culled from:http://www.forbes.com
Title III is the widely anticipated component of the JOBS Act that we at Onevest,
a leading startup investing marketplace, believe has the potential to
liberalize and standardize startup investing across the board. Given
this game changing legislation, which is ultimately responsible for the
birth of equity crowdfunding, I suspect that investing platforms will
become the new standard for early stage private equity investing. In the
same way that ETFs have become in the last 20 years one of the most popular
investment vehicles used by both institutional and individual investors
adding up to more than $1 trillion assets under management, and best
known for providing a low-cost diversification approach, I predict that
startup investing will undergo a comparable trajectory. In fact, many
financial players like PENSCO Trust Company
who help investors use their retirement account funds to invest in
private companies anticipate that this structural change in the way
startups raise funds and investors buy startup equity via equity
crowdfunding platforms is the wave of the future.
The venture investment landscape reimagined
This past year, the accumulated investments by angels
surpassed the venture capital market by roughly $3 billion or 15%. The
sheer mass of incoming, soon to be angel investors, will dwarf the
current venture capital market. In a thriving economy where 543,000
companies launch each month, seed funding remains a large gap to be
filled by incoming investors. Venture capital firms will still play a
key role in this space by remaining dedicated investors looking for the
next billion dollar exit, but their role will take another shape much
like that of the hedge fund. Individual investors and boutique firms
will now be able to make direct investments into startups, and take
advantage of investing much lower minimums, without having to rely so
heavily on venture capital firms to surface the best deals.
Direct Investments, diversified funds, indexes and a growing list of investment products
The asset class of early-stage startup equity made
available on equity crowdfunding platforms is in its infancy and soon
enough, will begin to look a lot like the public market’s intricately
woven basket of ETFs and mutual funds. Chris Dixon,
a well-respected entrepreneur who founded Hunch, which was acquired by
Ebay and Partner at Andreessen Horowitz says “When you look at the
biggest crowdfunding markets – publicly traded stocks on NYSE, NASDAQ,
etc – you find that in general, non-professional investors lose money
when they try to pick individual stocks. This suggests that something
similar to mutual funds would be the best mechanism for amateur
participation.” To better hedge risk and maximize chances of a return on
investment, dedicated funds exist today around a particular early-stage
startup industry or theme like for instance a “Mobile Healthcare Fund”
or the “Harvard Alumni Startup Fund”, but its currently restricted to
high net worth individuals or people that qualify as accredited
investors. However with the implementation of Title III of the JOBS Act,
the general public will soon be granted access to this financial
product that offers high risk-high reward potentials, and where a lower
minimum investment will make it much more accessible to main street.
Additionally, what will contribute to the popularization of this
financial product is the new passing of general solicitation laws where
before private companies were only limited to fundraising within their
own network, versus now, it can be advertised on a billboard in Times
Square.
With
an increased volume of shares purchased and traded, options markets
will highly likely pop up – initially between larger brokers to mitigate
risk and later individual investor will participate. As more capital
begins to flood into this alternative asset class, the angel investor
will be empowered by a large variety of investment products.
Increased shareholders reduces price-per-share volatility
A typical funding round is
often filled by a short list of angels and/or venture funds, who often
know each other, so the pricing is heavily dependent on a handful of
players, which means it has the ability to change drastically based on
the mood and expectations. In contrast, by increasing the volume of
shareholders and thereby exposure to a larger market, the pricing is
more responsive to a deeper pool of supply and demand and has a better
chance to stabilize its fair market value.
High volume of positions increases liquidity of these assets
In the current state of
startup investing, the sellers of equity are largely the startups
themselves; but with an increased pool of shareholders, investors may be
willing to divest at an early stage post initial investment. The
ability to buy and sell these shares on the second market will increase
liquidity in this sector and asset class, and thereby reduce the risk of
holding, what was previously, highly illiquid positions.
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