What Achilles and Equity Crowdfunding Investments Have in Common

With the advent of attractive crowdfunding investment opportunities like TerraCycle and TruBrain, ventures that would otherwise not be available to non-accredited investors, no wonder the growth of crowdfunding continues at seismic proportions.

And what’s more, platforms such as StartEngine have cleverly provided a platform that makes crowdfunded investments easy. In fact, StartEngine is raising money on it’s own platform for it’s own venture right now – and their plans are intriguing.

StartEngine plans to be the first exchange for privately-held companies; where investors could trade shares of private companies (that have been purchased via StartEngine) similar to the public stock market. There’s no other way to say it; that’s cool! And given who the platform’s CEO is, Howard Marks, Co-Founder of Activision, we think they stand a near certainty of suceeding.

The benefits of crowdfunded investments are plentiful. From preferred shares, to dividends, to getting access to opportunities (purported to be the “ground floor”) that may one day be the next “big thing”. Due to these factors, Crowdfunding is being positioned as the new democratized method for participating in ventures that were previously reserved for the inner circle and/or firms like ours.

This is where we draw our parallel between equity crowdfunding investments and the great Achilles from Greek mythology. In the story of Achilles, he had many great gifts; just like equity crowdfunding does. But Achilles also had one small but significant flaw (his heel) – and if he had not been so arrogant, it may not have been fatal. Equity crowdfunding also has it’s own version of the Achilles heel, and if this type of investment isn’t managed correctly, it could be equally fatal.

The Achilles heel of equity crowdfunding is the typical exit strategy.

Exit Strategies for Crowdfunded Investments

The exit strategies for crowdfunded investments are generally limited.

Investors are forced to either wait for the company to get acquired or go public. Both of these scenarios are unlikely and can be very long-range. If the investment pays no profit share or dividends, the investor’s capital will sit tied-up in the venture for years without anything to show for it. In fact, offering circulars are required to state that the investment may never yield a return. Many circulars also disclose that acquisitions or IPO’s could be 10 years out.

Let’s assume that approximately 200 companies per year go public; which is actually a fairly realistic number. With 14 million businesses in America, that’s so far below .5% that it’s arbitrary to even mention.

So think about this. Not only is the exit strategy less than ideal, but when taken into account with both the high business failure rates and the low probability of going public, it’s s a fairly draconian situation.

The point of this post isn’t to dissuade any investor from pursuing crowdfunding investments. In fact, our intent is quite the contrary. We appreciate the crowdfunding model – and these ventures are part of our strategy deck. The purpose of this article is to emphasize the importance of due diligence and position sizing.

Crowdfunded investments have long-term implications, and generally few (if any) short and intermediate term tangible return. This can be problematic for a professional investor. Why? Because returns are the investors revenue. Also, capital tied-up in a long term investment can’t be used for anything else. Wise professional investors respect the principle of capital cycle rate (CCR), one of our core investment principles.

But what about the stock shares you get with equity crowdfunding from day one?

As nifty as stock share certificates are, you can’t pay utility bills or buy coffee with them – and these are two very important and perpetually imminent needs!

Blessings.