Crowdfunding Investing: A Portfolio Approach

By Nathan Rose, Assemble Advisory & Will Mahon-Heap, Equitise

Who can invest in startups?

Many wealthy investors have long had exposure to venture capital in their portfolios, and now retail investors have the opportunity to add this asset class through equity crowdfunding investing.

Until recently, retail investors (most of the public!) were shut out of early stage company investing. The rules said that, without a full initial public offering (IPO) on an exchange, early stage companies could only market to sophisticated and high-net-worth investors. The cost of an initial public offering is prohibitive for companies needing to raise money in the $250,000 - $2 million range, thus effectively ruling out the possibility of bringing these companies to retail investors.

Early stage companies had to rely on angel investors, venture capital and private equity for funding. High minimum investment sizes, typically of at least $20,000 per company, made early stage investing an exclusive domain. Such high minimum investment sizes meant ordinary retail investors simply didn’t have the cash to play the game without putting an unreasonable proportion of their wealth at risk, even if the rules had allowed them to.

What's new about equity crowdfunding investing?

Equity crowdfunding investing has changed all that. Technology and a friendlier regulatory environment has enabled early stage companies the means to seek funding from retail investors, and 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 - $2,000 mark now mean it is a realistic addition to the portfolios of mum and dad investors.

These lower minimum investment sizes mean that people with ordinary, middle-class levels of net worth can realistically buy into several crowdfunding offers without putting a substantial proportion of their wealth at risk. While early stage companies are individually very risky, owning stakes in several of them means the risk is diffused across several opportunities.

Here is how it could work

Here’s how it could work – invest in ten equity crowdfunding investing opportunities at $2,000 each – an outlay of $20,000 (not an unreasonably large sum in the context of the amount we invest in property and retirement portfolios across a lifetime). Eight of these companies completely fail, one of them is a moderate success and doubles in value, one of them is a large success and increases in value by twenty times. This would see the portfolio rise in value to $44,000 – a return of more than twice the initial outlay, despite a failure rate of 80%. This is the sort of outcome venture capitalists hope for – they invest in many opportunities, expecting most will fail, but that the successes will tend to be large enough to make up for the failures. The proportion of right and wrong does not matter - what counts is the accumulated payoff.

It is also possible all ten could fail. That’s a risk, and a non-trivial one at that, which is why it is also important to limit the exposure to early stage companies to a small proportion of a total portfolio. To be clear, the vast majority of a portfolio should remain safe. Never be exposed to the possibility of losing everything. Nassim Taleb (author of Antifragile) talks about the merits of a “barbell” strategy in investing – the numbers he uses are 90% in safe assets, while 10% can be put into high-risk venture capital, hoping for the big payoff. Crowdfunding investing makes this strategy possible for mum-and-dad investors.

Of course there needs to be education and companies need to make clear that early-stage crowdfunding investing is risky – in fact, the equity crowdfunding platforms and the documentation in each offer makes this abundantly clear. So long as investors don’t put all their eggs in one basket, equity crowdfunding investing has the potential to be a great addition to portfolios.

A disclaimer: This is not investment or legal advice. It takes no account of your personal financial circumstances. You should consult a financial adviser before making any investment decision. The authors expressly deny any loss resulting from use of the general information in this article.


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About the Author

Nathan Rose is the founder of Assemble Advisory, a consultancy for equity crowdfunding. We help busy company founders get their information memorandums and financial models in order, and provide advice on structuring a successful equity crowdfunding campaign.