As innovation and entrepreneurship are on a seemingly consistent rise, a helpful thing to know is just how many investors exist. For entrepreneurs in the United States, you should know just how many investors there are in the United States alone.
Despite the pandemic and the unprecedented year we experienced, venture capital-backed companies in the United States raised nearly $130 billion last year, which is a record-setting amount. A trend that many realized throughout this past year is that the rich got richer, while the middle and lower class struggled.
This is seen throughout the trend of investments over the past year as well. According to a Reuters report on the CB Insight, although investments were up 14% from 2019, the number of actual investment deals is down 9%, meaning a greater amount of money is going to fewer investors. Mega-rounds, which are deals that are worth $100 million or higher, also hit a record amount of $63 billion only over 318 deals.
How do Accredited Households Play into Overall Investments?
Although we ended up seeing a smaller number of investments and higher values, the number of accredited households actually increased in 2020. According to DQYDJ, there were 13,655,475 accredited investor households in America in 2020. In line with this statistic, roughly 10.6% of all American households were accredited in 2020.
The Securities Act of 1993 defines accreditor houses as being one of three things:
- $1,000,000 in net worth outside equity in a primary residence
- One household member earning $200,000 the last two back to back years with the expectation it will continue
- Married to someone earning $300,000 for the last two years straight with the expectation it will continue
This 10.6% of American accredited households controlled roughly 73.3 trillion in wealth in 2020. This comes out to be around 76.3% of all private wealth in America.
This statistic may surprise you, but it may not. It has long been the case that accredited households hold a large amount of wealth in America and this past year has shown us that when the going gets tough for one person, another may benefit.
This statistic though not surprising is a huge increase from 2016, where only around 9.9% of households could qualify as accredited. This number was an impressive increase from 8.3% in 2013, but it has shown that it can continue to climb. Today, there are roughly 3,556,664 more accredited households than in 2013.
The number has grown an impressive 35.2% in the last 6-7 years. This growing statistic means that not only are more households better off than they were in 2013 but also that there are more investors. This is great potential for individuals and businesses who are looking for investors. Though, it is important to note that accredited status does not always mean that a person can invest.
Sometimes there are other factors at play, or sometimes the supply just is not there for the investments that people are interested in, so they hold onto their money.
Who are Angel Investors?
Angel investors are typically individuals who invest in startups when they are in their early stages. In exchange for the investments, the angel investors usually hold equity in the company and hold onto that equity as the company grows and develops.
Angel investors are huge in the development and growth of startups. To succeed, often these companies seek out angel investors to help get their feet off the ground. More than half of angel investors, 55% to be more specific, were previously a founder or CEO of their own startup.
These investors tend to take their experience and success and look for ways to give back. According to research done by Angel Capital Association, there seems to be a virtuous cycle between angels and entrepreneurs. Not only do angel investors have experience as a founder or CEO of their own startup, but they also like to give back. 60% of angels with an entrepreneurial background take an advisory role for new startups and 52% of them take a board seat. Out of angels without entrepreneurial background, only 38% take an advisory role and only 26% of them take a board seat.
Some angel investors offer startups mentorship and guidance. Angel investors also write larger checks with an average investment of $39,000 as compared to $28,000 for those without any entrepreneurial background.
One very notable and important trend noted by the American Angel study profiled by Angel Capital Association is 22% of angels are women, a number that is much higher than the number of women in venture capital firms. More importantly, this number appears to be growing.
With 30% of angels who started investing in the last two years being women, it is clear this is more than a temporary trend. This is extremely important past the point of diversity and representation. Women are actually changing the role of angel investors. In general, women have shown different preferences and investment behavior than men have.
Female investors place great importance on the gender of the founders they are considering investing in. Studies show that 51% of women consider gender to be highly important, while only 6% of their male counterparts considered this as a factor.
