Funds a Crowd

My wife asked a question about a movie we watched recently, and I responded with, "I should know, I'm in the business."

I once stood on a hill and imagined all of my windmills lining the landscape collecting wind energy and powering homes.

When it comes to electric vehicles, I'm sure my car company will soon be considered not only a leader but an innovator that redefined how we think about vehicles..

And, among friends, I wonder too loudly how "my places in Austin and Miami are doing during the quarantine."

The truth is, I'm not a titan of industry. I'm not a majority shareholder in any of these companies or real estate investments. In fact, my total investments are barely worth the t-shirt each of these companies will inevitably send me in the mail. But with the rise of crowdfunding sites such as Republic, WeFunder, and NetCapital, small-time investors can now at least feel like they're part of something much bigger.

Are the risks worth the potential payouts? Are wannabe angel investors sinking money in sinking ships? And what are the upsides to investing in a crowdfunded company (aside from the free t-shirt)?

What is Crowdfunding?

Imagine Kickstarter, but for companies. Small businesses that are looking to grow put their financials out into the universe, and ask for capital from investors around the world. Usually, these investments take the form of tiered pricing. Invest more, and get more in return - usually in the form of ego-boosting swag. There are the aforementioned t-shirts, but companies will also offer your name on their investors page, discounts on eventual products, or private meetings with founders. But ultimately, these investors want the companies to do well. To be acquired. To IPO. To see their small equity balloon exponentially as the rest of the world sees just how amazing these companies are.

In short, this is angel investing for the masses.

The Risks

Angel investing is incredibly risky. Sure, most angels expect anywhere from a 25 to 60 percent return, but diluted additional funding rounds and the very real chance of everything falling apart are some serious issues to consider before throwing down your own cash.

And that brings me to, perhaps, the biggest risk: this is your own cash. This isn't a fund. These are individual investments that can easily go away - along with your money - in the blink of an eye. And because you are a minority investor, you have no say in management decisions or funding rounds.

Oh, and only 1 in 10 startups is successful. So yeah, good luck.

The Benefits

You'll see this word thrown around a lot: potential. It's in pitch decks. It's in investor meetings. And it's used surgically to show just how amazing your investment can be while also covering everyone's ass in the room. A study found that the overall return on 1,100 plus angel exits was 2.6 times the money in 3.5 years, or about 27% gross Internal Rate of Return. But those numbers take into account that more than 52% of those exits lost at least some of the initial investment and only 7% provided most of the returns. So, diversifying your personal investment portfolio is key.

Cast a wide net, and hope you pull in a big fish. This is why I like crowdfunding. I know not every one of my investments will payout. But the hope is that with every 9 that fail, 1 will hit big and (hopefully) not only cover my losses but provide a nice return. And because these crowdfunding sites do a significant amount of due diligence while also providing detailed analyses of each company's financials, my trust in the upside outcomes of my investment is increased.

Denouement

Crowdfunding has increased almost 90% year over year for the past decade. The JOBS Act created an exemption under the federal securities laws so that crowdfunding can be used to offer and sell securities to the general public and this, in turn, has fueled the rise. So, should you jump onto the crowdfunding wagon?

• Do so only if you're an accredited investor.

• Understand the risks.

• Look past the free swag and make sure the company is headed in the right direction with a product that can be ground-breaking.

• Underline, bold, and capitalize every mention of "potential" in a pitch deck or online discussion.

• Finally, I've always looked at any type of investing as informed gambling. Never invest more than you're willing to lose.