By Chris at www.CapitalistExploits.at [14]
In a shocking and uncharacteristic display of common sense, the US government has recently managed to pass two laws which are an absolutely fabulous idea.
The legalization of marijuana in the US is the first one.
I say this not because I'm a closet pot smoker; I don't even reside in the US, but because Government's involvement in deciding and having control over what we do and don't put in our bodies is the height of absurdity.
The leading cause of death in the Western world is not giggling stoners stumbling into oncoming traffic, it's actually heart disease. We may as well ban deep fried food and TV...
The second law they passed was the JOBS act, which, in a nutshell, allows everyday people to invest in private business while at the same time allowing private business to solicit capital from everyday people.
Combining the two would certainly produce some interesting investment choices, especially if marijuana precedes the investment choice. Then again, this would be akin to drinking alcohol and gambling, which is about as American as apple pie. Let's face it, without alcohol and gambling Vegas would consist of a single motel and gas station run by a guy with a lazy eye named Chuck.
I bring this up since I recently received an email from a friend where he discussed both crowdfunding and marijuana.
He had been debating whether the marijuana crowdfunding platforms are an "industry to watch." Legislature changes often provide accelerant to glowing embers and the legalization of marijuana is no different.
We all remember how crazy pot stocks got a few months back. In fact, we detailed this in a January edition of a private alert we put out on select trades we're placing our personal capital into.
At the time we determined that due to the asymmetry available we just HAD to short one which stood out. Specifically, a useless pump and dump candidate one of our editors of the alert service brought to our attention. The company in question was General Cannabis Corp (CANN [15]).
Easy pickings - find a company with little substance that is being run up on a deadly combination of BS and stupidity and you have yourself a candidate. What could possibly go wrong?
What indeed?
Investors who went long CANN as we went short in mid-January lost their shirts but no matter, they may have kept their underwear as it hasn't completely disappeared. Rest assured, however, that we'll get another series of amusing debacles before we all go in a box.
Equity crowdfunding, like the now legalized marijuana industry, is relatively new so the question as to whether marijuana crowdfunding platforms are a sector to watch really isn't a silly one.
We've been very close followers of equity crowdfunding since its emergence, and are very well connected into the ecosystem so I thought I'd offer some insight into the industry as I see it.
Before I proceed a caveat is in order. Seraph [16], the company Mark and I founded, are, together with our members, investors in a company that keeps a pulse on the equity crowdfunding marketplace and we're vetting a number of candidates continuously in this space. We do therefore have a bias towards the industry as we have placed capital and are looking to do so again.
It seems obvious to me that the vast majority of the crowdfunding platforms out there, while being run by well intentioned entrepreneurs, will absolutely never make any profits. And when the venture capital that is currently keeping them alive dries up they will simply disappear like a fading sunset over the horizon.
Now, I've been accused of being too harsh on many of the platforms who are looking to raise money so I'm going to choose my words carefully. Here goes: most are crap and will die!
Don't get me wrong. I'm incredibly excited about crowdfunding in general and believe that the growth will continue. In part, because the financial architecture that has been built ensconcing Wall Street, brokers, various other "intermediaries" and political interests provide little value in our world today. People are fed up with them and increasingly distrusting of the financial institutions which we are told are "safe".
Quarter over quarter, investment via equity crowdfunding is experiencing tremendous growth, and as more laws and regulations are relaxed and people become aware of investment opportunities, we certainly hope - and expect - this growth to continue. There is a movement of capital globally from public to private and crowdfunding is but one conduit for these capital flows.
Equity crowdfunding is a great experiment in the sense that for the first time since the Great Depression, non-accredited retail investors have access to privately listed investment opportunities.
The United States and the United Kingdom acted nearly simultaneously in 2012, allowing equity-based crowdfunding in the US via the JOBS Act and in the UK through new regulations put in place through their Financial Conduct Authority (FCA).
While American accredited investors have been able to crowdfund for several years now, the American government finally implemented rules legalizing equity crowdfunding for non-accredited investors a few weeks ago. Government efficiency at its finest…
The reason why, for the first time in almost 100 years, non-accredited retail investors suddenly became allowed to become angel investors is better answered by the guys who were instrumental in drafting the legislation and bringing about the concept itself. We discussed this some time ago with our colleagues Jason Best and Woodie Neiss and you can listen to their story here [17] and here [18].
