Venture Capital is Sexy, but Crowdfunding is Cool
It's how all the cool kids make money. (And you can do it, too)
When I first told people that I started this investing newsletter, I knew friends were curious about the topic, but I wasn’t sure what they already knew.
Some thought it would be about stocks (it’s not), while others thought it would be about how to get investment for your business (it’s not exactly that either).
After sharing my first article Why I started investing…eventually, I found that most readers didn’t know anything about venture capital funds (VC). And that’s what I’m most passionate about.
So let’s start with a little crash course in how funds work, and then I’ll tell you how you can get skin in the game, even if you aren’t accredited.
The Way Funds Work (As Far As I Understand)
Let’s take a well-known example of a successfully funded company: Uber.
Today, you can buy stock in Uber because it’s a publicly traded company. If a company is public, that company has already proven its success.
You (as a retail investor) can buy and sell Uber stock on your own, but many people invest through a mutual fund, exchange-traded fund (ETF), or an index fund. These funds bundle stocks from various companies in order to distribute and minimize risk (the potential for loss or gain). So maybe you’ll find Uber stock in a fund that focuses on transportation, apps, companies with four-letter names.
Hedge funds can also buy and sell Uber stocks, as well as other liquid assets (things that can be sold quickly). But they’re only available to super wealthy people (i.e. accredited investors). Hedge funds focus on high short-term profits, whereas private equity funds usually play the long game.
A private equity fund (or two) probably invested in Uber before they went public. In the early 2010s, they demonstrated a strong growth trajectory, but couldn’t necessarily produce big returns for a few years.
As Uber continued to grow and generate more money, a percentage of that profit went back to the fund. And then when it went public, it sold shares to other funds and retail investors. So if a private equity fund invested in Uber early on, they made a buttload of money when Uber went public.
And that brings us to VC. Before you even heard of it, Uber pitched their idea to multiple VCs. A few of them were crazy (or smart) enough to realize its potential, and agreed to give the founders hundreds of thousands of dollars to make it happen.
VC funds invest in businesses at their early stages. But it can take anywhere between 5 to 10 years for that early stage company to generate returns.
And therein lies the risk: VCs have to make a very calculated decision about whether they think a company will grow and succeed. As a result, there’s a lot of loss and failure in the VC world, but the wins make up for it - and then some.
The takeaway: by the time you are able to purchase a stock for a publicly traded company, hundreds of other people (who are already wealthy) had the option to invest early on, and as a result, they have more opportunity to make a buttload of money.
(I’m not getting into SPACs, but if you want to learn about them, check out TechCrunch’s article.)
How Can Anyone Build Wealth Without Money?
Unfortunately, it’s nearly impossible to get access to early stage investment opportunities if you don’t already have a lot of money.
And to some extent, it’s understandable. Small business owners and founders need more than a couple hundred dollars to get their ideas off the ground. But that’s the beauty of equity crowdfunding!
Platforms like StartEngine, Republic, and fundBLACKfounders are changing the game for investors and founders alike. Similar to Kickstarter, founders can share their project on the platform and require a minimum investment amount. Then unaccredited (and accredited) investors can invest in companies they want to support!
Dawn Dickson, the first first female founder of any race to raise over $1 million in equity crowdfunding, summed up the situation pretty well: “I keep seeing these things floating around about Uber. Somebody invested $5,000 turned $25 million...You had to have a friend to put you on to that deal.”
In other words, you have to already have money to unlock opportunities for more.
When she launched her first round of crowdfunding for Popcom in 2019, the minimum investment was $252. It was high enough to deter people who aren’t serious, but low enough that a family could make it happen for themselves.
Her investors included a career woman who had only invested in her 401k, and a college graduate in her early 20s. Both of them learned about PopCom and what it means to have equity, and then made an educated decision to invest in PopCom with their hard-earned dollars.
Doesn’t that sound like the way investing should work?
I could go on and on about it, but you should just listen to this interview with Dickson and get inspired!
Things I Found Informative and Interesting
If you’re a founder, check out Dawn Dickson’s Medium to learn how she crowdfunded PopCom
Mac Conwell launched RareBreed Venture this month to focus on underrepresented founders
JP Morgan Chase pledged $30 billion to help close the racial wealth gap (Disclaimer: I contributed to this piece)
We’re encouraged to live modestly and invest mere fistfuls of dollars, with the hopes of receiving returns that may afford us a comfortable retirement. Meanwhile, people who are already basking in generational wealth have investment opportunities that can produce even greater returns than our humble stocks.
But now that you know a bit about crowdfunding, I hope you’ll consider exploring some new opportunities not just to grow your own net worth, but to help a founder on their journey to generational wealth, too.
This issue is already quite long, and I’ve just barely scratched the surface! I genuinely cannot wait to tell you more about all the other incredible efforts people are making to make equity more accessible.
If you want more, please be sure to subscribe!
PS - I’m working on a really nerdy surprise for you. It’s like…super nerdy. It’s so dorky that I might get more joy out of making it than you’ll get from using it. I can’t wait to share it with you!
Do you know someone who is almost as much of a dork as I am?
Big thanks to the folks at Compound Writing for helping me with this, including Kyla Scanlon and Philip Thomas
Correction 29 October 2020: an earlier version stated that Dawn Dickson is the first Black person to raise over $1 million in equity crowdfunding.