Early Investing

Crowdfunding Shows Its Strength

Crowdfunding Shows Its Strength

Crowdfunding reached the ripe age of four years old earlier this month. It’s come a long way in a relatively short time. And we know much more about it now than we did back then.

Last week I gave you five of my top 10 observations about crowdfunding’s past and future. Here are the rest — beginning with a topic that’s particularly relevant to the trying times we’re in…

  1. Don’t sweat falling equity prices. A falling market is nothing new. In the past, I would get swamped with questions if the market fell: are you selling? What are you selling? How much are you selling? This time around, startup investors have enveloped me in a welcome cone of silence. Nobody has questions about selling. It can’t be done, not without a liquidity event (an IPO or buyout). The vast majority of liquidity events happen roughly 3-11 years after a seed round.When prices of virtually every investable asset class are falling, startup prices aren’t budging. Until now, this was an advantage only in theory. It’s the one investment where time is truly on your side. You just…have…to wait. The most promising startups will come out of this pandemic period just fine. Many will even be stronger on the other side.
  2. Valuations are mostly fair (for better or worse). In the bad ol’ days of crowdfunding, startup valuations ranged wildly. Investors could go bargain hunting. I looked for (and often found) exceptionally low valuations. Price discovery was my best friend. These days, most startups are priced fairly. Investment platforms are helping startups arrive at fair valuations. And investors can find comparable valuations from the thousand companies that have crowdfunded over the past four years. Bargain prices aren’t as common as they used to be. But neither are overpriced startups. Overall, it’s a positive development.
  3. The crowd speeds up the vetting process. I used to fear that investors would be put off by how hard it can be to get information about a startup. Four years later, I can see how foolish that concern was. The beauty of crowdfunding is you have an entire community vetting potential investment opportunities. Any investor can quickly get up to speed by reading the Q&A section on the startup’s investment page (on the portal where they’re raising). It takes 10 to 20 minutes. And you’ll find answers to questions you’ve thought of and many you haven’t. You can also ask founders your own questions. Most founders provide detailed and direct answers. The questions and answers uncover and expose weaknesses in a startup. And the crowd does it as well (if not better) than professional VC firms.
  4. From pre-revenue to revenue-generating startups, it’s your choice. When crowdfunding began, it was hard to find companies with a serious revenue generation track record. Startups with annual revenues of $1 million or more weren’t crowdfunding. Your only choices were startups with no revenue and startups just beginning to generate revenue. Now, the entire gamut of startups — from those generating no revenue to those generating more than $1 million of annual revenue — is crowdfunding. And there are plenty of variations on that theme. Some startups have little revenue but a ton of pre-orders. Some have one or two powerful partners ready to make a huge order. Others have created limited but fast-growing sales with no marketing spend. Investors have so many more choices than they used to.
  5. What happens now? Crowdfunding has only known good economic times and a bullish stock market. So what happens now? In the last couple of months, deal flow has been up and down. But the amount of money raised through crowdfunding has increased (it’s a small sample size though).

    Human nature says people prefer less risk in bearish markets. If this happens to crowdfunding, valuations will fall — allowing investors to buy shares at lower prices. Deal flow also slows down in bearish markets. But that shouldn’t create a big problem for investors. Deal quality is high enough to still generate plenty of great investment opportunities. Crowdfunders should do very well under the present circumstances. It’s a great time to invest, especially since many startups will encounter less competition for top talent as well as lower fixed and operating expenses.

Startup investing is needed now more than ever before. A small investment can turn into an uncommonly large gain. High upside is getting still higher. There are some industries that investors should avoid, like hospitality, restaurants, entertainment and travel. But overall, startup investing is one of the best investments you can make in today’s market.

The past four years have been interesting to say the least. The next four promise to be even more revealing.

Top Posts on Early Investing