Venture capital is growing enormously as a potential for exponential returns on investment. According to PitchBook, 2018 is on track to surpass $100 billion in deal value, an enormous achievement. Equity crowdfunding is a venture capital model disrupting the traditional world of VC by allowing greater access into startup investing – by communities of investors.
Crowdsourced capital raising for startups via equity crowdfunding, unlike non-equity crowdfunding platforms (think Indiegogo, GoFundMe), exchanges participation with a stake in the company. The field is being spearheaded by platforms like AngelList, Crowdcube, and OurCrowd. Opening up startup investing to a larger audience has several benefits – mainly, the ‘crowd’ can gain access to exclusive deals for lower minimum investments.
For example, OurCrowd, a leading global equity crowdfunding platform, has attracted over $750M in assets under management since 2013, and has 25,000 self-accredited investors on its platform. A starting investment in OurCrowd’s curated companies can begin at as little as $10K. This is a far cry from the traditional venture capital minimums at which, according to Rockies Venture Club, venture capitalists invest an average of $7M. Even seed-stage angel investment typically requires putting in $25-100K in capital. The OurCrowd crowdsourcing model allows for investors to diversify their portfolios easily, while diversifying the types of investors per company – leading to more opportunities for strategic connections, customers, and mentorship.
In the crowdfunding model, a ‘community’ of stakeholders with worldwide web contacts is a natural benefit. OurCrowd specializes in utilizing this community to benefit young startups, often by simply asking its constituents where they are connected to multinational corporations or other strategic partners for actual benefits to their portfolio companies. These connections are critical for startups seeking realistic partners, customers, or acquirers.
So, how can new investors get involved, and what do they need to know before embarking on becoming part of this risky asset class? All angel investors dream of finding and investing in the next Uber, Airbnb, Waze, or Mobileye, startups that have the potential to produce astronomical returns. While it is easy to get seduced by the hype, it is critical to manage expectations and learn the best practices of successful investors.
- Understand Risk
Statistically, the majority of startups in one’s portfolio fail. According to Horsley Bridge, a seasoned limited partner in VC funds, just 6% of their hundreds of investments have generated 60% of their total returns since 1985. Unlike the extremely-liquid stock market, where you can buy and sell shares on demand, startups are long-term, illiquid investments. Unlike the stock market, it is not uncommon for investments to go completely bust.
- Do Your Due Diligence
Wiltbank and Boeker found that investors who spent more than the median time performing due diligence had an overall portfolio return of 5.9X, while those that spent less than the median only had returns of 1.1X. OurCrowd, for example, typically evaluates potential startups through a lengthy process of studying the company’s team strength, historical revenue (if available), consumer base, market size, product development, and legal integrity.
- Invest More than Money
Angels Ashton Kutcher and Mark Cuban throw themselves behind their portfolio startups while still allowing room for the team to operate with independence. Angels should strive to offer their startups connections, business advice, and mentorship to help their investments succeed. OurCrowd’s strategic OurNetwork community and Corporate Innovation Program are rooted in this investing philosophy.
One of the most important rules of investing is diversification. The more companies invested in, the greater chance there is at least one “winner”. In startup investing, diversification can come in several forms; company, industry, and business stage. Some experts say that 10-15 companies is the sweet spot for building a strong portfolio, while the Monte Carlo Simulation suggests that 25 investments provides the optimal return.
- Be Patient
Angel investing is a waiting game. It often takes 7-10 years to see capital, so this is not a game for quick cash, despite its potential for returns.
To learn more about equity crowdfunding and startup investing, download this introductory guide: How Startups Are Born: An investor’s guide for the perplexed.
Liz Cohen, VP Marketing & Investor Community at OurCrowd, co-created this article with OurCrowd colleagues Sarah Lavin & McKinley Hall
OurCrowd is a Supporting Organization of our CSW Global 2018 conference taking place 24-28 October in Washington D.C. Over 60 US and international speakers from 15 countries will share their crowdsourcing experiences, knowledge and insight with delegates drawn largely from CSW’s North American community. Here is a full agenda and a few tickets remain available. We’d really like to meet you there.