The 3 Most Common Crowdfunding Concerns
“Can I really make money with equity crowdfunding? I mean, does this even make sense for someone like me? I’m not a ‘professional’ investor.”
We’ve been getting this question a lot lately. Ever since we began talking about this massive change in securities laws – known as the JOBS Act – hundreds of readers have been asking different versions of this same question.
Most investors agree that equity crowdfunding sounds promising and exciting, but based on their experience – including everything from the dot-com meltdown to the mortgage crisis – they have every right to be skeptical.
We don’t want to say that “it’s different this time,” but there are certainly some aspects to equity crowdfunding that are fundamentally unique. For starters, the entire crowdfunding system was specifically designed for everyday citizens. Equity crowdfunding was established to help small companies raise small rounds of financing, ideally in small amounts from many investors.
We believe that, approached with caution, equity crowdfunding can offer a reasonable way to enhance your overall portfolio returns. That said, we applaud our readers who take the time to write to us with their questions and concerns. And since you may share some of these questions, we thought we’d use today’s article to dig into some of the most common ones.
The first concern is: “I don’t have enough money.” This is a popular topic.
Although equity crowdfunding was specifically created so that a “crowd” could pool together small sums of capital to invest in a start-up, many people still think they need hundreds of thousands, or millions, to get started. The reality is that you can start with just a few hundred dollars.
Most of the online crowdfunding platforms have small minimum investment requirements, and the fact is, you probably wouldn’t want to invest too much in any given opportunity anyway.
While the returns could be tremendous, don’t forget that this is a risky asset class. Therefore, you’ll only want to allocate a small portion of your portfolio to equity crowdfunding. The number we’ve been hearing from the venture capitalists and portfolio managers is approximately 5-15% of your investable assets. For example, if you have a $500,000 portfolio, you’d allocate roughly $25,000-75,000 in total to all of your equity crowdfunding investments. And because you’d want to diversify, you’d allocate that capital towards many different opportunities.
What’s that mean in practice? It means you’ll probably end up writing a fair amount of checks, some for a few hundred dollars, some for a few thousand. Again, the underlying principle behind crowdfunding is to have many, small, contributions that ultimately add up to a much larger investment.
The second most common concern is: “It’s too complex and I don’t have enough time.” Look, early-stage investing isn’t “easy.” Not that any type of investing is easy, but early stage is especially difficult.
By and large, the companies raising funds have only been in existence for a short while, and they’re all privately held. As the term implies, “private” companies are not obligated to make any of their data public; they can share as little or as much information as they care to.
This means you have to perform a fair amount of research in order to become familiar with these companies. If you’re looking at several opportunities per week, it’s easy to see how this could become a time-consuming process. However, there are ways to speed up the process. For one thing, you can follow other investors – investors who have many years of experience – into deals they’re putting money into.
Unlike investing in public equities, equity crowdfunding is extremely transparent. For example, I can see if famed PayPal founder and Facebook investor Peter Thiel recently invested in a startup on Angel List – if I like the company too then I can invest at the same terms as Mr. Thiel. If you wanted to see Warren Buffett’s latest investment you’d have to wait several months before he made his quarterly filings with the SEC – chances are, it’s too late to invest alongside Mr. Buffett.
Another way to avoid a lengthy research process is to simply buy a “basket” of companies. Essentially, with a single check, you can put capital into 10 different start-ups at once – almost like a “mutual fund for start-ups.”
Last but not least, the third most common concern we hear is: “The ‘big guys’ will keep all the good deals for themselves.” One aspect of crowdfunding that has us particularly excited is the quality of deal flow we’ve seen on the various online platforms.
Take AngelList and WeFunder as an example. They allow you to put money into companies that have very good potential – for example, companies already generating 7-figures in revenue, companies backed by successful entrepreneurs and angel investors, or companies that historically would only have been accessible to all but the most connected investors in Silicon Valley.
Nowadays, through equity crowdfunding, individual investors from anywhere in the world can get access to early-stage companies that could become the next Facebook. Currently on AngelList, there are three active deals backed by the likes of Mitch Kapor, the founder of Lotus and Dave McClure, a prominent angel investor and founder of 500 Startups – one of the most prolific investors in Silicon Valley.
This phenomenon is unique to equity crowdfunding. Where else will you find some of the most successful investors willing to bring you in on a deal at the same time and on the same terms as themselves? I’d put those in the “good” deals category!
We’re excited about this space and what it can do for entrepreneurs, investors and the economy. We’re also excited about the tremendous amount of interest already expressed by the thousands of subscribers like you who have read about equity crowdfunding with us in the Sunday Investment Review.
That said, it may take some time to get used to equity crowdfunding. Remember, investing in securities like mutual funds, options, and more recently, ETFs, was once “new” and probably intimidating too. But with a little education and patience, these investment vehicles have become a standard component of millions of investors’ portfolios. If you haven’t already, be sure to watch our explainer video. It takes under three minutes to watch:
Ed. Note: Private equity crowdfunding is one of the most exciting developments to hit the market in a very long time. In fact, some estimates say this market could grow to roughly $300 billion. So if you’re interested in getting in on the action, it’s important to stay informed. That’s why The Daily Reckoning email edition features regular articles from Wayne Mulligan and his partner Matthew Milner. These gurus are ahead of the game and could help some lucky investors see the kind of profits most people only dream about. If you’re not getting the FREE Daily Reckoning email edition, now is the time to get in. Sign up for FREE, right here, and learn all you need to know about this promising new market.