Yesterday we rated StartEngine’s current raise as a Deal to Watch. StartEngine is one of the major crowdfunding platforms. And we frequently rate investment opportunities listed there.
Because we use StartEngine to source deals for our members, the issue of bias came up. We do not have a financial relationship with StartEngine. But we do interact with them. And we both want equity crowdfunding to succeed.
So we decided to take a step back and consider the issue of bias. Could we effectively rate a startup within our ecosystem? And if so, how do we eliminate bias?
This was also a great opportunity for us to be transparent with you. I came up with four major questions about bias (and rating investment platforms) and put them to the KingsCrowd and Early Investing teams. Here’s what I found out.
How do you ensure nonbias when assessing a company’s raise?
Olivia Strobl (Senior Investment Analyst): This is always a challenge. The first step is to acknowledge where bias can exist. Once that potential for bias is identified, we can consciously work towards not letting it get in the way. Running investments through a knowledgeable and diverse team of analysts is essential. Our team spans a wide range of backgrounds. We bring our varied expertise to the table and that helps dilute any bias.
Andy Gordon (Co-Founder, Early Investing): You can’t. But you can subject your own biases to the scrutiny of others in a group discussion/assessment of a company. You have to be a good listener and respect the opinion of others in the discussion.
What about when that raise is in the private equity crowdfunding ecosystem?
Francis Vu (Investment Analyst): I’m all for supporting companies in the equity crowdfunding space. But for me, it’s about the merits of the investment and whether or not it has potential to be disruptive and generate strong future returns.
Ahmad Takatkah (Chief Investment Officer): Well, the best we can do is depend on the data. But instead of depending on historical data with inherent biases, we decided to compare all active companies and teams to each other. This includes companies from different industries. Then we decide whether to feature them in our Staff Picks or not. By doing this, we try to make the decision as objective as possible and focus more on the opportunity at hand rather than the industry.
Vin Narayanan (Vice President, Early Investing): Do we want crowdfunding to succeed? Yes. But crowdfunding only works if it can generate returns for investors. It’s not in our interest to play favorites. Additionally, we have no financial relationship with the investment platforms. Our only metric is can a startup generate a good return on your investment. Is its upside worth the risk of investing? If the answer to those questions is yes, then we should recommend it. If the answer is no, then we shouldn’t recommend it.
How often do platforms themselves raise money via crowdfunding?
Vin: Most do. And they should. Eating your own dog food is important.
Olivia: Many do! I think this actually makes for a better platform (money aside). Platforms that know firsthand the challenges and the rewards of raising via equity crowdfunding walk the walk and talk the talk.
Ahmad: Most of them do. If a platform can’t raise money for itself from its community of investors, then other startups might see this as a sign that they won’t be able to successfully raise funds on that platform.
What are the rules for platforms that choose to crowdfund? Can they raise capital on their own platform? On other platforms?
Vin: There are no formal restrictions. But the goal is to create a virtuous cycle, where your customers become your investors and advocates. So raising on your own platform is really the only decision that makes sense.
Olivia: I have seen platforms raise capital via their own platform and on others (talk about knowing your competition). There aren’t too many restrictions here that I am aware of.
Andy: No formal restrictions here. But it wouldn’t make sense to raise on another platform. It makes complete sense to raise on your own platform, and give investors who invest through your site and like your site the chance to invest in it too. It’s taking advantage of the classic crowdfunding dynamic of turning your users into your investors and vice versa.
So there you have it. Bias is always present. But we take many steps to prevent it from influencing our ratings and recommendations. We make sure that we have a diverse team from varying backgrounds. We take a deep dive into the data. And we work hard to ensure you get the best analyses possible.
We are also big believers in the crowdfunding space! Crowdfunding has significantly changed the startup investing ecosystem. We love being part of that change. And we’re excited to see what happens next!