Why accredited investors should like crowdfunding.

When you talk to your banker to make an investment, before he give you any advises, he’s gone to ask you a lot of questions in order to evaluate your objectives, and you capacity to manage risk. Base on the answers, he will propose a portfolio with a percentage of: Fix revenues, low risk funds, higher speculative funds, and sometime direct investment is public corporations.

An accredited investor will generally self-manage his investment. Even if he is more open to risk, and have more experience to manage it, he’s still gone to wish to invest a part of his assets in safe options, another part in more active products, and a last portion in risky business with explosive potential.

Up to recently, acting as an angel investor was the risky business. Today, angel groups still give an exciting opportunity to accredited investors, but behaviour is different. As discuss in another post, angel group are not at seed level for start-ups, they are acting between seed and VCs, which is often call funding round 1.

Crowdfunding will act at seed level, and investors that wish to invest 10 or 20% of their asset in potentially explosive products will have to follow that new trend.

At seed level, a start-up will generally look for 25 to $200K investment. Consider this example; In order to give a good number of shares to investors; a start-up at seed level sells new shares at $0.25 each. Those shares may also be granted of some purchasing options for following funding round.

After few months, if the product delivers as expected, we are now at the next funding round for commercialisation. As all facilities of a new corporation must be set, require funding will be few hundreds to one or two millions dollars. Angel groups will be interested here, as the corporation already have presales of a tested product. In this case, shares should be sales between one to three dollars per unit.

As sales growth well, it will be time for a larger factory, or to begin international deployment. Investment require in round 2 is now 5 to $20M; its time for VCs to act. At this point, we have established profitability, detail market potentials and a good management team. In our example, shares should be sales between five to twenty dollars.

Next step is the exit for investors, it is time for strategic investors, or IPO.

In our example, as we have few years of profitable operation, shares may worth 25 to $100.

 

In short:

Seed investment is at time 0 and shares worth $0.25.

Round 1 is at time 6 to 18 months, share worth 1 to $3.

Round 2 is due after 1 to 3 years, share worth 5 to $20.

Round 3 is 3 to 8 years after beginning, share worth 25 to $100.

However the sale scenario, the ROI is always much higher for seed investment.

Future of seed investment is crowdfunding, where accredited investors can bet $5-20K on an idea, or a charismatic entrepreneur. The objective now is to build a structure that scammer will not destroy before it’s become mature. This is the subject of my next post.