Venture capital is no longer the exclusive preserve of the wealthy, says bestselling author Nathan Rose. Startups are building the economy of the future. They are disrupting old markets and finding new ways to solve problems. Wealthy investors have always been able to invest in these types of exciting opportunities and enjoy the potential for outsized returns in the event the companies achieve their ambitions.
However, until recently, most of the general public were shut out of early-stage company investing. High minimum investment sizes of ~€ 50,000 per company made early stage investing an exclusive domain. Ordinary investors simply didn’t have the cash to build a diversified investment portfolio without putting an unreasonable proportion of their net worth at risk.
Equity crowdfunding has changed all that. It allows companies to seek funding from ordinary members of the public, under a reduced disclosure regime. These investors are empowered to screen and compare a large number of opportunities to make their own informed decisions. Minimum investment sizes closer to the € 500 mark now mean that it is a realistic addition to anyone’s diversified investment portfolio.
What is equity crowdfunding? It is a way of raising finance by asking a large number of people to each invest a small amount of money. It allows businesses to reach thousands of potential investors online. Equity crowdfunding companies are often early-stage, trying to deploy a new business model, with little operating history. Investing in these kinds of startups is inherently risky.
However, with great risk can also come great reward. The goal of equity crowdfunding is to pick the “next big thing”. Imagine being one of the earliest investors in Facebook, investing on exactly the same terms as Peter Thiel in 2004. In that scenario, you could share in a windfall profit once Facebook became the global social media behemoth that it is today.
Here’s how it could work: invest in ten equity crowdfunding opportunities at € 2,000 each – an outlay of € 20,000 in total. Eight of these companies fail, one of them is a moderate success and doubles in value, while one of them is a large success and increases in value by twenty times. This would see the portfolio rise to € 44,000 – more than twice the initial outlay, despite a failure rate of 80 %. This is the sort of outcome venture capitalists expect. They invest in many opportunities, understanding that most will probably fail, but hoping that the successes will be large enough to generate a positive return.
It is also possible that all ten could fail. This is why it is important to limit the exposure to early-stage companies within a portfolio. The majority of funds should remain safe. Nassim Taleb (author of Antifragile) talks about the merits of a “barbell” strategy in investing – the numbers he uses are 90% in low-risk assets, while 10% can be put into high-risk venture capital, hoping for the big payoff. The “risky” part of the portfolio is where equity crowdfunding has its place.
Equity crowdfunding gives worthy companies access to investment from ordinary people, and allows those investors to share in the returns. It is also forging a more direct relationships between companies and those that surround them – their “crowd”.
This is is irrevocably changing the culture of investing. When we encourage the public to explore direct ownership in private companies, we get citizens with greater levels of financial education, taking responsibility for their futures. Venture capital is no longer the exclusive preserve of the wealthy.
Keep an eye on the initial public offerings taking place over the next few years. There is every chance that their origins will have come through the collective power of the crowd.
Nathan Rose is the bestselling author of Equity Crowdfunding: The Complete Guide For Startups & Growing Companies. He runs the website www.startupfundingsecrets.io, hosting the world’s best crowdfunding learning resources to teach entrepreneurs how to raise the money they need, while gaining massive marketing exposure at the same time.