This is a guest post from one of our partners, Brian Thopsey, Founder of FundWisdom. FundWisdom’s mission is to provide insights on investing portals and market intelligence platforms that help source investments to produce higher returns, lower fees, and reduced risk.
Equity crowdfunding provides access to higher-risk, higher-potential return investments in startup companies. In 2016, new regulations were implemented under the JOBS Act that allowed all who read this to now gain access to this previously private market. Platforms, called funding portals, allow you to invest your hard earned money in startups to get a piece of the pie. We first advise you to get to grips with what an online funding platform actually is, what the top platforms are, and watch reviews of different funding portals (also here) that are available to investors.
Once you have a basic grasp of startup investing and equity crowdfunding, you’re ready to learn more about investing in funds.
Good question. Why on earth would you invest through a fund? One reason is diversification. You know, that “never put all your eggs in one basket” stuff. Diversification through fund investing can protect you from bearing all the risk of one company going under. Not only this but you don’t have to go through all the fuss of finding a specific company you like (we know how much you love staring at company financials all day). You can let an experienced fund manager do that work for you. The challenge arises of whether the fund manager is good enough to justify the additional fees.
Fund management is the overseeing and handling of a financial institution’s cash flow and a Fund Manager is the individual in charge. A Fund Manager has the simple goal of bringing their investors a return and ensuring proper due diligence is done on all investments. A Fund Manager will conduct all the hard work for you and provide you with the information you need to know.
Potential to Boost Angel Investor Returns with Broader Exposure
Furthermore, as a recent study of thousands of angel investments on AngelList’s platform showed, they found that “If you miss the best-performing seed investment, you will eventually be outperformed by someone who blindly invests in every credible deal.” That’s the power of diversification, especially when investing in the venture asset class.
This is counter-intuitive, since “Conventional investing wisdom tells us that VCs should pass on most deals they see.”
Why is this? It all comes down to power law returns in early-stage investing. The power law says that one or two of all your startup investments will return more than all your other investments combined. Thus, it is crucial to have sufficient diversification that gives you a chance of hitting that one, massive home-run out of dozens (or even hundreds) of investments.
Investing in funds is one way of achieving that broad diversification.
Individual Startup Investments vs Diversification in Startup Funds
The Motley Fool said it best, “when you’re picking your own stocks you have far more control over your own portfolio”. It’s true that investing in an individual asset, or asset class, gives you the investment freedom you desire. As a non-accredited (but educated and informed) investor, having the power to pick your own investments can yield a far greater return than investing through a fund. But be warned new investors, it doesn’t come without its risks.
Diversification through a fund can generate greater returns with lower overall risk. However, as with selecting any individual startup, it’s essential you do your research on the funds that you invest in.
Neither approach – investing in individual startups vs. investing in funds of startups – is particularly better than the other. Each depends on various factors such as your risk tolerance, amount of capital and availability of time.
Risk vs Reward
Regardless of whether you invest in a fund or in individual companies, there will always be risk. Don’t let the risk of losing money or missing out on a home run scare you though. With the right fund manager it is possible to attain a healthy return on investment.
Having created an investment plan which encompasses your risk tolerance, available investment capital and asset classes of focus, you should have a good idea of where you want to put your money, along with your risk appetite.
Let’s finish with our favorite topic…fees. Understanding fees is vital as you consider the various (sometimes hidden charges) that come with investing. You know those pesky things that eat into your profits? Fees can catch you by surprise, which is why you must educate yourself on the platform you’re investing through. These fees depend on the asset class you’re investing in, but you can expect to pay management fees (often a percentage) and carried interest fees. The typical “2 and 20” consists of a management fee of 2% of assets annually, with an incentive fee of 20% of profits above a certain threshold known as the hurdle rate. In recent years, due to platforms and technology improving back office administration, these fees have seen downward pressure.
Our fund analysis has primarily focused on investors and companies raising money in the United States of America. International funds provide investors with the opportunity to diversify their portfolios, to help mitigate the risk of geopolitical or currency challenges. OurCrowd has a strong presence in Israel and therefore provides great exposure to startups in that region while abiding by US-based securities laws.
Startup Funds Available to Investors in 2020
The funds we rank serve non-accredited investors, crossing asset classes whether it be seed stage to later-stage venture and crypto-focused funds.
