Let’s begin by addressing the why behind investing in your future. Your why is truly important when it comes to setting financial goals and making quantifiable investment targets. To many, that ‘why’ is to build a nest egg for retirement, or perhaps funding a child's college education (good luck!), but this is different for everyone. Take a few minutes to think about why you want to invest in the first place and the level or risk you are looking to take.
What comes to mind when you think of professional investors? Is it a silver haired white man smoking a cigar in a high rise Wall Street office? If so, I can’t say I blame you; the media has blinded you with this toxic vision. We’re here to show you how equity crowdfunding is providing access to a much more diverse set of investors and entrepreneurs.
Many businesses require money, or cash, to grow. This is the basic premise of companies offering up equity ownership at different points in time during the growth and scale. In return for that money, founders are willing to provide an equity stake (i.e a piece of the company). With me so far?
Now how that money is spent, whether it be on new technology, an employee training scheme, or simply a new coffee machine to replace the one Susan from the Sales team can’t stop using, the hope is, we are able to see a whopping return on our investment.
The funding we provide as investors give startups access to cash, or liquidity, they need to gain market share. This money can be used to finance new growth strategies and ultimately take them from 0 to hero real quick. It’s clear how valuable your investment can be.
Investing in Alternatives
An alternative investment is an investment in asset classes other than stocks, bonds, and cash. The term is a relatively loose one and includes tangible assets such as precious metals, art, or antiques as well as financial assets such as a real estate funds, commodities, private equity, hedge funds, venture capital, film production, and financial derivatives. These alternative investment assets have traditionally been held mostly by institutional investors or accredited, high-net-worth individuals because of the complex nature and relative lack of liquidity.
No doubt alternative investments can be a risky path to follow, especially if you don’t know what you’re doing. There’s a sea of platforms setting out in the alternative investment space. Long gone are the days where only large scale institutions have access to this market.
Higher returns: Alternative investments can achieve a higher return than traditional investments alone. A key lesson when it comes to startup investing comes from the fact that the vast majority of your returns will be generated by a very few number of companies in your portfolio as Alex Graham shares on Toptal. Seek out these winners. Simple, right? So, move past your failures to improve your process to seek out the home runs.
Diversification: Investors can lower risk and control the correlation between investments by allocating funds across asset classes. With alternative investments a portfolio can lower dependency on the overall stock market's performance.
Accessibility: Historically only the wealthy had access and even as that changes there are restrictions if you do not reach the SEC's bar for wealth.
Liquidity: Typically you lock your money up longer with many alternatives particularly private equity in startup companies. This may mean you have to wait years before you can cash out the investment. This is also changing as more secondary markets are opening.
Fees: Alternative investments often have high minimum investments and fee structures compared to mutual funds and ETFs.
Transparency: There is much less opportunity to find and publish verifiable performance data.
JOBS Act makes Alternative Investments more accessible
While most of the alternative investment types have been familiar to the investment community for a long time, one alternative investment solution, equity crowdfunding, is quite new. The Jumpstart Our Business Startups Act, or JOBS Act, is a law intended to encourage funding of United States small businesses by easing various securities regulations. President Barack Obama signed it into law on April 5, 2012, and the rulings of Title III of the act will likely come into effect in late 2014. Then, the JOBS Act will enable non-accredited investors to invest in start-up businesses and private firms.
Accordingly, equity crowdfunding is likely a great solution for any investors interested in alternative investments. The benefits of diversification and higher returns from equity crowdfunding can boost the value of your investment portfolio. Furthermore, accessibility may also be improved since businesses offering equity will often include additional information about what is required in Regulation D filings.
To find information on the latest alternative investment offerings or private equity offerings you can visit the Fund Wisdom Offerings section. If you are looking to further assess these investments or gain further insight into the market, we provide solutions to help.
5 Tips How to Get Started
Now your why is locked in. How do you go about finding opportunities to invest in? Well, begin by mapping out your objectives, followed by industries you’d be comfortable investing in . Usually these industries are those you have previous knowledge in or a prior background in. If you don’t understand a business model, it may not be the most viable investment.
