Number of the Day – $2.3 Million – Angel Funding

June 16th, 2010 · No Comments

$2.3 Million. As in the amount of money that would have been required of angel investors to be classified as “accredited” had the Senate not passed an amendment on May 17 to the Financial Regulation Bill, which is still being reconciled. That would have represented a sharp 130% increase over the current level of a cool 1 million bucks.

OK. But what would that have meant in real terms?

First, have a look at estimated angel investments in NC from 2003-2009:

According to figures from the excellent Center for Venture Research at UNH a total of 57,225 start-ups received Angel funding in 2009 (CVR Anaylsis Reports). Related metrics include:

A total of 259,480 individual investors participated
At a rate of $67,828 per angel.
An average of 4.5 angels per funded company.
An average of $307,558 per funded company.

While those figures don’t tell us many specifics about the actual investors and their net worth we can still make some assumptions and think through a few plausible scenarios. I’ve put together a Google spreadsheet with some hard data on recent angel and venture capital funding in North Carolina and the rest of the US.

The spreadsheet also includes some (potentially) educated assumptions baked into those numbers. Looking at the numbers, there are some startling takeaways. Had the Accredited Investor regulations been in place since 2003, in North Carolina ALONE it could have represented:

A loss of $300 million to over $1 billion of angel funding
A loss of 3,600 to 18,000 jobs that wouldn’t have been created
Between 700 & 3600 fewer companies founded

What’s even more frustrating is that the money that would have gone into those startups, again, as much as $1 billion just in NC, might have been put to use somewhere else, or quite possibly NOT put to use. Meaning it could have been parked in a savings account or CD at a bank, where the bank would most likely be busy NOT lending it to anyone. Though, to be fair, since these are angel investors we’re talking about they likely would have found a more risky and useful place for their money. Anywhere but a bank right?

Indeed, some would say Angel & Venture capital is the way true Capitalism is meant to work and that, in that sense, is more productive for the real economy than other capital. Investors are rewarded for real risks they take on long term investments. That’s how the VC/Angel model works, so it’s probably fair to say that yes, this capital is some of the most productive we can put to use.

Now to be clear, this analysis is a thought experiment and many of the assumptions are subject to variation. I actually encourage you to have a play with the numbers in this version of the spreadsheet to reach your own conclusions. One additional wrinkle to consider is that, according to some sources, most angel investors actually don’t qualify for accredited status.

Beyond the net worth considerations, though, and perhaps just as discouraging, was the provision that startups file with the SEC and wait 120 days for approval to raise money. It’s difficult enough to come up with an idea, and a prototype, and fend off competition. Waiting 120 days to be able to put capital to work is not going to help anyone win.

All that is why John Mauldin (always a stimulating read) called this part of the bill “a job and innovation killer of the first order.” Fortunately the Senate came to their senses on this and passed the amendment. So it looks like Angel investing can continue to be part of the economic engine in North Carolina and the rest of the US. As for the rest of the bill, we’ll see what it ends up accomplishing (or not) around July 4. In the meantime you can have “fun” reviewing the Reuters Scorecard on the possible permutations of the bill.

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