Invest Alongside a Venture Capital Firm when Crowd Investing

"Partnering" with Venture Capitalists can Improve Your Odds

The risks of investing through crowd funding are significant. In an article on MSNBC, Lisa Buyer, an Initial Public Offering consultant who worked on Google's IPO estimated that out of every 800 companies raising funding, only two will succeed. With such incredible odds against you when crowd investing, it's important to find as many advantages as you can to tip the scales in your favor.

One strategy: look for opportunities VCs have already invested in

Venture Capitalists (VC) are the structured companies that have been providing early stage funding to start-ups for decades. These organizations have significant experience and expertise analyzing early stage companies to find the ones that have the best chance for surviving and succeeding.

Venture capital firms research all aspects of the business, utilizing accountants, lawyers, management consultants, and other experts to thoroughly vet a company and its founders before investing. If a VC has already come on board as part of the crowd of investors, it is a good sign that the company has a better chance of survival.

If you see a company that you are considering investing in, think about waiting until a VC has invested, and then invest alongside them. If no VC invests in the firm, that might be a sign that the company isn't as good a bet as you thought. 

Finding VCs on Crowdfunding Platforms

Finding the opportunities that VCs have invested in may be difficult in the beginning. With the entire industry being in its infancy, it is unclear how much transparency there will be in knowing who exactly has already invested. What is clear, however, is that VCs and platforms both see the benefits of investing the crowd alongside a VC.

Some crowdfunding platforms have already started promoting the model of partnering experienced investors with the crowd. SyndicateRoom, CirculeUp, Crowdfunder, and Seedrs are all platforms that feature opportunities to follow a lead VC investor into a deal. This model, however, is not a panacea for safe crowd investing. 

Just because a 'lead investor' is in a deal, that doesn't mean the company is one to invest in. VC firms and angel investors make bad bets all the time. You will still need to do your own research and due-diligence when investing. (Subscribe to our newsletter to learn how)

Even with VC backing, most companies fail

Just because you are investing alongside a venture capital firm doesn't guarantee success. The statistics are that between 30% and 40% of venture-backed firms fail, but statistics can be misleading. Harvard Business School senior lecturer Shikhar Ghosh places the 'failure rate' at a much higher percentage. Ghosh researched over 2,000 venture-backed companies that received $1 million or more in funding since 2004. Ghosh's did find that 30% to 40% of the firms liquidated all of there assets, but that only told half the story.

Ghosh also found that 75% of the companies never returned any cash to investors. That means that although the companies are still in business, investors had their capital locked up inside an illiquid investment. Although the companies didn't technically fail from a business perspective, from an investment perspective they did. If you are going to invest in venture capital firms, make sure you understand the risks

Take the Purposeful Finance Challenge

In just a few minutes a week, you can move toward financial independence. Each week you will receive a simple action item to take to improve your financial situation. Visit our challenge page and commit to build your financial plan one week at a time.