Once I heard a fellow investor confess “I don’t do startups” with such a delighted tone, as if he were saying “I don’t do drugs.” Well, if you think about it, every startup by definition is the weakest player in the market with the least resources, an unproven business model and a team with a questionable potential to actually execute. This makes it impossible to judge which of the early stage investors are good at their business; the margin between genius and just dumb luck is very small.
The truth is the majority of successful venture capitalists and angel investors have generated most of their returns from a handful of companies. Most of their investments simply did not work out.
How were the handsome returns generated? Well, not too long ago, they were produced primarily from a focus on high-tech companies, whose values were inflated by investment banks anxious to take such companies public, which triggered an artificial demand among institutional investors – only so they could unload them to individual investors before the share prices returned to Earth.
As the show must go on (and it does), I can sense the excitement of local investors witnessing the technology boom. As the Los Angeles County Economic Development Corp. presented in its most recent report, local tech companies support 763,600 jobs in the city, 368,500 of which are direct – a number that surpasses any other metro region in the nation. No one wishes to talk about what exactly it means (flying cars easing up the L.A. traffic, anyone?) but one thing is clear – the local VCs and some respected angels are in the hunt.
In the old days, financial advisers, investment bankers, brokers and other important people were the main sources for investors eager to discover the next big thing. But with the Jumpstart Our Business Startups Act of 2012, accredited investors, defined by the Securities and Exchange Commission as individuals with an annual income of at least $200,000 (or joint income of at least $300,000) or a liquid net worth of at least $1 million – in other words, angel investors – find themselves benefiting from an overflow of information on deals presented by what it is called equity crowdfunding (or crowdinvesting) platforms.
My favorite provision of the Jobs Act is the one that would allow not only accredited investors but every mom-and-pop individual to crowdinvest. But that is still in the hands of the SEC, which is reluctant to enact the rules (in an argument that to me smells like elitism). The good news is that the SEC has managed to enforce the act’s rule allowing private companies to advertise their investment offerings to the public.
It is clear that those who are in search of deals now have a much easier way to access a very broad range of investment opportunities since they are online. It is also notable that the beloved high-tech companies, while still being presented in a bulk of platforms, are surpassed by real estate, retail, health care and media companies. This should help balance financial flows to a range of industries, preventing the notorious overpricing of tech startups.
There are two important benefits for entrepreneurs: a pretty straight-forward procedure of putting their offerings on such websites, and there are no fees. That’s refreshing; there were (and still are) a few angel investment groups in town that charge entrepreneurs $500 and more for pitching in front of investors, which frankly drives me crazy.
There are plenty of great, superactive and innovative crowdinvesting platforms in town, including InvestedIn, which presents investment opportunities in alternative funds, such as real estate, venture and hedge funds. There are superstar platforms focused on particular businesses/segments, including, RealtyMogul, Fundraise and AssetAvenue, all for real estate; TradeUp, export companies; FlashFunders, seed capital; and BitAngels, the first angel network for virtual currency startups.
Finally, the important thing to remember is that crowdinvesting platforms do not guarantee any liquidity event (such as an IPO, acquisition or buyout) in which an investor would get rewarded. Just as any other VC or angel investment, it might take up to four to five years before crowdinvestors would benefit from any liquidity event, if one occurs.
With new crowdinvesting platforms mushrooming in Los Angeles almost every week, I am wondering if Los Angeles is to become a capital of alternative financing. But one thing is clear: The new model is here for good, so stay tuned.
Victoria Silchenko, who has a Ph.D. in economics, is founder and chief executive of Metropole Capital Group, a Santa Monica firm that helps small companies with capital formation. She also is on the board of the Los Angeles Venture Association and is the producer of the Alternative Funding Forum, to be held Nov. 21 at the Hyatt Regency Century Plaza hotel.