Why this is GREAT for entrepreneurs, angels and the U.S. economy. Our guest blog post from Scott Mize.
As attendees prepare to gather tomorrow at the Kansas City Convention Center for the 2nd Annual Think Big Kansas City conference, my thoughts have turned to how the “flattening” of the world is impacting the entrepreneurial sector of our economy. This is the flattening popularized in the book entitled “The World is Flat” by New York Time columnist Thomas Friedman. The basic thesis of the book is that the internet and other information technology (e.g. new mobile devices) have created a level playing field for businesses worldwide. Increasingly, the historical hierarchies and barriers of geography, resources and markets are disappearing and becoming increasingly irrelevant. Although the focus of the book was globalization and its cross-border impact, there are many ways in which this transformation can benefit places like Kansas City. It also might be an important key to solving the problem of job creation in the U.S. and around the world.
We all know that the overwhelming proportion of new jobs come from small and medium-size high-growth companies. They are the primary engine of economic growth and prosperity. The Great Recession has dealt a serious blow to this job creation engine. Although we technically came out of the Great Recession in 2009, the so-called recovery has been nearly jobless. It is also showing every sign of going sideways at best for the foreseeable future. To battle this inertia, it is essential that we focus on regaining serious job-creation momentum.
I have long felt that we really need to have more than one word for investing. In much the same way that we could use more words for “love” in the English language (the Ancient Greeks had four!) we need at least two for “investing”. One would refer to the type done on the stock market. This is not IPOs or other offerings wherein an issuing company takes in the investment. I mean the overwhelming majority of the transactions wherein investors buy and sell existing stock from each other in a global speculation casino. This type of investing may create wealth for some investors, but is creates few jobs directly. The other would refer to what angel investors and venture capitalists (VCs) do - buying stock from a private company itself and having that money applied to building the business, which creates jobs quickly, many of them very high-value jobs. Diverting a relatively small percentage of the current investment in the stock, bond, commodity and/or foreign exchange markets into startup investments would have an extremely positive impact on job creation.
VC firms are often perceived as the key to funding early-stage companies. The reality however is that the overwhelming majority of businesses will never get any VC money because they do not fit their target profile in one way or another. I don’t have the room in this post to go into the reasons in detail, but Mark Suster of GRP Partners has written a couple of great posts about it here and here. On top of that, the venture capital sector in the U.S. continues to shrink and has generally delivered lackluster returns. Many observers believe that about half of the venture firms that have been active over the past few years will soon go out of business. This makes increasing the level of angel investment more critical than ever.
Angel investors have always been important to fueling start-up companies. Over the past decade, there has been strong growth in angel investing (despite a pullback during the Great Recession), and broad proliferation of angel investment groups. According to the Angel Capital Association (ACA), the number of angel groups has tripled since 1999. According to the Center for Venture Research at the University of New Hampshire, in 2010 in the U.S., 265,400 angels invested $20.1 billion in 61,900 companies creating 370,000 new jobs. This puts angels at rough parity with VCs, who according the National Venture Capital Association invested $23.3 billion in 2010. There are now angel groups in virtually every city in the U.S. The ACA has over 150 angel groups as members from 49 states and 6 Canadian provinces. Although data is harder to come by outside the U.S., there are many indicators that there is good growth in angel investing around the world.
In order have the greatest success at creating new jobs, ensuring economic prosperity and solving the major challenges facing humanity, we need more angel investing. The good news is that there are two key factors that poise us for a boom in angel investing. First, the ACA estimates that the potential number of angel investors (defined as those with over $1 million in net worth) is approximately 4 million. Second, in much the same way that the global competitive environment is flattening due to advances in information technology, so is the start-up funding environment.
There is a huge opportunity to make angel investors of a good chunk of the 4 million high net worth individuals that are currently sitting on the sidelines. The ACA and Angel Capital Education Foundation have made a great contribution by creating a professional association for angels, which among other many other things compiles and disseminates best practices for the field. Both are spinoffs of The Kauffman Foundation and are based in Kansas City. The proliferation of angel groups makes it easier for high net worth individuals that are new to the game to find a community in which they can get up the learning curve and plug into deal flow.
Software-as-a-Service (SaaS) applications like AngelSoft make it easier for angel groups to aggregate deal flow and syndicate deals. This is good for both entrepreneurs and investors – taking down traditional barriers and limits and thus flattening the investment process. The ability to aggregate deal flow from multiple sources dramatically increases the number of deals to which an angel investor has access. Workflow management capabilities enable angels to more easily collaborate and use their collective intelligence in sourcing deals, performing due diligence, and overseeing their investments. The angels thus have unprecedented access to more and better start-up investment opportunities. This type of application is also good for entrepreneurs because they have access to a much wider range of potential investors than ever before, and therefore unprecedented access to investment capital.
It is the common wisdom in many quarters that globalization and the “flattening” of the world spells doom for the U.S. To the contrary, by using these same forces creatively we can stay in a leadership position. Activating the sleeping potential of angel investors and embracing these new technologies can produce exciting entrepreneurial successes, powerful new product and services, robust job creation and a myriad of ways to address the pressing challenges facing humanity.
Written by Scott Mize. Scott is a Silicon Valley Venture Development Executive and is the moderator of the Think Big Kansas City panel on “Lessons Learned from Kansas City Entrepreneurs You May Not Have Heard Of”. He can be reached at email@example.com.