EquityZen's Blog On Startups and Their Economics

Think Angel Investing = Seed Investing? You're Missing Out.

Atish Davda | December 18, 2014

Imagine you are a public market investor. Your entire portfolio holds only penny stocks. You’re hoping for one of those investments to break through and return several times the investment, to make up for all the other losses. By the way, if you do pick winners, you won’t be able to touch your money for nearly a decade.

This strategy works if it’s a small part of your larger portfolio, but for most new venture – nearly all crowdfunding – investors, it comprises the entirety of their venture investments (successful seed stage companies take nearly a decade to see exit).

Now, imagine paying someone a finders’ fee and carried interest for putting together that portfolio of penny stocks. That’s the equivalent of “funds” and “syndicates” products available on crowdfunding websites that focus exclusively on early stage investments. Such asset class concentration (and fee structure) is rarely seen in the public market, but is all too common in the private, venture market.

Angel Investing (Online)
As equity crowdfunding grows, mindshare (and portfolio-share) taken up by angel investing has never been larger. According to Forbes, in 2013 the world saw over $5.1B of capital deployed via crowdfunded platforms – that is 89% higher compared to that in 2012.

While impressive at a high level, even a cursory investigation into this figure reveals a terrifying trend. Investors using these crowdfunding platforms are creating heavily concentrated portfolios, putting all their eggs in one basket. The basket is the asset class of early-stage (pre-Series B) venture backed technology companies.

So, if you are one of the investors who believe that angel investing equals seed investing, you’re missing out.

The Case for Diversification
As Wall Street Journal reports, 95% of new businesses fail to meet their projected return on investment, and it is widely accepted that nearly 80% fail to return much altogether. By comparison, Crunchbase’s data suggests only 3% of companies that have raised $90M+ fail, and over 80% are still operating including in public markets.

With such a stunning difference in success rates, it is clear late-stage VC backed companies have different risk profiles than do early-stage ones. Investors should be aware of diversification avenues available to them: later stage venture backed investments.

“But, I don’t have millions to invest. Can I still invest in later stage venture backed companies?”

Yes! Platforms, like EquityZen (disclaimer: I’m affiliated), that allow you to invest in secondary offerings in companies past their Series B financing offer a valuable means of diversifying your venture portfolio. In the public market analogy, it is like adding some blue chip, growth, and value names to your portfolio of penny stocks.

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