Venture

Gen Z Angels: How A Younger Generation Of Investors Is Getting In On Deals

Joe Niehaus made one of his first angel investments after hearing about the deal through a Slack channel for Generation Z venture capitalists, investors and founders.

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The University of Cincinnati student, now 22, had recently heard about the company, ethically sourced tinned seafood brand Fishwife, when the deal surfaced in the #dealflow channel for the organization Gen Z VCs. So, he asked to be connected to the company’s founder and set up a call. 

“Someone in the Slack channel connected me with Becca, the founder of Fishwife, and we got on a call,” Niehaus said. “And I was like, I can’t meet this minimum, but this is a super interesting company.”

But the Fishwife deal stayed on his radar and Niehaus DoorDashed over the holiday break to make some extra cash. He reached out to a mentor about the deal as well, and ultimately went in with his cousin for the investment.

Niehaus is among a group of younger angel investors — part of Generation Z, or those born after 1996 — cropping up and writing checks to invest in companies early. A group, Gen Z VCs, has even been formed to support aspiring venture capitalists, early-career VCs, and other young investors and founders. The group has grown to more than 6,000 members since it was formed in November 2020.

Historically, there were greater barriers to entry into angel investing. In order to invest in most early-stage startups, a person had to be considered an accredited investor by the Securities and Exchange Commission. And to be an accredited investor, a person either needed to have a net worth of at least $1 million alone or with their spouse, excluding the value of their primary home, or make $200,000 individually each year or $300,000 combined with their spouse. 

Investing in early-stage startups is considered risky, and the SEC rules made it so that only people meeting certain wealth guidelines qualified to invest. But it’s also drawn criticism for shutting out many people from investing early and, for lack of a better phrase, letting only the rich get richer. 

In August 2020, the SEC revised its rules so that people with professional knowledge, experience or certifications could also be considered accredited investors. A person could, for example, take a Series 65 exam, which is meant for people wanting to be licensed investment adviser representatives, and become an accredited investor. 

And on Monday, the SEC’s loosened crowdfunding rules went into effect, making it so that startups could raise more money through regulation crowdfunding and individual investors could invest more. The regulation crowdfunding limit was increased from $1.07 million to $5 million.

The barriers to entry have been lowered thanks to new ways to invest like syndicates, rolling funds and platforms like AngelList, according to John Smothers, 24, an investor at Acrew Capital. That’s also helped demystify the world of angel investing. In the past, Smothers said, he felt that people were often under the impression that they had to write at least a $25,000 check to companies to angel invest. 

Now, through platforms like AngelList, or if the investor knows a founder, they see they can invest less money. The rise of special-purpose vehicles also allows people to write checks for between $500 and $2,000.

“I feel like folks who are in the Gen Z category who don’t have a ton of liquid capital see that they can get into the industry,” Smothers said.

Smothers began angel investing while in college at the University of Delaware with small checks, and invested in companies like Finix, Buy Me A Coffee and Ample Foods.

“It’s probably not the old man’s game anymore, which I think is awesome,” Nik Sharma, CEO of Sharma Brands and a Gen Z investor who has invested in around 25 deals, said in an interview. “It’s really anybody who can be involved in it can be involved in it. And of course platforms like AngelList and Republic … these platforms also make it really accessible whether it’s through syndicates or rolling funds. You don’t have to be a lucky friend of someone with a prolific venture fund.”

Sharma, 24, made his first angel investment in late 2018 with the alcohol brand Haus. Sharma became acquainted with the founder of Haus through Twitter and stayed in touch through direct messages for about a year before the company launched.

He said he finds deal flow via a group chat with other younger investors. Someone will typically send a DocSend link or a link to a pitch deck and offer introductions.

The COVID-19 pandemic has contributed to more awareness and accessibility to investing, according to Meagan Loyst, 23, an early-stage investor at Lerer Hippeau and the founder of Gen Z VCs. 

Before the pandemic, young people wanting to invest might be more dependent on resources offered by their college — if they had a dorm room fund, for example. 

“COVID, being at home — it forced people online and it forced people to get out of the central school bubble,” Loyst said. 

It’s also given them access to more deal flow. The Gen Z VCs Slack, for example, has a channel where members can post deals, which is how Niehaus heard about Fishwife raising money and made an angel investment.

“It’s no longer your network is your campus, your network is Gen Z VCs,” Loyst said.

Loyst also pointed to the GameStop investing saga and retail investors becoming more active while at home as parallel to the idea of more younger people getting involved in investing.

“(People are) realizing that you have the agency to put your capital to work in different ways,” Loyst said. “And platforms like Republic are doing that too. You can invest alongside core VCs … there are ways as a nonaccredited investor where you can get involved.” 

For those who want to build a career in VC, angel investing early also helps them build a track record, according to Loyst.  

“A lot of people now care about the Gen Z perspective and we’re also making VC more transparent and accessible to the next generation of investors” Loyst said.

Of course, angel investing does come with notable risks. Investors are betting on young companies often without a long track record of operating. It’s not the same as investing in a public company that has to meet regulations set by the SEC. 

Because of that risk, people shouldn’t be investing any money they aren’t willing to lose, according to Sharma.

“Most of the people I know, they just assume it’s never coming back and hopefully it does come back,” Sharma said. “And I also think a lot of angel investors are getting in so early to these companies you might at least make that back.”

Sarah Behr, a financial planner at Simplify Financial Planning in San Francisco, said as a general guideline for angel investing, it’s wise only to invest less than 20 percent of a person’s total investable assets.

“It’s mostly not risking so much so if it’s gone or it’s not available for a certain amount of time … that you don’t have to give up other opportunities, namely other things that might be other financial goals for you like buying a home, or going to grad school, or taking a year off for traveling,” Behr said.

Angel investing can produce great returns. But it’s inherently riskier than investing in the public markets, and the reporting and transparency requirements of startups aren’t standardized either.

“Getting in early on a company, the potential for significant return on investment is much greater than in the public market,” Behr said. “But also the reason is risk and return go hand in hand. It’s much more risky.”

And ultimately, Gen Z is the future, and there’s value in having that perspective on the cap table, according to Erik de Stefanis, 24, an associate at Interlace Ventures, who leads the Gen Z VCs syndicate.

“People are realizing that this generation is coming of age and beginning to earn more money and becoming a more and more powerful consumer base, and founders I’ve talked to about potentially having a syndicate come in, it’s becoming a more valuable proposition to have young people on that cap table and have that view.”

Illustration: Dom Guzman

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