As company start-up costs plummet because of cheaper, more powerful technology, RIAs and their mass-affluent clients have joined ultra-wealthy investors in participating in a wave of new early-stage, angel investment opportunities, industry observers say.
“The beauty of the times now is that anybody can invest,” says David S. Rose, a longtime angel investor and entrepreneur. “The typical amount put in a company by an angel investor these days is about $25,000.”
Indeed, registered investment advisors represent a new wave of customers for angel investment opportunities, according to experts speaking at the recent Venture Forward Conference in New York. These new players, representing clients with typically $100 million to $5 billion under management, are seeking well-managed alternative investment products in the early-stage market.
A well-managed angel portfolio can generate a 25 percent to 30 percent IRR, compared with 4 percent to 5 percent in the public markets, Rose says. Today, he says, many more investors have “the ability literally to fund the future and get the kinds of returns that were historically reserved only for a few.”
In 2012, some 67,000 entrepreneurial ventures received angel funding from more than 268,000 individual investors, according to the Center for Venture Research at the University of New Hampshire, which has been conducting research on the angel market since 1980. Total investments in 2012 amounted to $23 billion.
Some individual investors have the expertise and wherewithal to invest directly in startups, but many more join one of the hundreds of angel groups around the country. “The explosion of angel groups is where the action is,” Allan May, managing director of Emergent Medical Partners, told the conference. New investors in these groups learn from their seasoned colleagues. Members approach deals collectively, pooling their expertise for doing due diligence and diffusing the risk.
The challenge for angel investors is to identify the most attractive new companies. Conference speakers grappled with the question of what mechanism can best sort through the teeming masses of new companies. Platforms are one way. Gust, an investor relations platform of which Rose is chief executive, caters to more than 1,100 angel groups that can interact with 200,000 startups that display their business and financial information.
Another is “accelerators,” which screen new companies, then whip a select few into shape to present to potential investors. Some panelists spoke of “sherpas” who might serve as guides to high-quality companies, but left unsettled how they would be compensated.