Debunking Three Angel Investing Myths

By Wayne Mulligan, on Thursday, December 15, 2016

Nearly three years ago, Matt and I set out on a mission:

We aimed to teach everyday investors how to make money in early-stage investing.

From the very beginning, naysayers said it couldn’t be done.

Thankfully we ignored them.

More than 100,000 investors have now subscribed to our free and paid research services—and many of them have already used our resources to make profitable early-stage investments.

But from time to time, we still have to deal with skeptics and critics.

So today, once and for all, I’d like to set the record straight...

I’m about to prove, beyond a shadow of a doubt, that online early-stage investing is something anyone can do successfully.

To prove it, I’ll debunk the three most common objections—or as we like to call them, “myths”—that critics throw at us.

Myth #1 – Bad Companies, Bad Investments

Right from the start, critics argued that the only companies that would bother with online investing were the ones that couldn’t raise money through traditional funding sources.

Therefore, investors like you would only get access to sub-par deals—deals that the “professionals” had already passed on.

This turned out to be an unfounded concern.

As just a few quick examples:

Zenefits got its start by raising money on WeFunder, the funding platform I wrote about last week.

Today, Zenefits is worth more than $2 billion.

More recently, companies like Cruise Automation and Elio Motors used online investing to raise capital.

Cruise got acquired by General Motors for $1 billion. And Elio went public, netting early investors more than 300% gains in just 30 days.

(And speaking of transportation companies, let’s not forget that Uber raised an early round of capital online on AngelList. Uber is now valued at about $66 billion.)

Sure, plenty of deals haven’t worked out, but that’s just the nature of early-stage investing. That’s why you need to diversify.

Which brings us to Myth #2…

Myth #2 – Takes Money to Make Money

Another criticism the naysayers bring up is that early-stage investing is risky.

They say that in order to manage that risk, individuals need to diversify… they need to build a portfolio of start-ups. And to build a proper portfolio, individuals will need a lot of money.

That may have been true five or ten years ago, back when minimum investments were $25,000 or more. But that’s not the case anymore.

Many funding platforms offer minimum investments of just a few hundred dollars.

For example, one recent deal we featured in Private Market Profits had a $500 minimum. And the deal we featured before that had a minimum of $100.

Meaning, over time, the total capital required to build a diversified portfolio of a couple dozen high-quality early-stage deals might only be $3,000 to $5,000.

As long as that doesn’t represent a big chunk of your overall portfolio, you’ll never risk losing everything…

And you’ll be increasing your chances of backing a “homerun” investment like Zenefits, Cruise, Elio or Uber.

Myth #3 – The Pros Will Always Beat the Amateurs

At first blush, this particular myth was difficult to argue against.

I mean, it makes sense, right?

Shouldn’t professional venture capital investors have access to the best deals, at the best prices and on the best terms?

And doesn’t that mean that individual investors like you are going to get the short end of the stick?

As it turns out, that’s not the case:

According to a recent study published by professors from Harvard Business School and MIT, the returns of individual angel investors have been higher than those of professional venture capitalists.

The reason for this is simple:

Individuals tend to invest in start-ups earlier than venture capital firms. They invest before these start-ups have attracted the attention of the professionals.

And because they’re investing early, these individuals pay lower prices for their stock than later investors.

So when the start-up gets bought out or goes public, the returns for the individuals who got in earlier tend to be higher than for the firms that invested later.

And the numbers don’t lie...

The study I just mentioned showed that early-stage individual investors have earned roughly 26% per year.

That’s two full percentage points higher than what a typical venture firm earns.

Once and For All

So to re-cap...

Online, early-stage investing is a legitimate way for investors like you to earn above average returns:

It offers access to high-quality deal flow...

You don’t need to risk much capital...

And because you’ll be seeing deals at their earliest stages, you’ll have the opportunity to outperform even the most seasoned professionals.

Happy investing.

Best Regards,
Wayne Mulligan

Founder
Crowdability.com

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Tags: Angel Investing Early-stage Investing

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