Or is it better to review and pick the ones that you like and would have conviction in? Now, many equity crowdfunding platforms offer a couch potato choice, autopilot option. I.e., don’t do any research or work and just sit back and let the platform invest your money into every single startup offered on the platform. That sounds like a pretty good deal, to just sit back and make money. Let’s look at some data pieces and considerations to determine if you should be handpicking startups, or setting and forgetting.

Startup portfolio returns

The Pareto Principle, or the 80/20 rules, seems true in so many facets of life. So generally speaking, that is where 20% of your effort will lead to 80% of the results, and 80% of your effort will only lead to 20% of the results. And it is even more true in the world of startup investing. For an average VC firm measured over a longer time period, e.g. 7–15 years, with a high number of investments, ~30–100, the majority of the returns will actually come from just one company. Perhaps 51–90% of the returns will come from the one company. Then, the remaining returns will come from the 2nd best performer out of all the startups invested in. So practically all the returns come from just 2 companies in an entire portfolio, and every other company will return nothing, pennies on the dollar, your money back, or maybe a few times over. In short, the rest of the portfolio is essentially trash or just ok. Wow. This revelation can be hard to swallow at first because if you were doing the investing yourself and reviewing companies, it means most of your time was not only wasted, but a negative use of time. It is not just 80/20, but more like 95/5. And even with choosing companies individually, it could mean missing the 1 or 2 startups that will really return your money.

Spray and pray or narrow quality

Sitting back and using an equity crowdfunding platform auto pilot option would seem to be better, or going with an angel syndicate to begin with. That way, you are far less likely to miss the big winners, particularly if auto pilot in crowdfunding, since every company on the platform would be invested into. There are some drawbacks here however. For starters, many angel syndicates have high net worth and minimum investable amounts, that would disqualify the majority of average joes. The requirements are akin to, and in some cases, effectively only allow accredited investors to invest. So if you don’t have a net worth of $1m, and making total combined income over $200k, this is effectively not an option for you. The other issue I have with blind investing on the equity crowdfunding sites is the amount of low quality companies that you would get in with. I see mediocre ideas and companies that are unlikely to go anywhere in the long run and in very competitive industries: a new kitchen sponge holder (why not just buy the one from the dollar store), granola bars, new beverages, new snacks, substitute teacher apps, travel apps, more apps, news trackers. These ideas even if successful just don’t seem likely to move the needle for civilization forward in a significant manner, and consequently, muted returns. By blanket basket investing, it is now focusing on entirely quantity rather than quality. Such returns gained from the outliers will be muted by the high % mediocre companies that could have just been avoided. The best VC firms and angel investors meet with the founders, and are extremely selective in who they invest in. For instance, some of the top investors invest in just 2% of all companies that they evaluate. If the ‘smart money’ is doing that, they are clearly focusing on quality, not quantity. Does it make sense to do the reverse of that? Spray and pray is not a safe bet.

Instead, looking for companies that have excellent founders, teams, product, vision and execution will increase the likelihood of finding a market leader. And when market leaders are found, that is when asymmetric returns are produced. Market leaders get the lions share of purchases, and by extension, future profits and returns. Having conviction in finding quality could even lead to having just one company in each industry. Or, a less conviction-based strategy you might invest in a few companies in an industry and have a few of the top market leaders. But certainly not everything in every industry. These are your life savings after all, that you worked hard to earn. What little you have, as an average joe making average money, should not be squandered blindly investing into whatever.

Disclaimer

This is not Financial Advice. This article is meant only for educational and perhaps entertainment purposes.