Dear Early Investor,
D-Day has been postponed till late next year.
That’s when every adult American will be able to invest in startups.
Right now, you have to make $200,000 or have personal assets of at least $1 million. And you can’t include your own home.
Next year, the stakes get much bigger. Millions of Americans will become eligible to invest in startups for the first time.
But bigger for whom exactly? And how much money are we talking about?
Let’s tackle the money issue first. Time to do some math…
A Conservative Approach
There are currently 300,000 active accredited investors. It’s an estimate, give or take 50,000 or so. It’s based on 5% to 7% of accredited investors who can invest actually doing so.
Next year, the government drops its long-awaited bombshell. We’ll finally see the new rules under Title III. They allow everybody to invest in startups. It’s expected about 230 million to 240 million Americans will become eligible.
Of course, not all of them will choose to invest. One reason why is Americans aren’t big savers. Not surprisingly, how much they save depends on how much they earn.
Capital One ShareBuilder did a survey earlier this year. It found that adults making less than $35,000 saved an average of 3.7% of their income. Adults making more than $100,000 averaged 10.4%.
Overall, only one-fifth of respondents said they were saving 10% or higher. The overall savings rate of all respondents? 6.4% of income.
Bankrate has done similar surveys. It says the same thing. Americans don’t save enough. For example, it found that three-quarters of Americans don’t have enough money saved to pay their bills for six months.
This data tells me that only one-quarter to one-fifth of Americans manage to sock away meaningful amounts.
Let’s be very conservative here and go with the lower numbers whenever we can. So what we end up with is…
One-fifth of 230 million Americans saving at a 5% rate.
Next data point: median income. The last census report on this was published in September 2013. It said that Americans made a median income of $51,017.
So, we have 46 million saving $2,550 each. That’s not much at all. And I think the reality is much higher.
For one thing, the overall savings rate of 6.4% is weighed down by 80% of the population who save very little. The remaining fifth of the population invests at a much higher savings rate. But again, I want to be very conservative in the assumptions I make.
I don’t want my final tally to be considered optimistic.
Total saved by the 46 million comes to $117.3 billion. So, how much of that can we expect to go into startups?
That depends on how many of them will invest in startups and how much they’ll invest. Yes, more numbers…
Stunningly Big Numbers
About 5% to 7% of accredited investors put money into startups. But how about non-accredited investors? Will they invest at a higher or lower percentage of their total numbers?
Here are some reasons why it might be lower…
- It’s considered a risky asset class with great upside, but also significant risk. Many investors will be too afraid.
- 401(k) plans don’t carry startups as an investment option.
- Brokers won’t be able to offer them, and therefore won’t be recommending them to their clients.
- The mainstream press doesn’t carry nearly as much information on startups as it does on public stocks and bonds. Many investors will consider startups too exotic.
But there’s a powerful countervailing force to take into account here. Tens of millions of people already participate in Kickstarter, Indiegogo and other rewards-based startup portals. Beginning next year, they’ll have the opportunity to acquire shares, not T-shirts or mugs, for their $100 contributions.
That’s a hard proposition to turn down, and I think a majority of these investors will graduate from accepting rewards to acquiring shares.
Given all this, I think the current 5% to 7% that applies to accredited investors also works for non-accredited investors as a very conservative estimate. But let’s be cautious (again). So, let’s take the low end and say that just 5% of non-accredited investors participate in funding startups.
Even taking this ultra-conservative approach, the numbers still get stunningly big.
Total non-accredited investors who will be investing in startups each year? 2.3 million, or 7.5 times more than the 300,000 accredited investors who now actively invest.
(And I suspect the real numbers could be much more than that.)
One last question needs to be answered to reach our final tally. How much will these 2.3 million new investors put into startups?
Advice on how much they should invest varies greatly. I’ve seen opinions range from 2% to 10% of savings. I suspect startup portals will be recommending toward the low end of that range (if nothing else just to stay in the SEC’s good graces).
Again, let’s be conservative and take the lowest number: 2%.
Investors in their 40s would have had 20 years to save at a conservative rate of $2,550 a year. Adults in their 50s… 30 years. Retirees and near-retirees in their 60s… 40 years. And so on.
As you’d expect, savings vary greatly by age (and income levels, as I’ve said). These non-accredited investors starting at the age of 40 would be bringing savings to the table of $100,000 and up. Much depends on how well they’ve invested their savings.
Again, in the absence of hard data, let’s take the low end of the range – $100,000. Dedicating 2% of that to startups would mean these 2.3 million non-accredited individuals would be investing $2,000 each, once the new rules come into effect.
That’s a capital outflow of $4.6 billion going into startups, beginning next year.
I can’t emphasize this enough. I’ve used very conservative assumptions in reaching this number. It’s probably more.
Now here’s the key part…
By law, only companies that raise funds on portals that meet the requirements of the SEC and FINRA (Financial Industry Regulatory Authority) will have access to this nearly $5 billion jackpot.
These portals operate behind the scenes, but they play a critical role. They’ve brought hundreds of new investors and tens of millions of dollars into the startup space.
They are truly transforming the early investing landscape.
Portals are the indispensible and only legal linchpin between hundreds of millions of investor dollars and the thousands of startups that will be seeking funds.
Though much delayed, these new regulations are coming. The timing is pointing to late next year.
These startup portals have been around for three or fewer years and are still figuring things out.
But already we can see significant differences in the growth strategies they’ve adopted.
In my next article, I’ll go into how these growth strategies have historically played out and where they might be headed. I’ll also look at what impact the new Title III regulations might have on the startup portal landscape.
Founder, Early Investing