Since 2012, the UK, US, and other markets have seen literally hundreds of equity crowdfunding platforms listing thousands of investment opportunities - with varying models.
In a very general sense, four models of equity crowdfunding platforms have emerged:
1) Platforms for Everyone
Take any trip on the London tube today and - unless you're blindfolded - you'll not miss the advertisements from Crowdcube [19], which boasts nearly £90,000,000 in investments and nearly 190,000 people registered on their site. They continue to be a leading platform in this space. Crowdfunder [20] and Seedrs [21] are two other well-known platforms.
These platforms accept investment in increments as little as £10, though the average investment is actually well over £1,500. They focus on the retail investor who I imagine would often be mom and pop investors. While there are tech and other startup-type businesses listed, investments can also be made into more established consumer goods and retail-type businesses.
2) Platforms Geared Towards Sophisticated Investors
Sites focused on accredited investors require much higher thresholds for investment. Jerusalem-based OurCrowd [22], has been very successful through a focus on Israel's hi-tech scene. It has also been expanding listings outside of Israel as well. In the United States, CircleUp [23] is another that comes to mind.
3) Real Estate Crowdfunding
People are claiming that the future of commercial real estate is in crowdfunding. Washington, DC-based Fundrise [24] is the first and among the most notable.
4) Niche markets
There are also a host of specialty crowdfunding platforms. Some focus on agriculture and yes, others focus on growing other products... like marijuana.
Buyer Beware
At the end of the day, equity crowdfunding - like all forms of angel investing - is inherently very risky. You have to accept that you will lose more times than you'll win but hope that your wins are many times bigger than your losses.
Over the last 30 years early stage venture capital has outperformed stocks and bonds by a large margin, returning an average of 21.29%. This while, as I mentioned last week [25], up to 3/4 of early stage deals will fail.
Investing in private early stage deals is extremely time consuming and difficult. It takes skill and lots of experience. I learn something new every day and I'm almost completely surrounded by veterans and due diligence from the moment I wake till late at night when I typically pen these articles to you. It's not a part time thing! There are a few key ingredients that I think are worth pointing out to those interested in getting their feet wet.
Do the Obvious
I am no longer surprised by people losing money in private deals. Occasionally someone will bring me a deal saying it looks really good. I'll hit them with some simple questions which any investor should have considered before wasting their or my time on.
- Have you done a background search on the people involved?
- Due diligence: have you asked for their financials, and if it's a start-up with none to show, have they been in business before? If so, ask for the financials of that business. What competition do they have? This question the founders need to have done extensive work on. Have you called the company, bought their product, tested their service? You can learn a lot from finding out how they're servicing clients right now.
- What terms are being offered? In early stage deals terms are way more important than valuation!
Still interested in crowdfunding?
We for sure are! Crowdfunding is a phenomenon that is changing the way that capital is being allocated. It is fundamentally better for individuals to make their own choices with their capital than it is for Governments or incestuous corporates tied to the government to do this for us.
What I do think, however, is likely to happen is that there will be an entire host of investors getting burned, just like they do at Vegas or Macau. Many will believe that they'll see the next Uber or Apple get listed on a crowdfunding site, and at the same time will be able to identify the deal.
Furthermore, even if they identify the deal they will have no idea about the structure of the terms and can easily be wiped out by VCs funding the company in a Series B or C round where investor protections were never put in place.
While it's possible I've yet to see the early stage deals from close networks that cross our desks being posted onto any platforms, certainly in the early stages. I don't see this changing.
Small networks of industry professionals will continue to share deals with those closest to them before taking in capital from any outside sources. Human nature isn't about to change and humans are social creatures.
When Seraph [26] gets a great deal we share it with those closest to us. Why would we do anything else? That's human nature....
Furthermore, founders are typically in search of smart capital that can help them build their business. This means connected money with skills and knowledge is always going to be at a premium. If you're an entrepreneur raising capital and looking to grow your business obtaining that from a crowdfunding platform is much more difficult.
The most promising investment opportunities will continue to be shared in tight, close-knit circles. They will, however, find their way onto crowdfunding platforms when they reach later stage financing rounds. When a company has in place the smart money and is just looking for expansion capital then I think the crowfunding sites are a sweet spot.
Lastly, back to the original question that my friend was discussing - marijuana crowdfunded deals. I don't see them as any different from a backed beans crowdfunded deal. Crowdfunding is merely a conduit.
- Chris
"An investment in knowledge pays the best interest." - Benjamin Franklin