Why 70k+ Angel Financings Is A Problem

Much as we would like to see more entrepreneurs successfully raise seed money from angel investors, the current level of investment is structurally worrisome.

In 2013, 70,713 ventures received angel financing (Source: Center for Venture Research, UNH).

However, the number of companies that get venture financing has remained more or less steady over the years at about 1000.

Presumably, a vast majority of the 70k entrepreneurs and their investors aspire to substantial exits down the line.

However, the market cannot sustain that many exits.

Instead of a large percentage of these 70k ventures becoming infant mortality statistics, I would like to see them focus on building value by generating customers, revenues, and profits, so that even if they don’t get follow-on venture financing, they can still survive as robust businesses.

They also need to think through other models of investor compensation like dividends, because the exit-focused investing is likely not going to pay off.

However, if you build a $5 million or $10 million business that yields 20% profit, you can offer investors dividends on an ongoing basis to make it worth their while.

The problem I see with the way capitalism is evolving is that the market is full of gamblers. Entrepreneurs and investors see Facebook acquiring WhatsApp for $19 billion, and think they can also buy a lottery ticket.

The current excess in angel financing is not driven by the desire or the commitment to build sustainable businesses.

It is driven by the lottery ticket phenomenon fueled by WhatsApp.

In 2014, the same source suggests further growth in the investments:

A total of 30,270 entrepreneurial ventures received angel funding during the first half of 2014, a 5.9 percent increase from the same period in 2013, and the number of active investors in Q1 and Q2 2014 was 143,140 individuals, a 6.1 percent increase from 2013.

Angel investments continue to contribute to job growth with the creation of 96,860 new jobs in the United States in the first half of 2014, or 3.2 jobs per angel investment.

Clearly, growth in angel investment is a highly desirable phenomenon.

However, if this phenomenon is not accompanied by a structural adjustment to the method of providing return on investment, it will result in a bubble that will inevitably burst.

We don’t want the angel investment bubble to burst.

We want dividends to become a part of the thought process of entrepreneurs and investors, so that the money continues to flow, making it possible for entrepreneurs from modest backgrounds to gain support and create wealth.