have the edge over men in rewards-based crowdfunding. Both rewards- and equity based crowdfunders rely on marketing to make funders aware of the opportunity. Research attributes the greater success of women at rewards campaigns to the support of their community — other women– and their marketing ability. Yet, women are less likely to seek funding online than offline — 18% versus 29%, according to Crowdnetic and the Center for Venture Research.
Angel investing isn’t just about making a return on investment or having a seat in the corporate board room. It’s also about ensuring that products and services being developed meet the needs of women, and about keeping the economy moving, with real products for real people, not unicorns.
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