Venturing into Equity Crowdfunding: Good Deals Go Fast!

By Matthew Milner, on Wednesday, July 17, 2013

Sweaty palms.  Rapid heartbeat.  Bulging eyes.   Uh oh.  Was I having a heart attack? 

No.  After taking a deep breath, I recognized the symptoms.  What I had wasn’t dangerous to my health; it was dangerous to my wallet.  What I had was greed.Let me rewind the clock a couple of months and explain how I got here.

The Intrigue

When I first learned about equity crowdfunding, I was thrilled.  I’d always been interested in investing in private companies, but with an average minimum investment of $25k or $50k, a diversified portfolio would run me somewhere between half a million and a million dollars – more than I was ready to commit.

With equity crowdfunding, however, the minimums were much lower.  $50k or $100k might be enough to invest in ten or twenty deals, maybe far more.

So I excitedly registered on dozens of the crowdfunding platforms that match start-up companies with potential investors, and soon enough, “deal” emails were flying into my inbox.  I browsed through them whenever I could, and gradually started to get comfortable with the idea of investing in a deal – if I could find one I liked.

Could This be the One?

Fast forward to the night before last.  I was sitting at the kitchen table after dinner, catching up on some work, when a deal email popped into my inbox.

I quickly saw that the company (let’s call it GameCo) met some of my basic investment criteria: big market, experienced management, and brand-name lead investors who’d already negotiated the terms of the deals.  The platform was offering investors up to $250,000 of the deal.

Tick-Tock-Tick-Tock

Curious, I clicked on the “READ MORE” link, and was taken to the crowdfunding platform’s deal page for GameCo.  All the usual documents were there – executive summary, resumes of the founders, etc.

But something on the right-hand side of the page caught my eye.  It was a small rectangular module that seemed to be a real-time ticker.  Upon closer inspection, I saw that it showed how much of the $250,000 round had already been taken, and how many investors had written checks.

A quick glance indicated that $170,000 had already been committed by 19 investors.

My first reaction was, Huh, that’s a good sign: there’s interest in the deal.  I grabbed a cold beer from the fridge and spent about fifteen minutes casually browsing through GameCo’s documents and their website.  As I finished the beer and put it down on the kitchen table, I happened to take another look at the real-time ticker.  I couldn’t believe what I was seeing: “$190,000 committed, 22 investors.”

Sweaty Trigger Finger

In fifteen minutes, GameCo had raised an additional $20,000!  This is when the sweaty palms kicked in.  I’m gonna miss this deal if I don’t pull the trigger right now.

I raced through the documents, trying to understand GameCo’s business model and deal terms in a hurry.  I dashed off emails to two friends who work in the same sector as GameCo and practically begged them to chime in with an opinion ASAP.

Mercifully, one of my friends responded that he knew about GameCo and was available to Skype if I wanted to chat.  What followed was a spirited discussion that ended with me calculating how many hundreds of millions or billions of dollars GameCo might be worth if x, y, and z happened.

I got off the call, and with my heart pumping, I checked the ticker: “$225,000 committed, 26 investors.”  Oh, I wanted in.

The Wire

My fingers were dancing as I logged into my bank account and loaded up the page where you can wire money.  I tried to recall what the limit was for online wires – Was it $5,000?  $10,000?  If it was $25,000, I could take the last $25,000 of the round…

Filling in the wire instructions, I reached the “Send Funds To” field.  As I entered GameCo’s name, I had a sudden thought:

I’d never heard of this company before tonight.  I barely understand what they do.  I’m about to send them money?

That’s when I took a deep breath, recognized the root cause of my wet palms and speedy heartbeat – greed! – and laughed at myself.

George Foreman Grill

Yes, I got emotional.  It happens to most of us at one point or another.  That’s why so many of us own a set of Ginsu knifes, a George Forman grill, or a $199 abdominal machine.

But once you recognize the symptoms of impulsively wanting to buy something – whether it’s a knife set or shares in a “hot” start-up – take a deep breath.  Clear your head.

Here are a few simple steps that have saved me big bucks over the years.  Try them yourself, or try to find a routine that works best for you.

Due Diligence

Before you think about taking out your checkbook, try to answer a few basic questions.  What exactly does this business do?  How do they make money?  What’s the background of the founders?  Who’s the competition?  Why is the timing right?  Until you can answer these questions, keep taking deep breaths.

Sleep On It

Before you make a final investment decision, sleep on it.  Personally, I find that sometimes I’ll get lucky and have an epiphany during the night, sometimes not.  But I’ve never regretted re-booting my brain overnight and giving myself the opportunity to look at a situation with fresh eyes.

Token Reminders

Think back to the purchase or investment you most regret.  Got something in mind?  Good.  Now’s your chance to turn it into a positive!  Whether it’s something useless you bought from a late-night infomercial, or the stock certificate from a lousy investment, put it right next to your checkbook.  The next time you’ve got an itchy trigger finger to make some money on an investment, let the token reminder inspire you to take a deep breath.

Stay Tuned

Curious if I finished my due diligence in time to make a go/no-go investment decision about GameCo?  Find out next week!

Best Regards,
Matthew Milner

Founder
Crowdability.com

Comments

If you enjoyed this article, subscribe to updates:

Sign-up today and you'll receive our daily insights on early-stage investing, as well as our FREE "Equity Crowdfunding Action Kit" – where you'll learn:

  • The Ins & Outs of Equity Crowdfunding
  • A step-by-step path to get started
  • Tips from dozens of Venture Capitalists
subscribe to updates

Thank you for subscribing!

Tags: Equity Crowdfunding Crowdfunding Investing

Share This:
comments powered by Disqus