Will the Crowd Follow the Herd?
Venture capital investors have a long history of moving as a herd. In other words, they invest in similar areas and sectors at the same time. Whether internet, telecom, biotech, cleantech, internet again, well, you get the point–sectors get hot and VCs flock to get in on the action. Angel investor groups tend to wander in or behind those herds. This is a natural and in many ways beneficial phenomenon. As noted by VC and general deep thinker Neal Dikeman, investment “herds aren’t all bad.” The bad side is that many “investable” companies do not get funded when a sector is not in vogue. Once crowdfunding investment opens angel investing to everyone regardless of wealth, will the crowd follow the herd? I predict the answer is more “no” than “yes.”
At a high level, it is easy to see how the crowd will follow the investment herd. Crowdfunding portals will try to find and feature companies in the “hot” sectors. For those portals that develop a following and related traffic, featuring these hot sectors will help focus crowdfunding investment activity. I envision that crowdfunding clubs will be formed much in the same way that angel investment groups exist today. Those groups that focus mostly on pure investment returns will probably be influenced by the investment herd just like other angel groups and VCs.
However, I think that one of the great opportunities with the crowdfunding investment exemption is that it will not be stuck in the herd. Crowdfunding portals should develop around more specific interests and specializations. Just like VC funds are sometimes limited to specific sectors, portals would do well to specialize behind specific industries. I hope that crowdfunding investment clubs, whether official or unofficial, will form around industry expertise. Maybe they will become “farms” that stay within their sectors whether the sector is “hot” to not rather than herds that move from area to area. I can envision investment groups that consist of investors with highly specialized knowledge–telecom engineers, aerospace and software engineers. Unlike angel groups, these crowdfunding investment clubs would not be limited to retired angel investors with sufficient net worth but could include working professionals. This is enabled for the first time by the JOBS Act because members would not need to be “accredited” for securities laws purposes. These industry specific groups will have a level of sophistication within their sectors that accredited and institutional investors will seldom share.
Perhaps these crowdfunding investment clubs can exist within large companies. Imagine the impact that a crowdfunding investment by members of a Google Employees Crowdfunding Club would have on others who decide to invest in a startup internet company. More importantly, imagine the influence outside of the “hot” sectors. What impact would an investment by members of a Cleveland Clinic Crowdfunding Club have on a nascent biotech startup? Think of the power of an incubator area like RTP for life science investment clubs or even Boulder for tech companies. A crowdfunding club of RTP professionals who identify a life sciences company as investment grade would be an immeasurable endorsement for that new company.
The typical crowdfunding investor will also likely not be as short-term or pure ROI based as the typical herd investor. The bigger crowdfunding issuances that are over-subscribed and meet the million dollar annual cap will grab the headlines but I think the more common funded round will be for the companies that you never hear about. It will be the company that gets funded by people who directly or indirectly know the founders that I find most appealing. Part of the excitement will be the companies that would not have been funded at all prior to the crowdfunding securities exemption. This is the traditional realm of “friends and family” (“friends, family and fools” to some my more cynical colleagues) but the internet and social media tools will make these companies known to supporters that would not even be considered acquaintances under traditional definitions. Local businesses will raise capital from local citizens because the business is one that the community wants in the area or is started by local high school kids. The herd mentality that is evidenced by this type of local investment has its roots in our more traditional senses of community–not ROI.
The possibilities are endless. This is what has so many of us excited about crowdfunding investment when it becomes a reality in the U.S. It isn’t an expanded herd of traditional investment, it is the potential for non-migrating crowds to form outside of any investment herd.