Once a week I get an email from AngelList that essentially says,
Josh… you don’t have enough money. Sorry
Seriously, I keep trying to invest with AngelList Syndicates – after connecting with folks like Gil Penchina and Tim Ferriss – I was pretty excited to have an opportunity to invest alongside investors like this in the interesting companies that they are seeing. Of course, I’m not an incredibly wealthy individual so it wouldn’t be prudent of me to invest a lot of money in these early stage companies, this is part of why I was so excited about the AngelList syndicates… I could invest a very low dollar amount in “just” the startups I wanted to invest in vs. be stuck in a fund where my money is going into a bunch of companies I think are lame. I could allocate $1000 to 10 companies or 25 companies of my choosing for the same price as a “regular” angel investment that I could make through Alliance of Angels or some other local angel group.
As a backer of a number of syndicates, I have seen a lot of companies slip through my fingers though. Surprisingly there are a lot of reasons they’ve slipped through my fingers:
- Some closed way too fast (I had no opportunity to even try the product) – so I passed and didn’t invest.
- Others came I didn’t like and passed on as a result.
- Yet more often, I am not able to invest in the companies that come through syndicates because I’m too poor.
This last one, me being too poor is exactly the problem that should be solved by AngelList – yet it isn’t. If I have to put in $10-25k per investment through AngelList, what diversification or benefit am I really getting from the syndicates? None! So why am I too poor to invest? Well the question isn’t about how much money is in my bank account, the question is how many investors can a single syndicate legally hold? The SEC has regulated pooled investments so that there are only a maximum of 99 investors per fund. That is regardless of how many companies each fund invests in. That was fine back in the day when everyone investing in a fund was putting in $100k or more as the minimum. Today it is a much bigger problem when tools like AngelList are trying to open the doors to more investors. These are above and beyond the issues I discussed earlier with the regulatory environment.
The message from Naval and other promoters of AngelList is that, AngelList is a platform to open up angel investing to the masses of accredited investors. Investors on the low end of the accredited investor status would have the ability to invest in a wide diversity of startups. The problem though is that the SEC doesn’t seem to agree.
75% of the investments that I’ve been excited about result in a message just like this… I’ve had two of these in two weeks from two different syndicates…
The majority of investors who would qualify to invest in early stage companies under the current regulation simply shouldn’t be putting $10-25k into every company if they are really going to limit the percentage of their portfolio to a reasonable size and have a healthy diversification across many investments. This is a real problem, the 99 investor rule is forcing bad investor behavior by many. I could easily go in and up my investment, but it wouldn’t be prudent for me to do so.
In the financial advisory world, the prudent man rule and fiduciary responsibility are things that are taken quite seriously by FINRA and the SEC. Why is it that on that side of the SEC’s mouth, the regulations are geared towards safe diversification of wealth, while on the other side of the SEC’s mouth, the regulations are forcing investors to not diversify?
I recently discussed some of the thoughts from Manny Fernandez and Bill Payne about DreamFunded. Bill mentioned in his talk referenced there that the median accredited investor has a net worth of $2.5M, which means the maximum amount that the median accredited investor should be investing into a company is $5k with an additional $5k held in reserves for a follow-on investment. Most of the people I’ve interviewed share this view that half the money set aside for a single investment should be saved for later (even though Rob Wiltbank’s data doesn’t necessarily agree).