The following is anÂ excerptÂ from Kevin Lawton, the author of the Crowdfunding Revolution.
I recently re-ran a quick study of the risk-vs-rewardÂ profile of penny stocks vs initial angel investments in startups (dataÂ from the Kauffman Foundation’s AIPP).Â See below.Â It’s yet another confirmationÂ that early stage investments are actually less risky and have betterÂ returns than “penny stocks” (which the public has access to withoutÂ limitation).
Fraud has been trotted out as the ad naseum bogeyman, but it’sÂ been nothing but a red herring.Â Failure is the issue.Â Given anyÂ degree of risk, a portfolio is necessary to mitigate against investmentÂ failure.Â So far, I can not find a person (at least one who has any wealthÂ left) who does not have a portfolio.Â And thus, for any high-risk assetÂ class where one can lose 50% of the time, having 1% of fraud is a tinyÂ and noisy component in investment failure.
The issue has always been an education thing (i.e. the portfolio).Â BeyondÂ that, if a system suppresses crowdfunding in a futile attempt to fightÂ the 1 unit of fraud, it will not only suppress the 99 units of investment,Â but often a 3x .. 10x economic multiplier (so up to a 1000 units).Â Most of theÂ crowdfunding projects tend to have a geographic locality component.Â And asÂ Amy Cortese points out in Locavesting, local businesses have a strong localÂ economic multiplier.
But I’m most curious why we are starving private equity of some seriousÂ profits and deal flow.Â Please see my brief post about how I applied a black-boxÂ hedge fund technique to amp up Venture Capital IRR from 30% to 46%.Â AllowingÂ crowdfunding platforms to flourish, opens up the door for some bigger players toÂ access investments in smaller companies, and frankly eat some of the VC pie.
Crowdfunding platformsÂ will include crowdsourced diligence & fraudster detection, which will rival theÂ response time and accuracy of anything that Venture Capital has ever seen.Â We just need the government to get the heck out of the way…
Author of The Crowdfunding Revolution and serial entrepreneur