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09.04.2014Why Startup Investing Will Blow Up

Here are my three main arguments for why startup investing will blow up.

Tanya Prive, Forbes.com

In 2011, Marc Andreeseen, general partner and cofounder of Silicon Valley venture capital firm Andreeseen Horowitz, stated that “software is eating the world” and will continue to do so.

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Fast forward to now. We are nearing the end of the first quarter of 2014, and now more than ever there is an “entrepreneurial explosion” in which new companies are disrupting every niche of every industry. There are building blocks that allow for faster iteration (APIs, open sourced code, free education on programming frameworks, etc.), industry methods that make it accessible for an aspiring entrepreneur to launch a company (eg, the lean startup), and accelerators and programs that offer hands-on support and assistance throughout the journey.

Furthermore, capital needed to back these important technology advancements is getting easier to access, particularly since the formation of online startup investment platforms. According to the most recent HALO Report by the Silicon Valley Bank, Angel Resource Institute and CB insights, which compiles analysis on trends of US Angel and Angel Group activity, there was an astounding $1.1billion in total angel investment rounds in 2013 and a three-year high for round sizes when angel investors co-invest with non-angels.

Given the entrepreneurial explosion and high angel investing activity, here are my three main arguments for why startup investing will blow up.

1. The leading industries are growing and innovating at record levels

In the past three years, the top sectors for startup companies have been Internet, Healthcare, and Mobile/Telecom. The 2013 HALO Report shows that these three sectors alone received 78.8% of angel dollars, about a 13% increase from 2012 activity.

The numbers of Internet and Healthcare deals available in 2013 were both at three-year highs of 38.5% and 16.2% respectively, and the average round sizes for these top sectors also increased. The average round size for Healthcare companies alone jumped $500,000 from $1.1 million in 2012 to $1.6 million in 2013; Internet Companies from $935,000 to $1 million; and Mobile/Telecom companies from $1 million to $1.1 million.

Over the coming years, I predict this will only continue to increase, as there are constant innovations in technology that lead to advancements in these top industries. Healthcare companies are finding ways to incorporate wearable hardware such as Google GOOG +3.13% Glass at the point of surgery. Mobile companies are benefitting from faster networks and growing smartphone user base. Internet companies have so many resources and building blocks that it’s getting quicker and leaner for them to iterate and find market opportunities.

In essence, there are a lot of high quality startup investment opportunities out there, and they’re only increasing.

2. The benefits of startup investing are apparent and interest is increasing

As I previously wrote about in more depth, a recent report by SharesPost (a private securities market) about historical return analysis and asset allocation strategies detailing investments in private growth companies, showed the benefit of alternative assets in any investment portfolio. It was concluded that an investor who allocates just 5% to private growth companies or alternative assets, and the remainder to benchmarked portfolios, could have experienced significantly higher returns. Overall, there’s a low correlation between alternative assets, such as startup companies, and traditional asset classes, such as the stock market and fixed income.

Increasingly, accredited investors are learning about these opportunities through word of mouth, studies, and equity crowdfunding platforms that provide access to high quality private deal flow. Co-investment has also become a more popular way for investors to hedge risk, share information and build confidence by going into rounds together. According to the most recent HALO Report, Angel co-investment has been trending upwards for three years, reaching its highest level ever in 2013.

3. Startup investing is on the verge of accessibility to the general public

On September 23, 2013, the ban on general solicitation was lifted via Title II of the JOBS Act, and proposed rules for Title III have been set and commented upon. For the first time in 80 years, we are seeing changes to securities laws that have governed how private companies raise money and vice versa, which investors legally are permitted to invest in startups.

The biggest business disruption that occurred over the past 50 years in the startup investing space has no doubt been the rise of equity crowdfunding. When Title III is fully implemented, non-accredited investors will have the opportunity to invest a certain percentage of their income per year in startups, and there will be an entirely new asset class available to the general public.

Imagine – you currently have your Charles Schwab SCHW +0.27% or E*trade account and can invest in Apple AAPL -0.01% because you like what they’re doing. Accredited investors are investing in what they think will be the next Facebook before the companies go public. Sometime later this year, hopefully, this type of investment will be available to non-accredited investors as well, and I predict that over the coming years, this asset class, in combination with the funding portals that aggregate it, will be commonplace in the personal finance and investment landscape.

In essence, we are living in an exciting time – Companies are growing and innovating at record levels. Angel investing activity is as high or higher than it’s ever been. A whole new asset class is gaining awareness which has clear benefits and will soon be made available to the general public. These kinds of developments in the financial and entrepreneurial landscape are revolutionary, and I argue that as technologies develop, education/awareness on alternative investments spreads, and laws get implemented, startup investing is only at the beginning of its growth.

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