A few weeks back I wrote about how risk shouldn’t stop crowdfunding from becoming available in the United States. Any responsible investor should consider risk before participating in any investment. Investment without pragmatism is just gambling, after all.
What are the legitimate risks involved with crowdfunding as defined by Title III of the JOBS Act? For one, this type of crowdfunding in the US marketplace is a complete unknown. We can learn lessons from other countries that have implemented some form of crowdfunding, but every country and every market is different. The United States is also the largest market to date that will legalize crowdfunding in this way, so it is undoubtedly a unique situation.
The general nature of the US startup ecosystem is notable, too. We are a nation of risk takers, a trait that has resulted in an extremely high rate of failure for new businesses. It is also the lifeblood of one of the world’s greatest economic engines. Give and take.
In a country where business opportunities abound and new businesses fail at a high rate, the well-studied investor inevitably wins. This presents a bit of a problem.
Judy Robinette, a partner at Crowdfund Capital Advisors, recently divulged that there were over 700 crowdfunding companies either existing or in development. Obviously, the market is expecting (or at least hoping for) extremely high rates of participation among the US business community.
If we expect a huge pool of available offerings when crowdfunding takes off, are we also naive to think that unaccredited investors currently possess the tools to make sense of this emerging movement?
A crowdfunding mutual fund or fund of funds could help solve some of these problems.
They would enable investors to spread their risk across numerous offerings. Lending-based offerings that provide medium risk and lower returns could be used to hedge against equity offerings that promise higher returns with the caveat of higher risk. Funds could also be allocated across industries and concentrated in those industries that provide the greatest chance of ROI.
The investment professionals who manage these funds could help facilitate educational outreach to potential investors, thus helping to eliminate the painful step of having to perform due diligence manually on individual crowdfunding offerings and those behind them. This would also lift a burden from business proprietors, who could focus communication efforts on one individual or firm rather than interacting with an unknown quantity of individual potential investors.
Most of all, it boils down an extremely complex funding movement into a much simpler exercise for tomorrow’s investor in much the same way that mutual funds and exchange-traded funds do for today’s investor.
Inevitably, the market will provide more powerful tools for investors interested in crowdfunding offerings, but a crowdfunding fund or FoF could provide added benefits and accelerate access to business capital in ways we haven’t imagined yet.
Charles Luzar is the Director of Crowded Media Group and CrowdfundInsider.com, a news blog dedicated to crowdfunding in the United States and around the world. Crowdfund Insider is helping to bring a global perspective to crowdfunding in advance of the JOBS Act becoming law in 2013.
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