4 Myths of Equity Crowdfunding: How to Become an Angel Investor

By Zack Miller, CrowdFunding Beat guest Contributor, General Partner and Head of the Investor Community at OurCrowd.

Equity crowdfunding is quickly finding its legs. For 2014, we estimated upwards of$700 million of capital invested in startups would be through equity crowdfunding platforms. Investors who have already migrated to these platforms are the early adopters, quick and flexible and open to trying an innovative new way to invest in the next Google, Facebook and Apple. However, many investors are still reticent to getting their feet wet since it’s still not entirely clear how equity crowdfunding works. This article dispels four myths about equity crowdfunding to offer investors a new investment track in some of the most exciting opportunities in the startup scene.

Myth #1: Companies that choose crowdfunding couldn’t raise venture capital

Raising money via crowdfunding channels may look easy, but in reality, it isn’t. And companies that are considering fielding an investment on an equity crowdfunding platform are, more times than not, choosing between many different sources of funding. Many of these companies have already raised an investment from an early stage venture capital firm or from other angel investors. Many will ultimately go on to raise venture capital in the future.

Take SCiO, for example. This pocket molecular sensor lets users understand the world around them. SCiO’s modern Star Trek-esque Tricorder raised almost $3 million on Kickstarter in a very popular campaign. SCiO also raised an investment round via equity crowdfunding on OurCrowd and counts Silicon Valley stalwart investment firm, Khosla Ventures, as an investor. There are numerous examples like SCiO that we and our equity crowdfunding peers can point to that demonstrate that investors signed up on our platform are seeing better and better quality investment opportunities as time goes on.

Companies choosing to go the equity crowdfunding route are doing so because of the added-value the transparency and collaborative investing native to crowdfunding, not because they suffer from the adverse selection of the finance industry’s winnowing process.

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Myth #2: Crowdfunding investors are all mom-and-pop investors

Equity crowdfunding essentially empowers every type of (accredited) investor to become a powerful angel investor with a souped-up deal flow. This obviously helps investors who haven’t had the time, energy, and network to access to quality startup investments but we’re finding that experienced angel investors are discovering value in equity crowdfunding platforms as well. Signing up to an equity crowdfunding platform not only opens up another deal flow channel for angel investors but it expands their geographic reach way beyond their local geographies. Angel investing is no longer a local activity — equity crowdfunding is one of the ways investors can instantly improve the value of their deal flow.

Angel investors are migrating towards equity crowdfunding platforms. Ryan Caldbeck, CEO of crowdfunding company, CircleUp, wrote in Forbes:

…We have found that angels love well curated equity-crowdfunding sites. Why? The answer is deal flow. Sure, there are a handful of angels in Silicon Valley (think Ron Conway) who see great tech deals before others and who have established such a prominent brand that companies come calling on them. For the vast majority of angels, however, and especially those outside the friendly confines of the Valley, it is both difficult and time consuming to generate quality deal flow. This is where great equity crowdfunding sites come in: a well curated site saves time, and extends the reach, for angel investors. This allows the angels to focus all their efforts on due diligence, which will ultimately yield a higher return on their time.

Equity crowdfunding makes everyone an angel investor and gives existing angel investors the scale to review more quality investment prospects around the world.

Myth #3: Investing on equity crowdfunding platforms is really tedious

Investing in startups has a lot of friction in the process — you have to kiss a lot of frogs before you find a good investment opportunity. You’ve got to line up a variety of investment candidates, meet with them, and begin your research on the ones that pique your interest. Once you find your startup ‘prince’, there’s negotiation and paperwork that can get very involved.

Equity crowdfunding platforms do a lot of the heavy lifting when it comes to curating and diligencing startup opportunities. At OurCrowd, we have boots on the ground and review upwards of 100-150 companies every month, on the prowl to find the next $1 billion investment opportunity…the next Facebook, Apple, or Google. We actually hear from our investors that they enjoy sifting through the investment opportunities onOurCrowd.com. We’ve lined up all the ducks so investors can simply log in to their accounts on OurCrowd and watch informative videos, plough through various presentations, and read a synopsis of our own work researching the companies that make it into our portfolio (we compile this work because we also invest our own capital into each one of the companies the appears on our website).

We sit on the same side of the table with investors and we experience investing in exciting startups together. There’s an ongoing lively conversation our investors engage in around each one of our investment opportunities.

Myth #4: Crowdfunding hasn’t provided any returns for investors

Look at the data and you’ll see that most venture-backed companies don’t end up providing a return on their investors’ money until year 7. The fact that equity crowdfunding is still in its infancy (most equity crowdfunding platforms are less than two years old) means that it’s still a little premature to look at returns. And yet, some investors using equity crowdfunding platforms are seeing a bright future.

CircleUp has said it’s had a small exit via an M&A. Funders Club has quoted someunrealized returns on its portfolio (meaning, the value of the portfolio is up on paper). In September of 2014, OurCrowd and our investors experienced the firstIPOof the entire equity crowdfunding industry. A developer of a bionic exoskeleton that’s helping paraplegics walk again, ReWalk Robotics went public on the NASDAQ and is now trading with a >$300 million market capitalization.

There will be losses in equity crowdfunding — there will have to be. But, it’s encouraging that the investment opportunities are there for potential profits down the road. There are 240,000 angel investors in the U.S. and many of them are turning to equity crowdfunding platforms for increased deal flow. There are a total of 8 million households in the country that qualify to participate in equity crowdfunding.

Many of these investors are also finding a home in equity crowdfunding platforms as they prefer the ease of use, curated deal flow and professionalism offered by today’s class of equity crowdfunding platforms – like the kind we’ve built at OurCrowd.

Zack Miller is a General Partner and Head of the Investor Community at OurCrowd.

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