Seed-stage investing has a bad rap.
It was true when we entered the 2000s.
And it’s still true today.
I’ve heard the criticisms. I bet you have too.
It’s too risky. Too many unknowns to make smart decisions.
The government has repeatedly voiced these concerns in the lead-up to the launching of equity crowdfunding last month.
Check out this post for some choice quotes from the SEC and FINRA.
Now, my startup investing years don’t quite go back to the turn of the century.
But Mark Suster’s do. Suster, of Upfront Ventures, says that limited partners in venture capital funds told him back then they weren’t convinced about seed funds.
Too small. Too hard to pick winners, they told Mark.
(See Mark’s full post right here and while you’re at it, read my post on what has made Mark and Upfront Ventures so successful.)
Things were very different back then. Twitter, the cloud and YouTube didn’t exist.
And seed funds were just getting off the ground amid a sea of skepticism.
Doubters Then and Now
The passage of time has proved the skeptics wrong.
Seed-stage investing has turned out to be the most profitable stage of private startup investing. And it’s not even close.
CB Insights says that about three-quarters of the top 20 VCs are investors who put money into startups during their early rounds.
Sure, the later rounds offer certain advantages. Startups are more mature. They usually have growing revenue. And how they’re monetizing is open to your evaluation.
But in return for this increased certainty, you pay much more for shares.
The payouts are more frequent but lower than your early-stage startups that turn into winners.
This strategy doesn’t pay off nearly as well as investing in the earliest stages. Study after study confirms this.
CB Insights offers the latest proof. Since the late 1900s, it says, between two-thirds and three-quarters of the VC industry’s returns have been generated by early-stage investments.
Early-stage investors in companies like Google, PayPal, Facebook, LinkedIn, Zynga, Twitter, Salesforce and many others acquired enormous wealth.
The idea of grabbing shares early while they were still cheap began attracting hordes of VC investors.
Seed funding surged as a result.
Equity Crowdfunders: All Aboard the Seed Stage Train
According to Tomasz Tunguz of Redpoint, it has increased by 10 times in the past decade – from $200 million a year to $2 billion.
George Arnold of Knightsbridge Advisers says that there are now more than 500 VC seed funds from a handful at the turn of the century.
It seems that everybody nowadays is doing seed investing – from friends and family to billion-dollar funds.
The latest group to climb on board?
Equity crowdfunders.
And now we’re hearing the same skeptical rumblings that made the rounds 15 years ago…
Too early. Too hard. And the investments too small (to make a difference for your portfolio’s bottom line).
We can dispense with the first two same-old, same-old criticisms. Yes, it is early and yes, it ishard… BUT it’s not too early or too hard.
Seed-stage investing’s track record in the last 15 to 20 years definitively says so.
The Journey From $5 Million to $100
So let me address the third criticism – the small size of seed investments.
For context…
Around the year 2000, the first institutional investment typically was several million dollars in a startup. That’s what they needed back then to develop their technologies and turn them into products. It’s now incredibly cheaper.
When a VC company wrote a $5 million check, it got a big piece of the company.
When specialized seed funds began writing much smaller checks – roughly between $100,000 and $500,000 (though this amount could be lower or higher) – they got smaller pieces of the pie.
Yet those investments that hit it big proved extremely profitable. It turned out that seed funds didn’t need to double or triple down on their investments in the later rounds.
Today, we have a similar situation. The super angels write checks for $25K to $50K. The accredited investors write checks for $10K to $15K.
Equity crowdfunders? As low as $100.
Too little to make an impact on your portfolio?
Making Equity Crowdfunding Work for You
First off, these are minimums, not maximums. If you wish, you can make much larger investments – several thousands of dollars per investment.
Secondly, these should not be one-off investments. I suggest you make multiple seed investments. You should build a portfolio of at least 10 startups, and if you stick with it for a couple years or longer, you should increase that to 20.
So, your overall seed investments will be 10 to 20 times your average individual seed investment.
And third, you’re looking to boost what your overall investments give you with the unusual upside that seed investments provide.
Again, boost your portfolio – not rescue it.
After all, you’re not running a fund. You don’t have limited partners to worry about. You don’t need your $5,000 to turn into a $500,000 windfall. (Though it would be nice!)
Invest the amount you’re comfortable with. The range should be from 2% to 10% of your investable savings. It’s your money. So it’s your decision.
This isn’t the aughts. Can somebody tell the damn government?
Seed investing is accepted for what it is: high risk and high reward with the opportunity to make extremely large profits.
Seed is my favorite round. About 90% of our Startup Investor portfolio (reserved for accredited investors) is seed. And it’s doing really well.
Now, finally, it’s your turn to step up to the plate.
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