A Contrarian Approach to Equity Crowdfunding
I have been equity crowd investing since 2014 when the concept was starting to develop after some initial confusion from the JOBS Act. I have had the good fortune in my career to sell a few startups I founded and grew so that my wife and I could become accredited investors. No home runs but sufficient capital to enable me to pay it forward and become an angel investor.
The current conventional wisdom to diversify a startup portfolio amongst dozens of companies seems somewhat wrong minded and self-serving by the portals. Most people who are considering Reg CF investments likely already have (or should have) a diversified portfolio of public traded companies in index funds. This should be the first step in a sound financial plan before venturing into equity crowdfunding.
I believe it is imperative to concentrate your allocation to equity crowdfunding in a few select companies with larger investments . Of course, the total allocation should never be more than you can afford to lose. Invest in companies in industries and markets of which you have had prior exposure or experience. Part of the process of selection should be in-depth due diligence beyond the documents provided in the postings on the portals. Extensive discussions with the founder and his team, reading all available resources to do an independent validation of products, markets and the business model, visiting the facilities, using the product or service personally, etc. should be a part of the process. You will be surprised how much information is available with a little digging online. This process should take several weeks.
Recommending emulating the venture capital approach of spreading the risk to dozens of startups anticipating a high failure rate assumes you can’t lower your risk by more a conscientious and dogged approach to due diligence. Calculating objective outcomes to get to a mean result on a subjective assessment of what qualifies as a credible deal seems analytical folly. The Warren Buffet approach seems more appropriate by investing in just a few companies with products/services and business models you can understand. If the objective is to beat the return on publicly traded markets, having small investments in dozens of companies that will have high failure rates will likely not achieve that goal in the totality. Invest in startups that will beat the market in time and have attractive exits but not necessarily become the unicorns sought by VC’s.
A contrarian view to conventional wisdom.