by Zack Miller, In 2009, while working on my book, Tradestream your Way to Profits: Building a Killer Portfolio in the Age of Social Media, I wrote an entire chapter on crowdsourcing investment ideas. Of course, back then, I wasn’t really talking about crowdfunding per se, but I did see the tremendous potential that added transparency and global access to funding startups portended.
Fast forward a few years and we just learned in March that crowdfunding giant, Kickstarter,topped $1 billion in total pledges for crowdfunding campaigns. Equity crowdfunding, the close brother to Kickstarter’s rewards-based crowdfunding that involves real investing, did over $200M in investments in 2013 and will easily double that this year.
For those of us who want to profit from equity crowdfunding, but are wondering how to go about it, my firm polled more than thirty of the smartest and most successful crowdfunding experts — entrepreneurs, industry analysts, and market participants — to assemble The Ultimate Investor’s Playbook to Crowdfunding, which highlights the asset allocation, diversification, due diligence, and crowdsourcing strategies the pros use to increase their chances of success while mitigating the risks inherent in the startup investment class.
Unique to crowdfunding is the opportunity to tap into the wisdom of the crowds to build an investor portfolio. Here are three tips for crowdsourcing a diversified portfolio of high quality startups, based on my experience as the OurCrowd investor community leader.
Piggyback top angel investors to build a world-class portfolio of startups
Charles Luzar, editor of crowdfunding industry resource, Crowdfund Insider, explains, “Say Company A is raising money to release a new mobile game. This company may have a crowdfunding round and be raising money on AngelList at the same time, and maybe Mr. Prolific Investor just brought his syndicate into the AngelList round. A smart investor will see that and realize that this investor – a seasoned, successful angel investor – believes in this company. The crowd can and will work together to pick the winners . Watch for trends and movement, even outside of that particular round.”
Equity crowdfunding not only gives people access to one of the hottest asset classes — startups — but it does so by inserting an added level of transparency and interactivity. Sitting in the office or at home, an interested person with little experience investing in private companies can now identify, research, and invest in deals that were solely the purview of closed-door, clubby meetings. Equity crowdfunding enables people to crowdsource their investment ideas by piggybacking on what the top angel investors are doing with their money. By tracking and following their moves, new investors can build a diversified portfolio of high-quality startups.
Identify and invest in the Right Founders
When asked about his advice for new participants in equity crowdfunding, author, speaker, and crowdfunding evangelist, Devin Thorpe said, “Start by investing the way angel investors have been doing it for years. Invest in people you know or who know people you know and trust. Focus on people within your geographic community or social sphere so that you’ll know where to find the entrepreneurs easily and won’t be left wondering what has happened. Then be sure to ask the hard questions. Don’t invest in what you don’t understand.”
Startup investing is a team sport. In a risky asset class, investing in a talented team is one of the best ways to improve your ROI. Equity crowdfunding platforms provide good insight into the founders of young company. Look at the founding team’s previous experience — all things being equal, I’d rather invest in an entrepreneur who’s failed once or twice than someone who hasn’t attempted to ride the startup roller coaster.
Steve Dresner, founder of dealflow.com, thinks investing in quality founders is paramount in angel investing, “Invest in founders who have domain expertise in the business they are raising capital for and founders who have shown an ability to create value in prior ventures.”
Use curated platforms or syndicates to identify crowdfunding opportunities
As more companies embrace alternative forms of financing and turn to equity crowdfunding platforms like AngelList, CircleUp, FundersClub and my firm, OurCrowd, there are plenty of deals to choose from. But where do you start? Enter curated equity crowdfunding platforms. As opposed to open marketplaces, where any company can list its fundraising, curated platforms require companies to apply for acceptance in an attempt to identify higher quality investment opportunities.
Many early stage companies fail to earn a return on their investors’ money. That’s why it’s so important to improve your chances by crowdsourcing more investable opportunities. Ryan Caldbeck, CEO of CircleUp explains, “Platforms with specialized industry experience are going to be more helpful to companies raising in terms of value-add, which translates into a more educational partnership with the investor. At CircleUp, our team is experienced in and passionate about consumer retail, and we leverage that expertise to educate our companies and establish key partnerships on their behalf.”
Uncurated platforms understand how hard it is for individual investors to pick winners. That’s why they’ve created syndicates — opportunities lead by a strong investor on to which other investors piggyback. This is how deals happen in the offline world and the same format has found its home in crowdfunding.
Sramana Mitra, founder of 1M/1M and who works with entrepreneurs globally, suggests the importance of syndicates for new investors when she recommends, “If you have never invested in a startup, it is better that you join a syndicate led by an experienced investor with some track record who knows how to do due diligence, set terms, and manage the relationship with entrepreneurs. Walking into a deal without any experience will, most likely, result in huge losses. The startup investing game is extremely complicated.”
Tapping into the wisdom of the crowds can be more powerful than harnessing expert opinion. According to crowdfund wisdom researcher, Lior Zoref, “Crowdfunding is based on a phenomenon called Wisdom of Crowds. Under certain conditions, big crowds can create intelligent answers to difficult questions. The question investors often ask themselves is whether an idea or a startup is worth investing in. When a big crowd of small investors agree to invest, there’s a collective intelligence in that action. This means that there’s a big crowd who thinks that it’s a good idea to invest in. Crowdfunding not only enables to make new ideas become businesses but also give big crowds the power of making dreams come true.”
Crowdfunding is a phenomenon that’s changing the way capital is allocated to ideas, projects, and companies. When used for investment purposes, crowdfunding can literally enrich an entirely new class of investors. Accessing the equity crowdfunding platforms is just the first step — by tapping into the wisdom of the crowds and crowdsourcing quality investments, a larger investor audience can and will invest in the next Facebook, Google, and Twitter.