Oxstones Investment Club™By Jeffery Carter,
Does it make sense for everyone to have access to VC backed deals? It’s a good question because VC backed deals are fraught with risk. But, taking the risk comes with very high reward. If you invested $25,000 in Uber it was worth at least $80M. Much of the time, money is lost. If you are going to invest in venture capital backed deals, you better be okay with losing money.
My personal opinion is that anyone should be free to invest their own money in whatever they want to invest in. It’s about freedom. I’d rather err on the side of freedom than the side of a bureaucrat deciding who can do what with the money they earn. Regulation and legislation around money and finance is often served up with the word “safety”, and frankly most of the legislation has to do with power. I realize that the Treasury prints the money and the Federal Reserve monitors the money supply, but they don’t own it.
The rise of crowdfunding is a good development for people, and entrepreneurs. As it matures, the world will get more transparent data provided the platforms provide it-which I strongly urge them to do. Show the mean and median check size, how many investments a person has to make to come up with a mean and median return. Show all the math. Show it by year, maybe even by quarter since falls in the stock market affect investing attitudes. An extreme amount of transparency will cause more people to participate.
I am really chagrined that the federal government has created a climate that increases the hurdle rates for venture backed companies to IPO. It makes it much more difficult for the masses to build wealth. Years ago, Andy Kessler left Wall Street. He raised a $10M fund and got an office in Silicon Valley. He did all kinds of research, and bought stock in a company that was public-but traded on the pink sheets. His fund owned a majority of it. The company took off and he and his investors made a billion dollars.
How do you become Andy Kessler today? It’s practically impossible.
I angel invest. I write checks when I think I have more information than the market, and think I can beat the market. I also write checks when I think I can have a material impact on the firm at an early stage. Somewhere in my network there is someone that I think can help give the firm and edge. I also invest based on the team, along with the idea.
So far, the returns on paper are good. But, they aren’t realized. Big difference. It looks good but until the money is in the bank I don’t have anything.
Where do I get my deal flow? I work my ass off for it. Venture capitalists and angel investors get deal flow from their network. Great deal flow doesn’t just show up at your door.
However, crowdfunding and the democratization of capital might change that a little.
I saw this site Crowdfunder. I have met with Rafe Furst who is involved in it so it is a real deal. They are based out of LA. Recently they opened access to deal flow. I am not invested in them.
It’s an interesting way to think about the average person building a portfolio of VC backed companies. I have no opinion on if it will work or not. I see upsides and downsides.
Another revolution happening in VC investments is the ability to transfer equity from person to person when there isn’t a funding happening. This is similar to a simple stock market buy/sell transaction. Second Market has been doing this for a while but there are others.
Certainly, many early stage investors would like to get liquid on their investments. When I got into the angel investing game, I incorrectly assumed the holding period would be 5 years. It’s really more like 10 years or longer. Again, the returns make up for the holding period.
As companies mature, things can change. If I invested in a $2M pre-money valuation company thinking that I would get out at a $60M valuation someday, what happens when it hits $60M? Technology changes. The attitude of the CEO might change. The market may have changed and they see a bigger opportunity. The company and majority of investors might not want to sell.
But, what if I wanted to get liquid? A marketplace could offer me that opportunity. The problem is transparency. If I am getting out, is it the greater fool that is buying in? How does the person getting out telegraph the real reasons they are getting out? How does the network diligence that person so there is trust? I think these are huge problems to overcome for these kinds of marketplaces.
Mistakes are going to be made. People are going to get hurt and people are going to lose money. I’d rather see the mistakes made. I’d rather lot of innovation in the space to eliminate the barriers so everyone in America might have an easier time of assuming risk to build wealth.
Free markets are the quickest way to fill in the income/wealth gap in America. Government programs, higher taxes, and regulation will fail.
Tags: access to venture capital deals, andy kessler, angel investing, crowdfunder, crowdfunding, entrepreneurship, getting high quality deal flow, investing in start-ups, second market, start-up investing advice, VC investing, VC investments