More Proof that Crowdfund Investing is Less Risky than the Special Interest Opponents Say

The following is an excerpt from Kevin Lawton, the author of the Crowdfunding Revolution.

I recently re-ran a quick study of the risk-vs-reward profile of penny stocks vs initial angel investments in startups (data from the Kauffman Foundation’s AIPP).  See below.  It’s yet another confirmation that early stage investments are actually less risky and have better returns than “penny stocks” (which the public has access to without limitation).

Fraud has been trotted out as the ad naseum bogeyman, but it’s been nothing but a red herring.  Failure is the issue.  Given any degree of risk, a portfolio is necessary to mitigate against investment failure.  So far, I can not find a person (at least one who has any wealth left) who does not have a portfolio.  And thus, for any high-risk asset class where one can lose 50% of the time, having 1% of fraud is a tiny and noisy component in investment failure.

The issue has always been an education thing (i.e. the portfolio).  Beyond that, if a system suppresses crowdfunding in a futile attempt to fight the 1 unit of fraud, it will not only suppress the 99 units of investment, but often a 3x .. 10x economic multiplier (so up to a 1000 units).  Most of the crowdfunding projects tend to have a geographic locality component.  And as Amy Cortese points out in Locavesting, local businesses have a strong local economic multiplier.

But I’m most curious why we are starving private equity of some serious profits and deal flow.  Please see my brief post about how I applied a black-box hedge fund technique to amp up Venture Capital IRR from 30% to 46%.  Allowing crowdfunding platforms to flourish, opens up the door for some bigger players to access investments in smaller companies, and frankly eat some of the VC pie.

Crowdfunding platforms will include crowdsourced diligence & fraudster detection, which will rival the response time and accuracy of anything that Venture Capital has ever seen. We just need the government to get the heck out of the way…

-Kevin Lawton

Author of The Crowdfunding Revolution and serial entrepreneur