The Rise of the Angel Investor
With technology rapidly altering the global entrepreneurial and investment landscapes, Professor Josh Lerner is paying particularly close attention to what angels are doing.
01 Oct 2015   Christian Camerota

Over the last ten years, technology has reduced entire catalogues of consumer goods to devices that fit in the palms of our hands. Phones are smarter, networks are faster, and more people have access to more information than ever before.

That democratization of access has affected different industries in different ways. Venture capital, for example, was once mostly reserved for institutional investors backed by endowments and pension funds. Today, it increasingly includes individual investors who are using technological tools and data to steer capital directly into the businesses they care about and believe in. Consider that one of those tools, crowdfunding, is on track to account for more investment money than venture capital itself by 2016, rising from just $880 million in 2010 to an estimated $34 billion by 2015.

To understand the current investment and entrepreneurial landscape, and what venture capital might look like in the future, we asked Josh Lerner, the Jacob H. Schiff Professor of Investment Banking and head of the Entrepreneurial Management unit at Harvard Business School, what trends he’s paying close attention to in the coming year.

What areas of entrepreneurship and venture capital are especially exciting right now?

Josh Lerner: One of the big changes in venture capital in the last decade is the rise of “personalized” entrepreneurial finance. That includes crowdfunding platforms like Kickstarter, individuals investing directly in companies through angel groups, and people gaining access through mutual funds, which ordinarily wouldn’t have invested in entrepreneurial companies but are increasingly doing so. At HBS, we’re spending a lot of time looking at the globalization of angel investing, focusing in on what I think is one of the secret sauces for entrepreneurial ecosystems: the creation and the role angels play in funding companies.


There’s been relatively little work on angels, primarily because these are high net worth individuals who (with a few exceptions, like the Donald Trumps of the world) prefer to fly under the radar, even while investing significant amounts of their own capital in various startups. So it’s been hard to study them, and the work that has been done is through imperfect mechanisms like sending out surveys that get very low response rates. Instead, we’ve been focusing on angel groups that have systematic processes for looking at would-be companies and evaluating them. In particular, we have a forthcoming working paper looking at 13 groups in 21 countries around the world. It poses the questions of: how do these groups work, what deals do they look at, and ultimately do they make a difference for the companies they fund?

Is crowdfunding a threat to more traditional notions of venture capital?

JL: There have been a lot of challenges associated with crowdfunding, reflected in the huge amount of time the Securities and Exchange Commission (SEC) has spent trying to write the regulations around it. The SEC wants to encourage individuals to make investment decisions, but they don’t want to open the door for scammers. At the same time, entrepreneurs don’t want to be required to divulge all their secrets (for regulatory purposes) because it would destroy their ability to compete. So it’s very hard to figure this out. My sense is that it’ll be a rocky road for crowdfunding, and there are going to be even more challenges for VC groups that are using crowdfunding tools.

What role should the government play in subsidizing or regulating access to capital for startups?

JL: I wrote a book about five years ago called Boulevard of Broken Dreams around government efforts to promote venture capital and entrepreneurship. As you can guess from the title, it’s a bit of a mixed bag. Entrepreneurship is an increasing returns activity— the more that people do it, the more likely they are to be successful at it. As such, there is a strong “public good” aspect to it and it’s important for governments to take steps to enable entrepreneurship.

It’s also the case that most government efforts to promote entrepreneurial activities have struggled to date. A lot of times, it’s probably fair to say that there are well-meaning government officials who don’t really understand the intricacies of the process and make poor policy decisions, or else political distortion leads to real issues that limit the success of these programs.

The news site Quartz published a chart showing the fastest-growing areas of startup investment since 2012: Bitcoin, photo sharing, storage, space travel, transportation, hospitality. What does that say about the venture capital industry?

JL: There is some ebb and flow in terms of what areas are hot or not. Biotechnology was very hot in the 80s and 90s, and then there was a long profound downturn. In the last 18 months it’s becoming really hot again with bioinformatics, which combines information technology and biotechnology approaches. Another example would be cleantech, which half a dozen years ago was red hot and is now in the doldrums. Fintech has come out of nowhere to be a hot area for investment. This continuous flow is part and parcel of the territory in the land of venture investment.

Why has entrepreneurship become such an in-demand course and pursuit for recent MBAs?

JL: I don’t think there’s an easy answer. Things in society tend to be popular or unpopular at different times, and student enrollments tend to reflect that. There was a lot of interest in structuring financial products prior to the financial crisis and then interest dropped off.

It’s also been true there’s been a change in attitudes. If you compare 2015 to 1995, there’s much greater interest on the part of the students in shaping one’s own destiny. Rather than going to work for 30 years for the same company, even if it’s a tremendous company, there’s a sense that today people want to control their own fate by being an entrepreneur.


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