How do you spot the good funds from the bad? Remember that historical investment performance does not guarantee future returns.
Investors should look for funds that have favorable (i.e. low) fees, strong leadership teams, and a track record of having many investors who are pleased with the platform.
Non-Accredited Investor Funds
- The Republic Note
- A new kind of crypto asset that shares profits when any startup on Republic’s platform gets acquired or goes public. Available to accredited investors now, and Republic is hoping to qualify the Note with the SEC under Reg A+ by the end of 2020. Learn more about the Note including Crowdwise’s valuation estimate of the Note token.
- Fees: no ongoing fees are currently disclosed (investors must wait for the Reg A+ Offering Circular for additional fee disclosures later in 2020). Unknown fees will be required for each $2 million distribution to Note token holders. Expected to be minimal as the payouts will be done via the low-cost Algorand blockchain in a USD stablecoin. The Note is truly unique because the profits being paid to Note holders are actually the fees that Republic collects from issuers on their platform.
- Minimum: $100
- Reservations are sold out as of August 2020, but Republic hopes to have the Note listed on secondary exchanges by the end of 2020.
- Seedinvest Auto-invest
- Startups conducting their raise under Reg D or CF must raise at least $250K before they qualify. Those using Reg A+ must raise at least $2 million.
- The same vetting and due diligence that applies to startups on Seedinvest applies to the fund.
- They charge a 2% processing fee (up to $300 per investment)
- Minimum: $200. Typical minimums when not using auto-invest are $500-$1,000 on Seedinvest.
- Invests a predetermined amount when companies reach 100+ investors and over $150k raised. Investors can opt out of any deals that are triggered.
- Minimum: $100
Accredited Investor Funds
- Wefunder Funds
- While Wefunder is open to non-accredited investors, none of its funds are yet.
- AngelList Syndicates
- AngelList created a platform for angel investors to create funds, called Syndicates. They state on their website that across the funds, they saw 46% annual returns. They are revolutionizing seed and venture fund creation by reducing management and overhead fees through this innovative technology. One benefit of Syndicates is lower fees as many syndicate leads are offering lower management and carried interest fees than traditional Venture Capital funds, which typically charge a 2% management and 20% carried interest fee.
- AngelList Access Fund and Rolling Funds
- AngelList also offers the AngelList Access Fund and Rolling Funds as other options. These funds allow accredited investors to be diversified into dozens of deals by writing a single check.
- The Syndicate (Jason Calacanis’ syndicate)
- One of the first and most successful syndicates on AngelList was run by famed angel investor Jason Calcanis. He has since spun off his syndicate to have it’s own website and currently boasts more than 4,000 syndicate members. Accredited investors can sign up for free and receive his monthly deal memos for investments that his Syndicate makes.
At FundWisdom, we provide insights to help you source and select innovative funds like those listed. I am sure there are others we have missed, in which case we are happy to get your feedback. Please contact Brian Thopsey of Fund Wisdom or comment below.
Building Your Own Fund
It’s safe to say that there’s a huge difference between investing into a fund and creating your own. Selecting a fund and relying on the manager is passive and less time-intensive, while creating your own takes effort in active deal screening and active management.
Once you’ve become more familiar with all the nuances of startup investing and invested in a number of your own investments, it’s time to begin building up your own fund as a lead investor and fund manager. At this point in time I am only aware of accredited investors that have access to build individual funds but I expect that will change soon.
AngelList Syndicates allow a lead accredited investor to create a fund-like structure to have backers similar to Limited Partners (LPs). By using AngelList to create a syndicate you can then find suitable startup companies to invest in and grow your little nest egg into a fully developed, beautiful portfolio. For more information, AngelList wrote an in-depth piece on the economics of Syndicates.
If you are interested in managing your growing portfolio but not seeking LP investors, VentureWallet is a great tool to build your own diversified portfolio, track progress, keep detailed due diligence notes, track valuations over time, keep key information for later taxes, and much more.
At Fund Wisdom I have focused most of my time empowering you to invest directly in founding teams; however, achieving immediate and seamless diversification through these funds can help spread the risk and lower the bar (i.e. check size) of entry into this asset class. Have you invested in any of these funds or created your own? Have you found a rockstar fund manager that easily justifies the additional fees? We want to hear about it, good or bad – feel free to share any thoughts in the comments below.