“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.”
Every week, we receive emails from Crowdability subscribers 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.
What’s worse, in cases like the mortgage crises, the big institutions were often considered “too big to fail” – leaving everyday citizens holding the bag.
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.
Concern #1: 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 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% of your investable assets.
For example, if you have a $500,000 portfolio, you’d allocate roughly $25,000 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.
Concern#2: It’s Too Complex & I Don’t Have Enough Time
This is another frequent concern we hear from investors.
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 start-up 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. In fact, my partner Matt wrote about this topic on Wednesday »
Essentially, with a single check, you can put capital into 10 different start-ups at once – almost like a “mutual fund for start-ups.”
Concern #3: 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 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 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!
It’s Just The Beginning
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 Crowdability subscribers who read our newsletters each week.
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.
So please continue to reach out with questions or concerns – we’re here to help! You can reach us by emailing us at: email@example.com