What this could mean is a significant increase in the number of women founded and run startups, which in accordance with the virtuous angel cycle we have talked about will lead to more female angel investors and the cycle will continue. This is a very exciting outlook and we will have to see what comes from this increase.
Where are Angel Investors Located?
We often think about places like Los Angeles, San Francisco, and New York as hubs for investors and startups. This is definitely true, there are a lot of startups and investors in all of these places, but angel investors are located all around the United States.
In a study performed by Angel Capital Association, they found that 63% of angel investors are located outside of these hubs that we traditionally think about. This study found that 16.2 of angel investors are located in the Great Lakes, 15.4% are located in the Southeast, and 10.7% are located in the Mid-Atlantic area.
Entrepreneurs should consider fundraising in areas outside of the West Coast and Northeast. There are so many angel investors in other areas where it may be easier to attract angel capital. You may not even have to leave your home region, if you aren’t in a traditional investment hub. In fact, the same study revealed that angel investors in the traditional hubs invested less than those in other locations.
According to the Angel Capital Association, Angel investors based in California and New England report writing smaller average checks. Investors in California and New England write checks that average $32,000 while investors in all other regions of the country write checks that average around $37,000.
Only 4% of the investors involved in this study reside in Texas, but these average investment check sizes were a lot higher at $44,000. Entrepreneurs should look outside of traditional areas and consider Texas when looking for their next investments.
Venture Capital Investors
Venture Capital firms make up a huge part of investments in the United States. The VC Firm was invented in the United States after World War II as a partnership model that was intended to be a unique provision for facilitating the private funding of new ventures. Venture Capital firms were created to spur and incentivize new innovation and give people the opportunity to get their ideas off the ground.
The difference between venture capitalists and angel startups is mostly in their size and capabilities. Venture capitalist investment usually comes from a firm where they pool money from various sources to invest in small companies. Angel investors are accredited individuals who use their own money to invest in small businesses.
An impressive 20% of all public companies in the United States were started with venture capital backing. This is a huge area of investment that is impossible to ignore as a startup founder or CEO.
The way that venture capitalist firms work is through the guidance of general partners. There are typically 5-8 general partners who receive an annual fee and an additional percentage of the profits. The general partners invest the money from limited partners and then wait up to a maximum of 10-12 years to see the money return, hopefully with a high profit.
Over a few years, general partners draw on the capital committed by the limited partners and invest it in different promising ventures. The fund sizes for these investments vary greatly from a few million to several hundred million dollars or even more.
According to the National Venture Capital Association, there are around 1,000 active venture capital firms in the United States. Being a general partner at a successful venture capital firm is lucrative and promising, so it may be surprising that there are not more firms nationwide.
The answer to this question is that it is very difficult to get a venture capital firm up and running. Given the stakes of investing through a firm, it is important that limited partners trust the firm to do well with their money. This is very hard to do when you do not have a proven track record of success, especially when investors compare your firm to others with much more experience and proven success.
Venture capital returns are typically comparable in their risk to S&P 500 investments. According to the Ivey Business Journal, only 10% of venture capital firms launch more than four funds and for around two thirds of venture capital firms, their first fund is their last fund.
Aside from venture capital firms and angel investors, there are certainly more nontraditional investors. According to Pitchbook, sovereign wealth funds and smaller family offices are more involved in the venture industry than ever before.
The bottom line is that there are plenty of investment options in the United States, but you need to do your research and figure out which investment option is best for you and for your chosen investors. Whether you try to go with an angel investor or a venture capital firm, you should research those in your area and try to align your goals.
One important thing you should take away from this quick overview of investors in the United States is that you don’t necessarily need to be in the big traditional investment hubs of California and New England. There are plenty of investors all across the country, you may find some in places you did not expect to.
Another important takeaway is that the profile of investors is changing. With more women and people of color in investment positions, there is an additional representation that we haven’t quite seen before. This is an exciting and promising time to be looking for investors, just be sure to keep all of your options open!
