Forget Bitcoin, Invest in Startups
If you are an investor, you’ve likely heard about the Bitcoin (BTC) craze. You might have heard about the crazy returns and are thinking to yourself, maybe I should get in on that…
Bitcoin (BTC) risks
There is a lot of speculation that Bitcoin is a bubble. It is a risky investment. In fact the entire “asset” is based on the public perception of what unit of value each coin holds, as opposed to being based on a government guarantee (traditional currency) or based on hard assets and cash flow (stock in a company). People are literally betting their house that this valuation will continue its meteoric rise bringing unprecedented returns to the people who got in early enough. Unfortunately, the BTC economy seems to be as unstable as ever despite the launch of futures trading. Bitcoin had its worst three days in a long time, losing 41% of its value since Monday.
But that’s the real risk: The BTC economy is entirely based on peoples’ belief that a Bitcoin holds value, and that value can be exchanged just like a government’s currency. But in a highly volatile market like this, investors — especially all the new people who are trying to cash in on the craze — will be scared off very easily by the wild swings (up to 60% or more) when it looks like they might lose their savings or risk being able to pay their mortgage overnight. A famous example is the Tulip craze of the 17th century Netherlands.
What is an ICO?
Capitalizing on the cryptocurrency craze, some startups have created a very new (and very risky) way to raise money. An “Initial Coin Offering” (or ICO) is a way for companies to setup a new coin, the value of which is usually pegged to a specific product the company plans to develop, market, and sell. The hope is that the coin will become more valuable as the company grows. But, in fact, the growth of one of these companies is necessary, but not sufficient, to any growth or appreciation in the value of the coin. What happens if that product doesn’t launch? What happens if the company pivots and launches a different product that takes off but is not connected to the coin? And these are only the risks you encounter in the case you buy a coin created by a company that is successful. There is also the obvious risk that the company itself will fold, as startups are always risky. Is there any way to recover part of your investment in any of these scenarios? The answer is no.
Regulation of ICOs
At this point in time, the U.S Securities and Exchange Commission (SEC) has made comments around how it believes an ICO should be regulated more like a traditional security (i.e. stock), but regulation is still in its infancy. On Dec. 11th, for seemingly the first time in the US, the SEC shut down an ICO due to it failing to register as a security. Other countries such as South Korea and China have banned ICOs outright, which created a big impact on the overall cryptocurrency markets. What is to say that sweeping regulation couldn’t hit this industry overnight and force all of these new coins’ value down to near zero?
Alternative to ICOs: Investing in Startups
There is, however, another way to seek outsized returns: buying equity in startups.
Venture capital has a lot of mystique. Every investor dreams of investing in the next Facebook or Uber. The problem is that, up until recently, you had to be an accredited investor to get access to these deals. But now, thanks to the JOBS Act, anyone can invest in startups that list their stock on funding portals like Netcapital.
Just like Bitcoin and other cryptocurrencies, these investments are risky, but also offer the potential for great returns. You are investing in real people, creating real jobs, fostering innovation, and buying real equity that is actually tied to the value of the company, just like you do on the public stock exchanges with larger more established firms. That being said, startups are still inherently risky and you should not invest any funds that you can not afford to lose entirely. Additionally, it can take a long time to get a return on your investment and, depending on the investment, it can be difficult or impossible to liquidate your investment, so don’t count on being able to get your money back.
Startups and small business are often cited as “the backbone of the economy.” These businesses are believed to create jobs, develop innovative ideas, and contribute to a dynamic and stable economy to a greater degree than larger and more established companies. Section 4(a)(6) of Regulation Crowdfunding adopted under the JOBs Act allows average investors to invest in startups, giving access to these formerly private deals to you. This allows average investors to diversify their portfolio and contribute to startups’ positive impact on the overall economy, all at the same time. Venture Beat states that “Data from companies that have been successful with an equity crowdfunding offering shows they hire on average 2.7 people within 90 days of a $300,000 raise.”
Invest and make an Impact
Investments in startups can also disrupt industries and change how we live. One great example is Court Innovations, a legal technology startup based in Ann Arbor, Michigan. Their technology allows people to fight a variety of municipal tickets and interact with their local court system all online. They are changing how we interact with the court system, increasing access to courts for everyone.. MJ Cartwright, Court Innovations CEO, was having trouble attracting institutional investors, but after raising $500,000 on Netcapital they were not only able to scale the business, but they raised an additional $1.8 million in additional capital.
So, while all of those ICOs out there are tempting investments, don’t forget about startups, a great way to invest in high growth opportunities that also help the economy as a whole.
Want to learn more about how to invest in startups? Follow our blog or email us at hello@netcapital.com
