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With startups such as Uber, Klook, GoGoVan reaching record valuations, many investors are looking beyond traditional asset classes to early stage ventures. However, the opportunity to directly invest in startups is reserved for those with the connections to an entrepreneur or a VC firm. The investment process tend to be opaque, time-consuming, and expensive. But now, with the arrival of technology-enabled equity crowdfunding platforms, startup investing is more transparent, efficient, and cost-effective; available to everyone looking to expand his or her investment portfolio.
“The small ticket size is an investment hack equity crowdfunding provides. Whether you invest 10K or 1M, you’re still an investor, receiving updates from the startup and tracking the entrepreneur’s journey. This is an efficient way to get experience in angel investing with a small investment.”
— Jason Calacanis, Founder of Angel University
Three Ways to Invest in Startups
Until recently, there were generally three ways you can be involved in early-stage venture investing:
ONE: Invest directly through your connections
You can directly back an early stage company if you know the entrepreneur, likely through family, friends, school, or work. This channel is very limited and the decision to back one may be more emotionally driven than return driven.
The other way to gain access to startups is to attend demo days or conferences. This can be extremely time consuming and taxing. Not to mention you would be competing with other well-known VCs or angels for an entrepreneur’s attention.
TWO: Invest indirectly through VC funds
VCs are highly exclusive. Well-known VC’s such as Sequoia or Kleiner Perkins cater primarily to LPs that have worked with previously. Additionally, early-stage focused VC firms generally require individual investors to commit at least a million USD for at least 5 years. Growth and later-stage funds have much higher minimum investment barriers. Therefore, unless you already have a connection to a VC firm, AND can tolerate having the entire check amount be illiquid, AND the VC happens to be raising a new fund, it is unlikely you will be invited to invest in a VC.
Investing in a VC fund is also expensive due to fund management fees. Most of the industry follows the 2+20 rule, meaning the VC takes 2% of the fund size for management fees each year, plus 20% of any profits for carried interest. The top firms can charge even higher fees such as 3+30.
By investing in a VC, you have no control or visibility on the investments beyond general thesis and guidelines. The VC selects the startups and dictate the terms without your influence, and you generally have no access to the companies or entrepreneurs.
THREE: Invest indirectly through institutional funds
You can invest in a mutual fund that invests into a VC. However, this is very similar to investing through a VC, with an additional step removed from the investment. This generally means increased opaqueness and additional fees, thus lower returns.
Equity Crowdfunding: Enables Everyone to Invest
Investors today have more tools to directly connect with entrepreneurs than ever before. Once exclusive to those invested in a VC fund, many investment options are now available to anyone with an internet connection. Equity crowdfunding platforms such as AngelHub bring highly vetted startups to investors directly. Think of equity crowdfunding as an online VC firm that charges less fees, requires a smaller check size, while giving you direct ownership of the investment decision and equity in the startup. Anyone who meets the status of a Professional/Accredited Investor can browse thousands of startups looking to raise capital and invest in minutes, at a ticket as low as USD10,000 per investment.
Beyond control and transparency, investing through equity crowdfunding platforms is also cheaper. Platforms such as AngelHub charge a one-time management fee of 2% per investment, compared to the 2% annual management fees charged by most funds. The deal-by-deal investment approach means you do not need to have all of your investable money readily available for capital calls, you can instead invest at your own pace without your money being locked up.
You pay high fees to give up control of your money when investing through a VC or institutional fund — you can now make your own decisions at your own pace with equity crowdfunding platforms.
Equity Crowdfunding: The Perfect Training Wheels
According to Jason Calacanis, world-renowned angel investor who backed Uber, equity crowdfunding is the best way to learn the rules of the game.
“If you can’t tell who the sucker at the table is, It’s you. So find another table or figure out how to be better than each of the other players. This might take time, but everything worthwhile in this life takes time and effort.
If you were learning how to play poker, would you sit at the $100,000 buy-in table with a bunch of sharks, or would you play at the $100 buy-in table for a couple of months until you were a winner? Use the equity crowdfunding platform to learn the game.”
Come to hone your skills as an angel investor at the Startup Impact Summit on January 25th, 2019 brought to you by WHub. Get your tickets to meet Jason Calacanis and many other world-class entrepreneurs and investors. Jason will also be hosting an exclusive angel investing workshop for a private audience. Email hello@whub.io to find out more with “Calacanis” in the subject.
