Entrepreneurs who require funding for their startup have long counted on self-accredited high net worth individuals (“angels”) to fill their needs, after friends and family, and before they qualify for institutional investments (“VCs”). New crowd funding platforms on the Internet, like Kickstarter and IndieGoGo, as well as the Jobs Act of 2012, are expected by many to ramp up regular people’s ability to fund new opportunities and kill the need for angel groups.
I just don’t see it happening any time soon. I just finished a new book, Angel Investing, by a friend and one of the most active angel investors in New York, David S. Rose. David is also the CEO of Gust, which is an online platform for startup financing used by over 50,000 accredited angel investors, 1000 angel groups and venture capital funds, and 250,000 entrepreneurs.
According to Wikipedia, angel investors contribute over $20 billion annually to entrepreneurs in the US, while the latest figures on crowd funding show about $1.6 billion collected in 2012. Of course, both are significant, but according to Rose, angel investing is as poised as crowd funding to take off due to the same online technology, and there is plenty of opportunity for both.
He does caution both entrepreneurs and investors to skip the hype and recognize the fundamental truths of the startup industry, before joining the crowd, or joining angels:
Most startups fail. Small business statistics have long shown that the failure rate for startups within the first five years is higher than 50%. Running out of money, or not getting funded is often given as the cause, but it’s often more an excuse than a reason. Thus investing in startups should always be approached as a low odds game.
No one know which startups are not going to fail. Even David Rose, who has invested in over 90 startups, and proclaims real success, reminds everyone that there are too many exogenous factors affecting business outcomes for anyone to be able to pick only winners. Professional venture capitalists will tell you the same thing.
Investing in startups is a numbers game. Most startup investors today will tell you to put the same amount of money consistently in at least 20 to 25 companies, if you hope to approach…