The existing class of startup investors is predominantly white and male. New startup-funding legislation has the potential to change that. If more women and people of color are brought into the investing community, then, in turn, the hope is that more women and minority business owners will receive funding.
The Jumpstart Our Business Startups Act, known as the JOBS Act, is expected to revolutionize the crowdfunding industry. It is also expected to change the face of the typical investor, according to Natalia Oberti Noguera, the founder of the Pipeline Fellowship, a training program for teaching women philanthropists about angel investing.
Currently, the community of individuals who make investments in startups is largely homogeneous. In the first two quarters of 2012, women angel investors represented only 21.8 percent of the angel market by headcount, and that was an impressive increase from the same period in 2011, when women angels represented only 11.7 percent of the market, according to a report from Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire. Meanwhile, minority angels accounted for only 4 percent of the angel population, the report says.
That is hurting women and minority entrepreneurs, says Oberti Noguera: "We don’t have friends and family who have the money to be our 'friends and family' round. It’s that lack of access. A lot of guys have the uncle, and I am saying uncle on purpose. They have the father who works in venture capital and are much more connected." She spoke at a women-entrepreneurship conference in New York City last week, hosted by women entrepreneur business network Own It Ventures.
A more diverse group of investors will be more likely to fund more diverse entrepreneurs, says Oberti Noguera. Not only do women and entrepreneurs of color face a higher level of skepticism from investors, she says, but they also don’t have the same avenues of access.
“A lot of people invest in their own communities,” says Jeremy Andrews, the founder and CEO of SmartMoney Entrepreneurs, a New York City-based crowdfunding platform that connects startups and investors, who also spoke at the conference. He has been doing research into the history of investing to get his new platform off the ground. Reaching outside of your community to get access to capital can be scary for the entrepreneur. “Is this person going to like me? Will we go for a beer? Well, I don’t drink beer.”
The JOBS Act will make the pool of investors more diverse by making it possible for a wider group of individuals to fund startups. As it stands right now, entrepreneurs can raise money through equity crowdfunding online from only accredited investors. The federal government defines accredited investors as those individuals who have more than $1 million in net worth, $200,000 in annual income or are part of a married couple who make more than $300,000 in joint annual income, explains Oberti Noguera.
This definition of accredited investor leaves out a lot of people who might want to invest in a startup. Consider a woman who is making $190,000 a year and has no dependents, says Oberti Noguera. Or an individual who has $800,000 in assets and makes $185,000 a year, says Andrews.
“The line of who can afford [investing] and who cannot afford it has to change and that is what we are pushing for,” says Andrews. “There are a lot of unaccredited investors who actually have a lot more liquidity, cash available, than so-called accredited investors.”
Oberti Noguera works with women who have the means to invest, but just aren’t part of the established community of entrepreneur-turned-investor, particularly in Silicon Valley. “Those sorts of outliers make me hopeful that there are ways for us to get more people out there to become investors,” says Oberti Noguera. She hopes that with an increasingly broad group of individuals with the ability to make investments in startups, more women and entrepreneurs of color will receive funding.
The JOBS Act was passed nearly one year ago. While the President signed the law, the changes will not take effect until the Securities and Exchange Commission writes and finalizes rules as to how the new law should be implemented. The SEC has already missed initial deadlines. Industry watchers are hoping to see the agency’s rules written and formalized by early 2014.