This Can't Be Right...

By Wayne Mulligan, on Thursday, October 8, 2015

Matt shook his head. “This can’t be right,” he said. "Let’s check it again."

We were reviewing the latest findings from our research team, and one particular data point was sticking out like a sore thumb:

According to the data (which we eventually triple-checked), online private investing last quarter represented 15% to 20% of all seed-stage investing activity.

This means, in just two years, the funding portals that we cover at Crowdability had gone from representing 0% of the seed funding market to representing nearly 20%.

That is explosive growth—

And today I’ll show you what this means for you and your portfolio.

Traditional Early-Stage Investing

To understand why this scenario is so shocking, let’s take a quick look at how early-stage investing worked before the existence of online private investing:

Let’s say a start-up had an idea for a new business, and it needed seed capital to hire a team, build a product, and do some marketing.

Since early-stage companies aren’t eligible for bank loans, the start-up had few options for obtaining financing. Just about the only game in town was to knock on the doors of the professional investors known as venture capitalists.

And since venture capitalists (or “VCs” for short) controlled the flow of capital to start-ups, they had enormous leverage when it came to negotiating a deal.

In some scenarios, this leverage could lead to a start-up founder accepting unfavorable term—terms that might, somewhere down the road, result in his losing control of his company, or being denied the spoils of a successful sale or IPO.

But now, that’s all changing...

A New Way to Invest

Since the passing of The JOBS Act, a series of new laws have been enacted that provide entrepreneurs with new ways to raise capital.

In particular, entrepreneurs can now turn to special websites known as “funding platforms.”

These websites play matchmaker between start-ups seeking capital, and investors looking for high-growth opportunities.

But these investors aren’t the VCs I described earlier; they’re people just like you.

In other words, all U.S. citizens—you, your friends, your family—can now invest in early-stage start-ups before they go on to become big, successful businesses.

Explosive Growth

This is an exciting development:

Historically, returns for early-stage investors have averaged about 27% per year.

That’s nearly four times higher than the stock market average, and it even beats Warren Buffett’s returns.

At 27% per year, early-stage investors could double their wealth every 3.5 years.

These market-beating returns might help explain why demand for early-stage investments is so robust—in the third quarter of this year, for example, roughly $300 million was invested into seed-stage start-ups.

But here’s where it gets really interesting:

Of that $300 million, roughly $22 million of it was raised from the 10 funding platforms we cover here at Crowdability.

That’s roughly 7.5% of all capital raised.

Furthermore, the $22 million only takes into account what’s called “public” deals—if we include the “non-public” deals that we can’t legally publish, the number gets even bigger.

Furthermore, we’re excluding data from additional funding platforms beyond the 10 that we currently cover—these are platforms that we’re currently reviewing for inclusion on Crowdability, but haven’t yet decided to feature.

If we add it all up, we estimate that funding platforms in Q3 contributed roughly $50 million to $70 million to seed-stage start-ups.

That’s roughly 16% to 22% of the entire market.

And this is just the beginning.

How to Get Started

The rise of funding platforms is great news for the start-up ecosystem—and it’s great news for you, too:

If entrepreneurs can raise all the capital they need from funding platforms—on more favorable terms—they’ll be more likely to favor the platforms over VCs...

And if start-ups favor the platforms over VCs, you’ll be getting access to deals that, traditionally, had only been available to the top VCs.

Ultimately, this means you’ll have more and more opportunities to earn those 27% returns that I told you about earlier.

We’ve been predicting this trend for almost two years now, and now we believe it’s about to accelerate.

Which is why you should educate and prepare yourself now.

Reading our articles is a great way to dip your toe in the water—but for those of you who are ready to start profiting from this trend, consider enrolling in our online course, The Early-Stage Playbook. You can learn more about it here »

Happy investing.

Best Regards,
Wayne Mulligan
Wayne Mulligan


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Tags: Equity Crowdfunding JOBS Act Title III Title IV

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