There are many ways you can begin as a retail investor. Perhaps your friend Paul from down the street has an idea he needs money for and you happen to have a spare $5000 at your disposal. Now we’re not saying to simply invest in an idea on a pot of luck because your friend has a passion and is rather persuasive. It’s vital you do your due diligence.
Once you have a foundational idea in place, it’s all about access. Having access to a network of founders willing to part with some of their company in exchange for your hard earned money.
Alongside simply tapping into that local network of yours. Friends or former colleagues on LinkedIn who work in their own start-up can provide a handful of great, investment opportunities. Building a local network can bring a flow of future opportunities and open doors to new connections when you least expect them.
So, now you get the gist of it, perhaps revamp your LinkedIn profile, begin sharing content and build a brand around your name. Yes, we know how much you love sharing funny videos on Facebook but i’m sure you can take a minute to tell people about your new investing journey. Who knows where it might lead.
Many factors should be considered to ensure above market returns when investing in risky startups. Risk is increased when accessing the equity security in the early stage firms raising capital online. We offer a 5 tips to improve access and performance.
1. Determine whether you should invest
Before planning to invest online, it is important to understand the inherent risk of investing in equity online.
The Financial Industry Regulatory Authority (FINRA) offers advice on investing retirement assets like 401ks. FINRA is dedicated to protecting investors and safeguarding market integrity in a manner that facilitates vibrant capital markets. USwitch also offers a similar guide to general investing via an article on 10 steps to choosing the best investment.
Most offerings are currently from companies in their early stages, or startups. These types of firms have potential for incredibly high returns, but with that comes risk. Many of these companies do not make it past their first few years of existence.
Every investor has a different risk tolerance and every investor has a different objective. You need to be familiar with how to structure your portfolio in a way that puts you at the highest chance of reaching these goals and “landing on a unicorn” as Alex Graham of Toptal writes. Of course, this really all comes down to the number of companies you intend to invest in, however as pointed out in the aforementioned article, there “is a trade off between portfolio size and quality.”
2. Duration and Longevity
The duration you are willing to part with your hard earned cash and the amount you can put in should be considered prior to investing. Many companies offering their equity online will take years to become profitable and provide investors the return desired. These early stage firms also often require several rounds of investment. The reduction in liquidity, or the ability to cash out, is a factor that drives the attractive returns. Assessing each option is what makes the differens between those that consistently achieve returns and those that do not.
Knowing that a potential investment will be inaccessible until a certain date may give you an insight into what investments you will want to avoid, reducing your investment options to those that won't tie up your money for longer than you can afford. Knowing whether invested capital will be available, and when, is crucial for every investor.
3. Consider how your age affects your investment
Younger investors may prefer to choose higher-risk investment options that produce higher returns but are less certain. People who are close to or are in retirement, however, may be more inclined to choose low-risk investments to make sure their money is as safe as possible.
4. Risk and Lifestyle Considerations
If you have dependent children, you may be more inclined to find low risk investments to help make sure your hard-earned money doesn’t get wasted. If, however, you are living without anything or anyone tying down your choices, then you might consider riskier investments that have higher returns.
5. Portfolio Management
Deciding how to balance your investments can be a challenge. Aggressive investment options like those being offered online, which provide attractive returns, can be balanced with lower-risk investments in debt and public equity. Funds are also starting to be created to offer diversification and reduction in risk.
With all the knowledge above in your hand, what you need is someone who can provide you with a way to best utilize your resources and act as your loyal partner. Contact us to help.
Picking Investments and Due Diligence
Next up is all about identifying the right opportunities to invest in.
Sam Altman, previous head of Y Combinator, states, “One way to do really well as a startup investor is to get good at predicting who is going to be great before they actually are.” Often a great investment sign is a young founder with the potential to improve fast and bring about a large return of investment. It’s easy to get a feel for a company's future success by asking yourself whether this is someone you’d work for or whether you can picture them becoming a thought leader in the industry. A founder with a mission and a relentless determination to achieve this mission are winning characteristics.
It’s important to see companies not for what they are now, but for what they can become. An industry with growth opportunities will provide the potential for a startup to flourish and see a great return on investment in the coming years.
Now you have established why and are prepared, read on to learn how to invest with some examples.