A Chicago Tribune reporter called me a few days ago, and we spent about 15 minutes talking about the future of the equity crowdfunding industry. Yesterday her article appeared in the Tribune’sBlue Sky blog, which covers innovation and entrepreneurship. The article, titled “Everything is About to Change for Startup and Small-business Investing,” focused on Title III and intrastate equity crowdfunding for non-accredited investors, and quoted me as saying:
“There will be losses and failures and bankruptcies and liquidations before there are exits. The picture might even look pretty dismal at first. It could take anywhere from three to 10 years to get a clear picture of how well equity crowdfunding investments perform.”
That quote is accurate and it fit very well into her article, presenting a realistic view for inexperienced angel investors.
It’s out of context, though, because I also talked about the possibility of upside exits—acquisitions, IPOs, sale on emerging secondary markets, etc.—and the importance of diversifying one’s equity crowdfunding portfolio to increase the chances of a good return on investment.
I’m not complaining about being quoted out of context. In fact, I’ve learned to expect it, especially in daily news journalism.
Why did I use the word “dismal”? Because as a general rule, an equity investment in a successful, fast-growing startup might take five, seven, or 10 years to produce an upside exit for early investors, whereas an unsuccessful startup might fail in the first three to five years. So investors will generally see losses before returns. If Title III investors are mainly people who have little experience in the private securities market, they will tend to get discouraged (or worse) before they feel positive or satisfied with this new angel investing scheme. It might seem dismal in the first few years, and it might be seven or 10 years before the market validates Title III as a good idea—or proves it a bad idea.
I do believe that Title III (and Titles II and IV as well) will be validated and possibly lead a transformation of private capital markets in the 21st century. Maybe in 10 years. Meanwhile, when Title III offerings launch in May 2016, there’s no harm in being enthusiastic about it but don’t allocate more than 5 percent or 10 percent of your investment portfolio to private securities, diversify your Title III portfolio in a dozen or so offerings over three to five years, and invest in offerings that make you feel good (because you like the founders or want to support community development or dig creativity and innovation) even if most of them fail. If more than a few of them succeed, it’ll make the dismal first few years seem much brighter.
David M. Freedman has worked as a financial and legal journalist since 1978. He has served on the editorial staffs of business, trade and professional journals, most recently as senior editor of The Value Examiner (National Association of Certified Valuators and Analysts). He is coauthor of Equity Crowdfunding for Investors, published in June 2015 by…
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