In Early-Stage Investing It Pays to "Be a Follower"

By Matthew Milner, on Wednesday, August 14, 2013

Remember a game called “Follow the Leader” from when you were a kid?

One kid, the leader, would stand up at the head of a line. He’d touch his nose, zig and zag, click his heels. Everyone else would have to copy what he did.  

If you didn’t follow the leader, you’d be out of the game.

Strangely enough, it turns out that “Follow the Leader” was good practice for investing in equity crowdfunding deals.

Who’s In?

A few weeks ago, I wrote about my exploration of an investment in GameCo, an early-stage company I discovered on an equity crowdfunding platform. One of the criteria I looked at was who else had already committed to invest — in other words, who would I be following?

If you’ve read our whitepaper on the 10 Commandments of Crowdfund Investing, you’ll recall that when you see successful investors putting their money into an investment, it’s worth considering being a follower by investing alongside them.

In the case of GameCo, investors included Peter Thiel, a co-founder of PayPal as well as the first angel investor in Facebook; David Bonderman, the billionaire founder of TPG Capital, one of the most respected names in the private equity industry; and Yuri Milner, a well-known businessman who also invested in Facebook, Twitter, and Spotify.

All things being equal, I’d follow GameCo’s leaders any day.

Side-By-Side

Considering how challenging it is to identify, get access to, and negotiate the right deal with promising early-stage companies, why not give yourself the advantage of investing side-by-side with professionals?

You still have to do your own due diligence — and you still have to believe it’s a good investment — but seeing a stamp of approval from a professional should make your decision to invest that much easier.

In this week’s post, we’re going to give you 3 tips for being a successful follower.

It’s Play Time

Here are a few ways to turn Play Time into Pay Time.

Get Your Feet Wet

Unlike the “Follow The Leader” game you played as a kid, where you had to follow whoever was at the head of the line, with equity crowdfunding, you can choose who to follow.

To get your feet wet, go to a high-quality crowdfunding platform like Angel List and look at the profiles of a few well-known investors.

For example, look at Mark Cuban (successful entrepreneur, owner of the Dallas Mavericks, and a “shark” on “Shark Tank,” the popular TV show about angel investing), Dave McClure (previously of PayPal and Facebook, a personal investor in Mint.com, and now a professional investor), or Esther Dyson (an investor in dozens of successful start-ups including Evernote, Flickr, and Square).

Each investor’s profile will provide you with insight into whether they’d be a good source for you to follow. For example:

  • Which companies have they invested in? Do you recognize and respect their investments?  
  • How many investments do they typically make each year? The more investments they make, the more investment opportunities you’ll see from them.  
  • Are they an Advisor or Board Member at any companies? If so, that shows they’re an active investor, the type who keeps a close eye on the company.
  • Do they have any recommendations that speak to the value they provide?
  • How many people are “following” them? This will give you a sense of their clout.

Once you’ve gotten your feet wet, you’ll be able to identify the attributes you like best in other investors. Then, when you’re looking at potential investments in the future, see if there’s anyone you trust that you can follow.

Following can become another tool in your investing toolkit.

I’ll Have What She’s Having

To ensure that you achieve the same returns as the professional investors you’re following, it’s essential that you own the exact same securities.

What’s that mean? It means, for example, that if they’re buying “preferred” stock at $1.00 per share, you need to buy the same exact preferred stock at the same price.

The type of security you’re buying should be spelled out very specifically online. If it’s not, or if you have questions about whether you’re getting the same shares as the professional you’re following, email or call the crowdfunding platform that’s hosting the deal, or email us at feedback@crowdability.com.

Toto, I’ve a Feeling We’re Not In Vegas Anymore

Investing in early-stage companies is inherently risky — and investing without diversifying is like going to Vegas and putting it all on black.

To mitigate that risk, professional investors build a portfolio of many, many companies. Although some companies will go to zero, the hope and expectation is that, somewhere inside the investor’s portfolio, they’ll have the next Google, Twitter, Tumblr or Facebook.

One of the advantages of equity crowdfunding is the opportunity to put smaller amounts of capital into more investments. So even if you decide to follow a proven captain — even if he’s the Derek Jeter of the early-stage investing world — make sure you don’t put all your eggs in one basket.

Democratizing Wall Street

In the past, identifying and getting access to early-stage investments with strong potential, especially in the technology field, was the realm of the insiders. If you weren’t part of the “angel” circuit in New York, the Bay Area or Boston, you were out of the game.

One of the most unique and groundbreaking aspects of equity crowdfunding is the way it democratizes investing.

Now, not only can you easily browse online for start-ups that fit your criteria, but when you find one you’d like to back, experienced investors will be negotiating the deal terms for you. If they make money, you’ll make money. Equity crowdfunding changes the rules.

So get in the game — and play “Follow the Leader” to stay in the game!

Best Regards,
Matthew Milner

Founder
Crowdability.com

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