February 20, 2019

Equity Crowdfunding: Opportunities For Entry And Exit

This is a Knight Contributor piece meaning it is written by a member of the KingsCrowd community. The opinions below do not reflect KingsCrowd’s, rather they represent that of the contributor. If interested becoming a contributor reach out to hello@kingscrowd.com.

As I mentioned in my prior article, a 5% portfolio allocation in equity crowdfunding investments is sufficient. Also you should invest in it knowing that you will need to build up to 20 companies diversified across various industries.  Invest in industries you know, and are progressive for example robotics, artificial intelligence, fintech, or a good concept that has a big market. If you have insight in some other industry by all means do your research, before investing in it.

In traditional Venture Capital, if you’ve done your research, then you will have 2-3 companies that will have 5x-10x (500% – 1000% returns), 3 in which you will get your money back and rest of which you might lose your entire investment.  This holds true in Equity crowdfunding as well. These returns are of course not a guarantee. You also have to consider the economic cycle, and the investment climate for these types of investments. At this time, even though the economy is showing signs of slowdown,  there is a lot of liquidity looking to invest in private companies.

What are you missing out on if you don’t invest in Equity Crowdfunding?

Equity Crowdfunding is a version of investing in venture capital, and is gaining traction fast. Traditional venture capital investing was previously only open to high net worth (accredited) individuals, who are investors with a net worth exceeding $1 million and has an annual income over $200k per year.  

To get some perspective, the below companies, backed by traditional venture capital, at some point are or another, have been available for investments by high net worth individuals, at a much lower valuation than they’re now.   Some of these returns may be more like 100x (or 10,000%), so if you invested $100, it would be worth $10,000. However, these types of investments are extremely rare. The rarity of these investments, make these unicorns. According to Wikipedia;   ‘A unicorn is a privately held startup company valued at over $1 billion. The term was coined in 2013 by venture capitalist Aileen Lee, choosing the mythical animal to represent the statistical rarity of such successful ventures.’

The key however is investing in these companies before it gets discovered, not after.

Below are some examples of these extremely rare finds, current valuations for which are phenomenal. &nbs p;

  • Lime ($2b)  

  • Airbnb ($29b)

  • SpaceX ($21b)

Equity crowdfunding has also produced unicorns like Zenefits and Brewdogs, and will continue to do so.

How are you contributing?

Nowadays, more and more private companies are raising money through crowdfunding investments. These are real companies, that are actually making a difference. For example, here is a biotech company, 20/20 Genesystems raising money on Seedinvest.com,  that is making a contribution in early stage cancer detection.

It is important to understand that you, with a very small investment, are helping the company raise money, which may be used for the following:

  • Creating jobs and paying salaries of employees

  • Infrastructure expenses – Eg; New Factory, Rent  etc

  • Research and Development for their products

  • Marketing / Advertising expenses

In the end you are helping the economy grow, and set a trend.

Exit Options:

On average you have to hold an investment for up to five years or more. Equity crowdfunding investments are not liquid, and their valuations go up with each funding round. However, there are times where you will be offered the opportunity to liquidate your investment at a much higher valuation than you invested in.  

Some of these events (termed liquidity events) are:

  • Mergers & Acquisitions: This is an occasion where another company might buy out your private company and you will be offered cash in return.

  • IPOs:  In rare occasions some private companies do go public and do offer exponential returns to their shareholders. For eg: look at Facebook, and consider the phenomenal returns of their private shareholders.

  • Funding round: On some occasions, you will be offered the option to exit your investment when the company is fundraising. Hopefully this is at a higher valuation.

Revenue sharing and Royalties are also offered by companies, for the investors. These are however, not common.

If you do feel comfortable with the return on investments, by all means, you should get out at these exit events.

Sources:

https://www.dummies.com/business/fundraising/venture-capital/venture-company-exit-options/

 

https://www.cbinsights.com/research-unicorn-companies


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About: Rudy banerjee

Experienced Senior Analyst with a demonstrated history of working in the investment management industry. Skilled in Sell Side, Securities, Mutual Funds, Trading, and Hedge Funds. Strong business development professional with a Master of Business Administration - MBA focused in Corporate Finance / Business Analytics from Georgia Institute of Technology.

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