I recently spent some time speaking talking to a well-known NY Angel, and I was surprised to learn how completely misunderstood equity-based crowdfunding is.  I had, by now, become accustomed to explaining the basics of how the traditional funding model works, and how crowdfunding is going to radically change the industry.  But here was someone who was quite literally a world-renowned expert in the industry, and he seemed to completely miss the point.  (Now let me preface the rest of this blog, by stating that this person is quite brilliant and I have nothing but the utmost respect for him.  I truly appreciate his time.  And to be honest, his debates always leave me thinking, and I am better off for having talked to him.  Most of the time his line of questioning helps me fine-tune my vision, model, and pitch).

He spoke in a argumentative manner, as he often does, about how there was no need for it, and the current model works great.  Mind you, in the next sentence he mentioned that angels investor rarely, if ever, make a return on their investments.  So clearly, the model isn’t working “just great.”  He spoke about how he works with experts and if they couldn’t pick the right companies, what hope would the general public have.  I wanted to mention that a lot of individual investors do better in the stock market than the supposed experts who manage funds.  I refrained from directly insulting his cohorts.  The one point I was able to get him to agree with me on was the limitation on resources that the current system presents for entrepreneurs.  He agreed that crowd funding is going to make a lot more capital available to entrepreneurs than is available in the current system.

Venture Capital firms, and angel investors, will all tell you that their doors are always open to good ideas.  But most entrepreneurs know that there are a great deal of biases and externalities such as ego, greed, familiarity, or “buzz” that come into play for an investment decision.  And of course, when you are an entrepreneur telling industry experts that you are about to disrupt their world, convincing them to give you funds will obviously be difficult.  My conversation ended with the angel telling me that he was now focusing on diversification in his portfolio to help improve their “pitiful stats”.  I had to hold back from jumping across the table to shake him as I yelled, “what have I been talking to you about for the last 20 minutes!?!”

Since I didn’t get the chance to discuss diversification with him, I thought I would vent and tell you about it.  Now let me present you with a couple options and you tell me which one is more diversified.  Option 1, you put your money, $100, into a fund.  The fund has 10 other investors with the same amount of money invested.  The fund then invests $200 in 5 companies that it deems worthy of an investment.  So 10 of you have now collectively invested $1000 in 5 companies.  Option 2, you don’t invest in a fund, but pick 20 companies on a crowdfunding platform and invest $5 in each company.  Instead of the fund deciding for you, you pick the companies.  Which option is more diversified?  The reason crowdfunding allows for more diversification is because it does not limit the number of investors in the pool.  And more importantly it changes the total number of investors who invest in each company.  Instead of one or two funds investing in just one company, you may have hundreds of individual investors.   Which reduces the risk to each investor and provides the entrepreneur with much more access to capital.  A fund has a limited number of investors, but the open market has a much larger pool.  Crowdfunding also allows entrepreneurs who are looking for much smaller raises to find a market, where before they had their personal savings, FFF (Friends, Family, and Founders), or worse, none.

Diversification aside, the lack of knowledge about equity-based crowdfunding is astonishing to me.  If experts in the industry aren’t aware of it, how can I hope to think regular investors would be?  This experience has invigorated and inspired me.  I want to go out and tell the world about how things are going to change.  I want investors, entrepreneurs, and everybody else to know that the playing field will soon be leveled.  A Facebook type IPO will no longer get to regular investors when it’s overpriced and overrated, draining their funds and portfolios as it moves their money into the bank accounts of insiders.  Regular investors will now have a chance to invest in a start up before it takes off.  The world of astronomic returns will no longer be the realm of the few wealthy experts who are friends with the right people.  Entrepreneurs will no longer have to cater to biases and prejudice as they seek funds.  Social entrepreneurs will no longer have to defend their desire to help others, even if it means that the return on the investment might only be triple, instead of 10 times.

The world is about to radically change.  And either you will benefit from the new opportunities to start your company, invest in a company, create jobs, and create wealth.  Or, you will watch it pass you by.  You can sit, and try your best to hold on to the old way things have worked.  And refuse to accept the oncoming train of innovation headed towards you.  But refusing to see the train doesn’t stop it from hitting you.   My suggestion would be, see the train coming and do your best to get on.

SmartMoney Entrepreneurs offers you the best opportunity to get on this train.  SME provides a way for you to venture into this world through a safe, easy, and informative platform.  SME will make it easy for “beginner” level investors to invest, as well as provide a slew of real time business data that even seasoned angel investors have never before had access to.  In addition, SME’s 60/40-investment return provides a safety net that is completely unheard of in the start up investment world.

By Chirag Sadana, Head of Business Development & Strategic Planning at SME

Contact: chirag@smartmoneyentreprneuers.com