Australia to quash angel investing

In the early days of a new startup, money is tight. Before they raise their first serious tranche of venture capital, most startups get by on the personal savings of their founders, cloud credits, and a small amount of pre-seed funding. This pre-seed funding can come from family, friends, industry veterans who’ve turned to angel investing, and established venture capitalists. I consistently hear from founders that, of all of these sources of very early-stage capital, angel investors add the most value.

While an angel investor may not bring much capital, a little can go a long way in the early days of startup building. More importantly, though, angel investors bring a wealth of experience and connections that can dramatically accelerate the trajectory of the startups they work with. Wise founders recruit angel investors who can offer them differentiated assistance. For example, a founder building a cybersecurity startup will typically recruit angel investors with experience building and selling cybersecurity products. These investors make introductions to recruits and customers and help to solve business problems as they arise.

Some startups get this type of help from consultants, but consultants can be prohibitively expensive for small startups. Angel investors have skin in the game by owning a share of the startups they work with. They are, therefore, motivated to help their portfolio companies succeed without consulting fees.

This arrangement is not only great for startups but also for angel investors because this type of investing is one of the best ways for technologists to build wealth. Most angel investors have a day job in more mature technology companies. They see investing as a way to support founders within their network, create additional value in the world, and build personal wealth. They can own a small piece of a company that they believe will be big one day for a relatively small amount of money. Often, these companies don’t survive. But when they do, liquidity events like acquisitions, secondary share sales, and IPOs can be life-changing.

To anyone outside the tech industry, founders and VCs get the most attention. However, angel investors play an indispensable role in the early days of many world-changing startups. While many VCs allocate capital and otherwise play a predominantly passive role in the building process, angel investors can be incredibly hands-on.

I’m incredibly disappointed to learn that, in an effort to protect consumers from predatory investment products, the Australian Government is about to make it nearly impossible for successful startup workers to reinvest their earnings into new startups. Specifically, the Australian Financial Review reported yesterday that the Government is considering a change to the definition of a so-called sophisticated investor to $4.5 million in net assets or $450,000 in gross income1.

Given that many angel investments today require sophisticated investor status and most active angel investors in Australia do not meet the reported criteria, this will essentially outlaw an enormous chunk of all angel investing activity.

This regime will be bad for startups and, in turn, the Australian economy. Less available capital means less startup formation. Less access to angel investors means fewer startups will succeed.

This regime will lock startup workers out of their best opportunities to build wealth by eliminating their eligibility to invest in startups. These people are not stupid. They do not need paternalistic government protection. Under the new criteria, a startup CTO earning $400,000 a year, with a net worth of $4 million, will not be allowed to invest $10,000 into a venture founded by people they know and trust, in a market they know like the back of their hand.

While the Australian Government may be justified in its desire to protect investors2, it should balance this desire against the negative consequences of any proposed policy change. If the Government is serious about creating a thriving startup economy in Australia, it should instead move in the opposite direction. The current criteria for sophisticated investor status, defined as having earnings above $250,000 or $2.5 million in net assets, unnecessarily locks many potentially great angel investors out of some of their best opportunities to create value for society and wealth for their families. The status quo already drives our best workers overseas for better work opportunities. This change will only further hollow out the domestic technology market.


  1. Michael Read (2024): “Labor to overhaul ‘sophisticated investor’ test.” Published online by The Australian Financial Review. ↩︎

  2. The Australian Government’s motivation for the change appears to be driven by concerns about retirees losing their savings in complex investments they don’t fully understand. We could, instead, implement more surgical regulations to help with this problem without harming innovation. ↩︎

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