Ever since I started in high tech in 1979, angel investment has been an amorphous, thoroughly disorganized, ad-hoc phenomenon that occurred somewhere between friends and family, on one end of a scale, and with venture capital, on the other. It was hard to find and hard to describe. People were selling lists of angel investors to entrepreneurs who were looking for investment.
I can’t say that the system worked; actually, I can’t even call it a system. Angel investment just happened. Securities law severely restricts the process of looking for investors, and, furthermore, also limits who is legally allowed to invest. An accredited investor has to meet minimum wealth requirements.
Last week I had a chance to talk at length with David Rose, founder of angelsoft.net. He guest posted on this blog last Spring. Meanwhile, I’m getting more involved in my local angel investor group (Willamette Angel Conference), and using angelsoft.net software more. And David told me he’s continuing to bring angel groups together, and organize. So I’m hopeful about that.
The long-term dream is a smoothly working market bringing startups together with investors who understand the risks, have money, and want to invest it.
There are at least these three problems to solve:
- Organizing the information into a market-like system. Angelsoft.net is making real progress. Startups get an orderly application process, angel investors and groups of investors get better deal flow, and there’s more information for both sides. Also thefunded.com continues to add to its database of founder reviews of investors. Not to mention how much more information about angel investors is now available easily through simple Web searchs.
- Legal restrictions. And here I’m not sure how long it will take, or even if a solution is necessarily a good thing. It’s not simple. Restrictions on soliciting investors and qualification hoops for investors were made law back during the Great Depression because people were getting swindled. The law regarding information is way behind technology. The assumption that wealth is equal to sophistication in startup investment is questionable.
- Processing investment opportunities. I’ve been meaning to post for three months now about Revolutionizing Angel Funding on The Emergent Fool. That post, by Kevin Dick, talks about setting up a system to process startup deals automatically, using an online screening process. I’ll be watching that one. I’m not convinced that the way angel investors process deals, one by one, case by case, is really a significant problem. But it’s an interesting idea.
Overall, I’m intrigued by how much organization has happened in the last year or two.
I do believe there’s an opportunity for healthy disruption in this marketplace. It may be something like what kiva.org is doing for microlending, or what prosper.com was doing for peer-to-peer lending before (gulp) it got a cease and desist order from the Securities and Exchange Commision (SEC). On one side, a lot of people who know what they’re doing would like to invest in some selected startups. On the other hand, a lot of startups would like to work with investors.
The toughest part of all this is securities law. A lot of what might really make a huge difference in organization of angel investment is on the brink of breaking laws governing fishing for investors. I’m waiting, cautiously optimistic, to see how this develops. And how long it takes.