and collectively enable and support projects and activities that cannot gain the required consensus from our all-too-frequent politically deadlocked current government. This aspect flows equally from all forms of crowdfunding, including the securities-based and specifically the equity forms to which this book is devoted.
As this book rightly and frequently points out, both the foundational JOBS Act legislation and its lengthy rule-making implementation are presently incomplete, imperfect in many eyes, and will almost certainly be further amended and improved. Given these uncertainties, what might the future hold for equity and other forms of securities-based crowdfunding, and what issues merit further attention and effort?
The fact remains that most knowledgeable and experienced early-stage investors firmly expect that the great majority of individuals participating in equity-based crowdfunding will lose money overall. This does not deny the likelihood that a minority can and will achieve net positive returns (if they are diligent, disciplined, and follow the recommendations contained in this book and elsewhere), but like their wealthier individual accredited angel colleagues, most equity crowdfunding investors can only be realistically expected to sustain overall loss from their participation in this endeavor. Indeed, the frequent public pronouncements by politicians and some industry leaders to the contrary represent for some a form of misguidance bordering on systemic fraud. This misrepresentation is far more worrisome in practice than the occasional possibility of issuer fraud (as opposed to failure) that has been given such public scrutiny but has in fact been almost totally absent in the more advanced crowdfunding experiences of several other countries for many years now.
What can be done to maximize and make positive the financial outcome for a greater fraction of individual crowdfunding investors? Numerous pearls of wisdom are contained in this book, and are inescapably critical for generating reliable financial success from any form of early-stage equity investing including crowdfunding. Among the most important of these are the essential importance of knowing and operating according to one's own priorities and goals, budgeting for and building towards a portfolio of at least 10–20 early-stage investments, and engaging in, having access to, or at least following others' extensive due diligence on every potential investment as conducted by investors and beyond the legal minimums provided by issuers and intermediaries, who necessarily have motivations different from those of the investor.
Even faithfully following all of this well-founded guidance, however, the deck remains stacked against the financial success of most small-scale equity crowdfunding investors for several reasons. As discussed at length in this book, early-stage investing is inescapably a risk-filled endeavor in which most ventures and commitments do not succeed. This is true even for all investors including angels and venture capitalists. Furthermore, wealthier private investors and investors in public securities can invest through the offices of, and thus benefit from, the consistent diligence and substantial experience of interest-aligned and full-time professionals. They can also thereby aggregate larger sums and thus obtain greater voice in their invested companies.
Finally, and learned only through hard experience and not acknowledged in most public forums, everything leading up to and including writing the initial check does not constitute the full story leading to success in early-stage investing, whether of the equity crowdfunding or traditional angel sorts. That first check is not the end itself, but really only the end of the beginning. As companies grow and prosper, more and larger sums of money are usually required to enable a company to reach the promised lands of independent success, private acquisition or public offering, and the final returns to earlier investors often depend critically on what takes place in these later rounds of fund-raising. These additional and later increments of financial support typically come from professional investors and pooled funds, and the norm rather than the exception is that later and larger money throws its weight around in self-interest and because it can, often to the detriment of earlier investors (the so-called Golden Rule of investing, namely, that [s]he who has the gold makes the rules).
It is by no means certain that successfully growing firms that earlier raised financial support through equity crowdfunding will choose or even be able to garner future and larger rounds through further Title III equity crowdfunding, that initial Title III investors will be allowed to participate again due to the financial limitations built into equity crowdfunding for investors' protection, or lastly, that smaller crowdfunding investors would in general have the greater financial resources necessary to take part even if allowed to do so. Concretely, in the more than 50 private investments that this investor has made personally, each and every company invested in has come back for additional funding, and later funders of the more successful companies have often (legally or otherwise, and in any case requiring often difficult negotiation or even opposition) abused the interests of their earlier co-investors. The ability of equity crowdfunding investors to aggregate as well as employ professional diligence and experience (as discussed above), and potentially partner with larger investors from the get-go, will be critical to their achieving financial success comparable to those of traditional angel and venture investors; these mechanisms are not yet either allowed legally or developed practically, however.
To close, Equity Crowdfunding for Investors performs an invaluable service by introducing the broad endeavor of early-stage investing in general and crowdfunding specifically, and giving much practical guidance on how to understand and approach participating as an investor in securities-based and particularly equity crowdfunding. It is also “a good read,” deserving the attention of anyone interested in understanding an important and growing phenomenon in our modern economic and social world. I remain a committed supporter of crowdfunding despite its multiple uncertainties and complexities, firmly believing that success with this rewarding asset class lies within the reach of anyone willing to devote the diligence and effort required, and I am pleased that the opportunity is becoming available to all. Some participants can, do, and will continue to make lots of money with these investments. The authors deserve our recognition and gratitude for the significant contribution of this book.
Preface: The New Angel Investors
Do you ever wish you could have invested in Apple Computer when it was still operating out of Steve Jobs's parents' garage? Or bought a piece of Facebook when its headquarters were in Mark Zuckerberg's college dorm room?
Few opportunities in life can generate personal wealth as profoundly as being a founder or early investor in a startup that achieves grand success.
Mike Markkula was the first angel investor in Apple. He met the founding Steves – Jobs and Wozniak – in late 1976, after they developed the Apple II prototype and just before they moved their headquarters from the garage in Los Altos, California, to an office in Cupertino. Markkula, who had recently retired from Intel at age 32, helped Jobs and Wozniak write their business plan, and then invested $80,000 in the company in return for one-third of the equity (he also loaned Apple $170,000). That transaction valued the company at far less than $1 million. When Apple went public three years later, the company's value soared to $1.778 billion, and Markkula's share was worth about $200 million. That's way more than a 2,000-times increase in his original investment in the company.
Reid Hoffman was one of Facebook's first two outside investors. As an entrepreneur himself, Hoffman had been a founding board member of PayPal and then founded LinkedIn in 2003. He staked $37,500 on Facebook in 2005, when the social network had just moved out of a Harvard dormitory to its new headquarters in Silicon Valley, and was valued at $5 million. When Facebook filed its initial public offering (IPO) seven years later, and the company's value topped $100 billion, Hoffman's piece of it was worth something like $75 million, giving him roughly a 2,000-times gain over his initial stake.
These are two high-profile examples of spectacularly successful angel investments. The overwhelming majority of angel investments are not so successful; some of them are moderately to very successful, and – this is the sad part – most of them are losses. As you know, the possibility of meteoric growth in the value of startups is accompanied by commensurate risk of sluggish growth or outright failure. That's why