Investing in early stage companies and startups is exciting and can deliver handsome returns. No debate about that.
But, there is a right way and a wrong way. The right way is to do what smart, professional angel investors do. They do good due diligence. They actively work to add value to the company to help it succeed. They monitor the activities of the company and they make sure good corporate governance is in place.
The wrong way, in my view, is to invest passively and select the companies from a crowd funding website.
Case in point. Recently the UK's booming crowd funding industry hit a rock. A number of companies funded on platforms such as Seedrs and CrowdCube, the two leading platforms, went belly up. Hundreds of investors collectively lost more than GBP 2 mn.
Anyone who knows me can tell you I have never been a fan of equity crowdfunding platforms. My view is that the risks far outweigh the reward and investors will be disappointed in the end. The platforms, on the other hand, will profit handsomely.
I wrote about this nearly two years ago to the day on my Angel Blog. Here's a snippet from my post on March 18 2014.
"There will be disasters in the crowd funding space sooner or later. There will be cases of fraud. There will be lawsuits brought by angry investors who feel they are not treated fairly in a corporate action. Inevitably there will be cries for tougher regulation."
I won't bore you with the detail here. One article in the Telegraph I found suggested there have been 70 crowdfunded companies, about 20% of the number funded so far, have gone bust while only 1 has delivered handsome returns of about 3 times investment.
I'll concede the glass maybe half full. The jury is out on the other 80% of the companies.
Still, the news flow is alarmingly predictable. I did a search on google recently and found a chorus of articles in the popular press talking about potential disasters waiting to happen. Seems I was not alone in my concerns.
My esteemed colleague Gonçalo de Vasconcelos, CEO of Syndicate Room, sent me an e-mail this week. He pointed to the failure of Rebus as evidence that the industry is prone to problems that go beyond simply the normal business risks of crowdfunding.
Goncalo runs an equity financing platform that takes crowdfunding to a higher level and helps remove some of the risks. At Syndicate Room, each deal posted has a lead investor who is putting money at risk and who and has a track record of success and who supports the transaction. Investors in the deal go in on the same terms as the lead investor.
Syndicate Room is not the perfect solution, but in my view it is a far better alternative and will yield far better results than CrowdCube and Seedr's will. Incidently, I don't have any money invested with Syndicate Room and I have not done any research into Syndicate Room's due diligence process or the due diligence process and integrity of the lead investors on their site.
The conclusion I still can't dismiss is that the keys to successful investing in startup and early stage companies are in the hands of the investors themselves.
Investors should invest in companies where they know the entrepreneurs, they understand the industry and the business and can draw conclusions as to the company's genuine prospects for success.
Investors can increase their chances of success by actually adding value to the company they invest in - introducing the company to clients, opening the doors to financing, structuring company governance, serving on the board of directors.
It is of course impractical for each investor in the crowd to do these things. However, it is practical for investors to join syndicates, invest in portfolios run by dedicated Angel investors, ask critical questions of companies, do some of their own homework to assess the real propensity for the crowd funded company to succeed.
Call me biased. I'm an angel investor. I run an angel investment fund. I'm an investment manager. So naturally I have to stand on this soap box. Or call me practical, wise, full of good old fashioned common sense. You're the crowd. Judge for yourselves.
But, there is a right way and a wrong way. The right way is to do what smart, professional angel investors do. They do good due diligence. They actively work to add value to the company to help it succeed. They monitor the activities of the company and they make sure good corporate governance is in place.
The wrong way, in my view, is to invest passively and select the companies from a crowd funding website.
Case in point. Recently the UK's booming crowd funding industry hit a rock. A number of companies funded on platforms such as Seedrs and CrowdCube, the two leading platforms, went belly up. Hundreds of investors collectively lost more than GBP 2 mn.
Anyone who knows me can tell you I have never been a fan of equity crowdfunding platforms. My view is that the risks far outweigh the reward and investors will be disappointed in the end. The platforms, on the other hand, will profit handsomely.
I wrote about this nearly two years ago to the day on my Angel Blog. Here's a snippet from my post on March 18 2014.
"There will be disasters in the crowd funding space sooner or later. There will be cases of fraud. There will be lawsuits brought by angry investors who feel they are not treated fairly in a corporate action. Inevitably there will be cries for tougher regulation."
I won't bore you with the detail here. One article in the Telegraph I found suggested there have been 70 crowdfunded companies, about 20% of the number funded so far, have gone bust while only 1 has delivered handsome returns of about 3 times investment.
I'll concede the glass maybe half full. The jury is out on the other 80% of the companies.
Still, the news flow is alarmingly predictable. I did a search on google recently and found a chorus of articles in the popular press talking about potential disasters waiting to happen. Seems I was not alone in my concerns.
My esteemed colleague Gonçalo de Vasconcelos, CEO of Syndicate Room, sent me an e-mail this week. He pointed to the failure of Rebus as evidence that the industry is prone to problems that go beyond simply the normal business risks of crowdfunding.
Goncalo runs an equity financing platform that takes crowdfunding to a higher level and helps remove some of the risks. At Syndicate Room, each deal posted has a lead investor who is putting money at risk and who and has a track record of success and who supports the transaction. Investors in the deal go in on the same terms as the lead investor.
Syndicate Room is not the perfect solution, but in my view it is a far better alternative and will yield far better results than CrowdCube and Seedr's will. Incidently, I don't have any money invested with Syndicate Room and I have not done any research into Syndicate Room's due diligence process or the due diligence process and integrity of the lead investors on their site.
The conclusion I still can't dismiss is that the keys to successful investing in startup and early stage companies are in the hands of the investors themselves.
Investors should invest in companies where they know the entrepreneurs, they understand the industry and the business and can draw conclusions as to the company's genuine prospects for success.
Investors can increase their chances of success by actually adding value to the company they invest in - introducing the company to clients, opening the doors to financing, structuring company governance, serving on the board of directors.
It is of course impractical for each investor in the crowd to do these things. However, it is practical for investors to join syndicates, invest in portfolios run by dedicated Angel investors, ask critical questions of companies, do some of their own homework to assess the real propensity for the crowd funded company to succeed.
Call me biased. I'm an angel investor. I run an angel investment fund. I'm an investment manager. So naturally I have to stand on this soap box. Or call me practical, wise, full of good old fashioned common sense. You're the crowd. Judge for yourselves.
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