Saturday 28 February 2015

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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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