Ever since the JOBS Act passed, investors in America have been walking in uncharted territory. Without a map or a compass, financiers need to plot a smart course to avoid crashing on the rocks.
Both accredited and non-accredited investors can now crowdfund private companies on platforms like Microventures, while non-accredited investors can spend as little as $10 to back a company on Republic. Complete democratization has blown the doors off the investing world, giving people opportunities that were once reserved for the wealthy elite.
What’s Changed in Investing?
Founders of businesses are happy to take money wherever they find it. With more diverse funding options, startups can raise capital from the community instead of pleading their cases to angel investors and wealthy uncles. This allows companies to solicit feedback before they negotiate with big-time investors, improving their leverage in later funding rounds.
Publicly traded companies have also joined the action. Thanks to StartEngine and similar platforms, anyone can invest in a public company without the fees or limitations of traditional banks.
These changes are massive, yet the biggest change of all involves the emergence of entirely new investing technologies. Blockchain-enabled cryptocurrencies via platforms like Coinbase and Binance create entirely new possibilities. With no intermediaries like banks, investors can exchange their assets directly for a stake in a business.
Volatility is the most important factor. Stocks in the S&P 500 have moved up and down for decades under known conditions. Startups and direct investing opportunities create high risks, but they also open the door to incredible rewards for those fortunate enough to back the right horse.
More Access to Good Investments
Investors and founders share one benefit in this new world: access. Investors below a high wealth threshold can now participate in high-return investments that were previously off-limits. Common people can pick their risk tolerance, choose which companies to back and pull the trigger in an afternoon.
Founders experience similar perks. Those with strong VC networks can always turn to their friends for cash, but those without have traditionally been forced to play the pitch game. Big investors remain important in the startup world, but they no longer dictate who lives and dies via access alone.
On the founder side, equity crowdfunding has proven to be successful for most ventures. Republic, an equity crowdfunding platform, boasts a 95 percent success rate for founders who would have been more likely to be passed over by traditional investors (women and minority founders, notably). Of course, equity crowdfunding is not a magic wand; an expensive campaign to attract backers might still leave the company short, for example. Although that usually means the product would have struggled in the first place, the acceleration of the risk can be an eye-opening experience.
Learning to Navigate the New Investing World
With more options than ever before, investors need to understand the best way to utilize this funding system. These four tips should keep investors new and old on the right path in a strange new world:
1. Take small bites.
Rather than go all-in and learn the hard way, pick a few founders or projects to back with small sums. Pixar, for instance, made a small bet on an animated film in 1988. When that film won an Oscar, the studio shifted focus to become the titan it is today.
Step back and wait to see how backed companies do. Some founders are great with ideas and bad with money, while others know how to transform innovative concepts into successful businesses. Pay a small amount to learn the ropes and make larger bets only with the confidence of experience.
2. Identify risk tolerance beforehand.
How much is too much to lose? It should always be said: Do not invest what you cannot afford to lose. Designate a certain percentage of money to investing and sprinkle it across multiple companies to create a diverse personal portfolio. Use future income to reinvest in promising prior investments, but never bet big on any single security.
3. Approach new markets carefully.
Be diligent when it comes to volatile markets. Cryptocurrency, for example, is a bit of a wild ride for investors. New coins appear every day, and while some prove worthwhile, others are thinly veiled cash grabs. For example, while bitcoin and Ethereum spent 2018 in free fall, VeChain and Binance Coin rose 15 and 70 percent, respectively. Before jumping into crypto — or other unpredictable markets — do the research and stick to an investment budget to avoid major losses.
4. Understand voting rights.
Non-voting shares have become increasingly common, especially in tech circles. Snap raised the non-voting stakes last year, while companies such as Dropbox and Spotify worked to limit their investors’ voting power. Limited input might be right or not right for your investing strategy at the time. So before dropping $10,000 into a Regulation CF equity crowdfunding campaign, think about how to gain more leverage from that investment.
Equity crowdfunding is already disrupting the startup scene and investing industry. This changing of the guard allows for founders and investors to participate in ways we’ve never before seen. It’s exciting to witness. Of course, any new opportunity comes with risks, but with research, due diligence, and thoughtfulness, equity crowdfunding could become one of the best investing strategies in modern times. It’s all about making decisions that are right for your portfolio, your business, and your goals — thankfully, equity crowdfunding offers more people more choices than ever before.