Equity Crowdfunding is not just about diversified portfolios

One of the effects of the U.S. leading the world in crowdfunding regulation advances is that its introduction is following the regulators step by step. Title II then Title III.

Incumbent players like broker dealers, investment bankers and other vested interests get to have a go first. This brings in a focus on things like diversified portfolios.

If we look at pledge and reward crowdfunding it started with the people, by the people and for the people. Very little curation and certainly not someone else making decisions for the pledgers.

As the more traditional investment operators have ventured into the equity crowdfunding space  there has been more and more written in the vein of …

  • Most startups fail
  • 90% of the returns come from 10% of the startups
  • Thus … dangerous grounds for individual investors
  • They need to build diversified portfolios
  • Incumbent investment organisation are the best at picking winners
  • Best take a fund approach, we have the track record to manage your investments
  • You can trust our curation and selection criteria
  • We will charge you a “small” percentage each year to manage your investment

Meaning, you are better off getting someone else to choose which equity crowdfunding ventures you put your money into and paying them to do it for you. Doesn’t seem like true “democratisation of finance”.

If this was true why over the last 10 years in Australia have self-managed super or pension funds grown rapidly at the expense of organisations that are paid to be very experienced at managing other peoples money?

In 2004 there were 271,515 self-managed pension funds and by June 2014 extrapolated figures should reach 540,000 a doubling in 10 years. People are voting with “their” money. We also have platforms like SelfWealth emerging with a business idea of being “Australia’s first investment solution that enables you to compare yourself to your peers, professionals and the market & use this knowledge to improve your own portfolio performance.” Crowdsourced investing!”  SelfWealth used the ASSOB Equity Crowdfunding platform to fund the first stage of its development with a raise of $1.6 million.

Looking back over the last 8 years on ASSOB we see that investment isn’t always about the numbers. Funds, brokers and other incumbents in the investment space take a predominantly analytical view of opportunities in the space and to them it is basically a numbers game.

However this is predominantly NOT the case with crowdfunding.

Crowdfunding is predominantly about people’s natural affinity to support causes they believe in. It is a strong human emotional drive and is at the opposite end of the spectrum to that which funds and brokers operate in. It is only now that the intersection of the technology to handle volumes of small investors and the desire of people to be more meaningfully involved is changing the game.

TechnicalCulturalCrowdfunding

“This chart comes to us from Jonathan Sandlund’s piece The Rise of Meaningful Investing at TheCrowdCafe.”

This trend “A desire to connect more meaningfully with the things we buy, the things we do, and the things we invest in” is what is driving crowdfunding now that the technical disruption required is marching forwards.

Equity crowdfunding will lift the crowdfunding industry to a new level. Pre-sales and patronage only work for some products and services. Not everyone can market their opportunity or product on the basis of pre-orders. Many opportunities and companies need money in the operational entity and usually it is a lot more money than can generally be achieved by pledge or reward crowdfunding.

These opportunities will attract their own tribe of people looking for a meaningful use of their funds and often a strong emotional connection to the people who are going to be the custodians of their hard earned dollars. This is not the area for a gatekeeper to make the decision for them.

However, as the title of this post says “Equity Crowdfunding is not just about diversified portfolios”. Which means there will be a place for people managing “diversified portfolios” where the more analytical can decide the best place for say 2% of someone’s investment portfolio in a high risk early stage venture. But, you can’t write human nature off.

Many people invest because they have a natural affinity to support causes they believe in. They will be friends, family, fans, followers where they passionately love the technology, people, geographical location or the general buzz. For these people a diversified portfolio is not their definition of equity crowdfunding.

 

 

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