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)
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
So, if you are one
of the investors who believe that angel investing equals seed investing, you’re
The Case for Diversification
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
(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.
Please read the remainder of this piece on Inc.com...
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