Today, OurCrowd is featuring Part 1 of a special 3-part series from Matt and Wayne, the founders of www.Crowdability.com.
Crowdability provides individual investors with independent research and education on equity crowdfunding. With their free service, they aim to simplify the process of discovering and evaluating crowdfunding opportunities.
In this series that they’ve created especially for OurCrowd, Crowdability will address investors’ 3 most common concerns about Equity Crowdfunding.
“Dear Matt and Wayne: Does investing in equity crowdfunding deals make sense for me? I’m not a professional investor, and I’m not planning to invest millions into start-ups.”
Several times a week, our subscribers ask us variations of this same question. Since it’s such a common concern, we thought we’d dig into it today.
Let’s start with the simple answer:
Yes, it does make sense – even if you’re not a “professional” investor, and regardless of how much you intend to invest.
You see, equity crowdfunding was specifically designed to help small companies raise small rounds of financing, ideally in small amounts from many investors.
The fact is, you can dip your toe in the water for less than you might think.
Let’s take a look…
Based on their knowledge of private placements or traditional venture capital funds, many people assume they need to allocate millions of dollars to be an early-stage investor.
But thanks to equity crowdfunding, you can generally get started for about $10,000 – far lower than the millions it would take to become a limited partner in a venture fund, or the $50,000 to $100,000 minimums of private placements.
These low minimums enable you to build a portfolio of start-ups – a basket of many of them – over time. And given the risk of each individual company, this is a critical part of early-stage investing.
To put start-up risk in perspective, let’s take a look at how the professional investors go about their craft.
How the Professionals Do It
Venture capitalists are the professional investors who provide funding to young companies when they’re just an idea on the back of a napkin.
They know that for every “winner” they invest in that earns them a massive return (Facebook, for example, provided its early investors with a 2000x return), they’ll invest in 5 to 10 others that will either stumble along – or will go out of business entirely.
That’s why it’s so important to build a portfolio of holdings.
What It Means To Be “Diversified”
To make the numbers easy, let’s say you have investable assets (stocks, bonds, cash, etc.) of $1 million.
The professionals recommend that individuals allocate only a small portion of their assets to early-stage companies – in general, no more than 5% or 10%.
With $1 million and a 10% allocation to early-stage investments, you’d have $100,000 to invest in early-stage companies. (You can re-calculate the math based on the real size of your own portfolio.)
Data has shown that, for early-stage investments, you need a portfolio of at least 10 or 12 investments to be “diversified.”
In the above example, to reach your $100,000 allocation to early-stage deals, perhaps you’d commit $10,000 to each of 10 different companies.
Keep in mind that you would make these investments over the course of several years – for example, $20,000 per year for 5 years.
Lean On The Professionals
As you can see, you can become an early-stage investor and get the benefits of a diversified portfolio… all without investing millions in startups.
What’s more, you don’t have to do it on your own…
With some equity crowdfunding platforms – including www.OurCrowd.com – you can invest right alongside the professionals.
We believe that, with a little help from the pros, everyday investors can leverage equity crowdfunding to enhance their overall portfolio returns.
We applaud our readers who write us with their questions and concerns – and we’re always happy to help. For our next column, we’re going to cover another concern we often hear:
“It’s Too Complicated & I Don’t Have Enough Time!”