Some say equity crowd-funding hasn’t taken off, but it certainly hasn’t gone away. There is still much room for the space to evolve.
Equity crowdfunding finds itself somewhere in the intersection amongst angel investing, venture capital, and public markets. Is private venture capital a capital network or has it evolved enough to be a marketplace? Is it little better than betting on your favourite horse at the races or is it a viable option for diversifying your investment portfolio? Do you invest in a venture as a favour to a friend or do you apply due diligence discipline and rank the opportunities alongside other private ventures?
When we evaluate private ventures as investment opportunities for Pique Fund, our process includes:
- Getting to know CEO and management team through experiential due diligence
- Analyzing the market opportunity and competitive environment
- Evaluating the business model
- Identifying potential risks and assess the team’s ability to make decisions in the face of uncertainty and handle potential risks
- Identifying potential impact – does the venture help take care of the village and improve access to essential resources for one or more groups of stakeholders?
Pique Fund typically invests when a venture has been in business for at least two or three years and is generating some revenue, but even at that stage, there isn’t often a long track record of performance to analyze. We need to evaluate other indicators of potential success.
We previously published a more detailed post about performing due diligence for angel investments. The question, when it comes to equity crowd-funded private ventures, is whether you as an investor get the opportunity to do the level of due diligence warranted by the risk of the investment opportunity, balanced with the size of the investment you’re willing to make.
For crowdfunded private ventures, investors are often not able to do the same type of due diligence because:
- They don’t have the same level of access to CEO and management team as in a seed stage or angel investment.
- They don’t have the same level of access to information. They don’t get as much time nor access because we might be one of many, many prospective investors.
And it’s also not quite the same as marketable securities and publicly traded companies.
- Investors don’t have access to the same level of disclosure of information as required for public companies.
- Private ventures don’t have the length of track record and performance as public companies may have.
- Investors don’t have the same opportunity for liquidity as we have for public investments. With public investments, we can sell at any time (maybe with a gain or maybe to recover some or all of our original investment).
- There isn’t the same level of regulation and protection of investors afforded to investors in the public market (buyer beware!)
Information on successful exits of private ventures for crowd investors is limited. Exits are important because the sale of your shares to a subsequent buyer, hopefully at a higher price, is how you’re going to get your financial return as an investor. Some of the publicly announced exits of crowd-funded ventures include:
- E-Car Club – sold to Europcar (CrowdCube, UK, 2015).
- Camden Town Brewery – sold to Anheuser Busch (CrowdCube, UK, 2015).
- On AngelList, through its various funds and syndicates, the crowdfunding platform can lay claim to Dollar Shave Club, Twilio, which went public in June, and Cruise, which sold to General Motors in March.
How to Mitigate Your Risk
If you’re still curious or interested in investing in private ventures via equity crowd-funding, there are steps you can take to manage or mitigate your risk.
- Read up on due diligence approaches for private ventures. Books such as David Rose’s Angel Investing, my book Integrated Investing, and the Angel Investing topic on Quora are great places to start.
- Ask for information. If there is something you want to know or have access to – ask.
- Allocate a small portion of your investment portfolio to private venture investing and a portion of that to equity crowd investing opportunities. Investing in private ventures is very risky so seek lots of appropriate advice and don’t invest any amount you can’t afford to lose.
- Invest with others. Find an investor mentor or a group of other investors with whom you can share information, ask questions, and experience different perspectives that could impact your investment decision.
- If you have any doubts about a venture or an investment opportunity, don’t invest. Learn to hone your intuition and then trust it. If the claims an entrepreneur is making seem too good to be true, they probably are. If you sense something odd about an opportunity, it might not be a good fit for you.
Some of our previous, older posts on crowdfunding:
- Let’s Talk About Crowdfunding
- Getting Money from the Crowd – Part 1
- Getting Money from the Crowd – Part 2 (Crowdfunding vs. Crowd-Sourced Equity)
- Getting Money from the Crowd – Part 3 (Online vs. Offline)
For more impact investing resources and tools, check out Integrated Investing: Impact Investing with Head, Heart, Body, and Soul, available at all major online book retailers.
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