A couple of weeks ago I wrote an article called “Defining Your Equity/Debt Investor” which hoped to provide startups with some idea of the different types of investors in the ever growing equity/debt crowdfunding market. You can read the article here. As Match Capital and SME continue to collaborate with North Carolina, Georgia and a few other states towards the implementation of state regulated unaccredited equity offerings, I find myself more interested in the correlation between the crowdfunding industry and the Mutual Fund industry. While Crowding is estimated to be a multi-billion dollar, and in some reports, a trillion dollar market, the current Mutual Fund Industry market stands at $15 trillion dollars. Whether or not crowdfunding will grow to become the market size of the mutual fund industry, there are some parallels and conclusions that I like to draw as it relates to the average consumer.
The parallel begins with looking at the 401K. As it stands today the 401K is the country’s primary way to save for retirement. According to the Employee Benefit Research Institute Report, the average balance in all 50 million 401K accounts is $60,000, clearly not enough to survive 20 plus years into retirement. As we continue to live longer, more productive lives, it is essential for our retirement income to keep pace. What is more troubling is that a third of those 401K accounts are within 10 years of retirement and have less than $25,000. One can argue that when it comes to investing and saving, those that have been financially astute and made smart financial investments over the years are better off. However this assumes that everyone starts or has access to the same investment opportunities, which is clearly not the case. As you may have guessed, many startups investments that create wealth are only accessible to accredited investors.
One of the paths to success for a startup and all of the investors involved is the occurrence of an acquisition by a larger company. Interestingly enough, when the media reports on an acquisition, it is usually the founders who make the news, primarily regarding their newly found wealth, on paper at least. Of course the acquiring company gains more market share.
What is intriguing, is that rarely are the seed capital investors mentioned, you know the people who gave the company their start, their seed capital? Unless you’re a well-known investor like my friend Brian Cohen (first investor in Pinterest), it is unlikely you will make the news. Other times, investors are happy enough being “Cashed Out” (making 10x to 100x their investment) and would rather not have the media coverage.
I continue to ask the question, could crowdfunding become a type of mutual fund industry? Proportionally there are many more unaccredited investors than accredited, with greater purchasing power, so the numbers seem to make sense. If you recall, an accredited investor is an individual whose net worth is $1 million or more excluding their primary residence, or maintains an annual income of 200,000. Obviously this is not your average 401K investor. And based upon the capital raises on sites like Crowdcube in the UK (Where equity crowdfunding is legal), the amount each investor can invest is relatively small, in some cases, equivalent to some mutual fund minimums of $500 or $1000.
Based upon the small numbers of 401K investments, logical dictates that most Americans cannot afford to invest in startups, let alone time tested Index funds that have provided a solid return over the years (Note: Managed funds not included). This would make sense until you see successful crowdfunding campaigns and the amount of dollars that are being invested in the crowdfunding industry by the average unaccredited person. While this is very exciting, I am wondering if the crowd is going to get serious about investing in startups that can either produce significant ROI or produce a pump and dump philosophy, similar to VCs. For those unfamiliar with pump and dump, if you review the track records of many investment VC firms, you will see that many do not invest in cash generating, long term dividend- viable businesses, but businesses that can be flipped like a house after pumping some hype and valuation in the media about the company to get acquired. Nevertheless the end result is “Cashing Out”. And with less than ten years until retirement, some 401K’s need a pump and dump.
While your average individuals’ knowledge of investing begins and ends with the stock market, there is a new world of opportunity for the 401K investor, who will soon come to realize that retirement comes quicker than most of us would like to believe. There is no doubt that funds will emerge that specifically focus on startups with promises of becoming great companies ripe for an acquisition.
The ultimate question is whether crowdfunders will be ready to make a serious investment in startups or miss out altogether on an opportunity to increase the value of their retirement portfolio and maybe buy that property they have always had their eye on.