Equity crowdfunding is causing quite a buzz among hopeful and experiences investors alike.
This new type of investing practice has opened the door to opportunities most people would otherwise not be able to access. It allows anyone over the age of 18 to invest in promising companies in exchange for private equity. It’s also the easiest path to becoming an angel investor — someone who invests early in these companies.
Becoming an angel investor can be personally and financially rewarding. That’s because you can support a mission or product you care about, while potentially generating 10x to 20x returns. In fact, some angel investors who invested in today’s biggest companies when they were starting out, such as Slack and Beyond Meat, have generated even higher returns. Andrew Braccia, a general partner at Accel who championed their investment in Slack, profited a 230x return.
However, there’s no guarantee returns will always be that high or that there will be any return at all. Angel investors need to earn their “wings” before they can build their wealth. This involves asking themselves some important questions before becoming an angel investor through equity crowdfunding.
What is your tolerance for liquidity?
Liquidity is a measure of how quickly you can get money out of your investment.
When making an angel investment, you’re receiving private equity that you may not be able to sell until there’s a liquidity event, which could be an acquisition, merger or initial public offering (IPO):
- Acquisition: An acquisition is when a company gains ownership of another company.
- Merger: A merger is when two companies form a new company.
- IPO: An IPO is when a company offers their shares to the public for the first time — typically, by listing on a stock exchange.
It can take years for any of these liquidity events to happen, so you should ask yourself if you can wait that long to receive a potential return.
How diversified is your investment portfolio?
Diversification is a strategy that mixes a wide variety of assets within your investment portfolio. The idea is that you shouldn’t invest your cash in one kind of asset — or as they say, “put all your eggs in one basket.” Instead, you should invest your cash in various asset classes to maximize your potential returns and minimize your exposure to risks.
While private equity is an asset class that can diversify your investment portfolio, it’s considered highly risky since most startups are expected to fail. However, when you invest through equity crowdfunding, you’re able to invest small amounts that can start at $100. This allows you to buy into multiple companies, in multiple industries, for relatively small capital outlay — subsequently diversifying your portfolio .
What industries am I interested or have expert knowledge in?
Investing in startups that operate in industries you’re interested or have expert knowledge in can help you identify their chances of success.
For example, some investors missed the opportunity to invest in Oculus VR, a virtual reality system that created the famous Oculus Rift headset. Traditional investors didn’t see the demand for such a headset. However, gamers who understood the need and potential for success jumped at the opportunity to invest through crowdfunding. The company was later bought by Facebook for $2 billion.
Have I done my due diligence?
Due diligence refers to researching and confirming facts about a company that you’re considering an investment in. This involves gauging the amount of interest and possible market demand for their idea or product and extensively reviewing their financial statements, projections and timeline (which can be found in the company’s Form C).
It also involves evaluating the equity crowdfunding platform that’s listing their investment opportunity. Not all equity crowdfunding platforms are equal. Some have high due diligence standards and only accept a handful of companies looking to raise money while turning dozens away.
Equifund is one of those platforms with elevated standards. It gives you a head start to becoming an angel investor and only lists a few of all companies that apply. It’s also one of the only platforms with an “investor first” philosophy. Meaning that it will not accept a company if they don’t believe there’s a clear path towards delivering returns to its investors.
To learn more about becoming an angel investor or to find promising companies to invest in, join our community today!