Lower Risk, Higher Reward

By Wayne Mulligan, on Thursday, March 6, 2014

“Wayne, I have something to tell you – and you’re not going to like it. I’m unsubscribing from your newsletter.

“Oh. OK, Tim,” I said with obvious disappointment. “But why? You read it everyday, you’re an active investor, and...


That’s right, my own flesh and blood was about to unsubscribe from the Crowdability newsletter. Can you believe it?

If it were anybody else, I wouldn’t have taken it personally. But he’s the guy at every family function who raves about our essays. He’s the guy who calls to talk about every deal in our weekly Monday roundup.

I didn’t get it. How did we lose my own uncle?

As it turns out, he unsubscribed because of something I couldn’t have predicted:

“Well Wayne,” he said, “you sent out that survey a couple of weeks ago. You asked about our goals for the year. When I filled it out, it occurred to me… now that I’m well into my 50’s, I’m not looking to take risks anymore. These deals you guys talk about are exciting, but they’re too risky for me.”

That’s when it hit me. My uncle, like many readers who participated in our survey, believes that crowdfunding equals risky.

Obviously Matt and I still have some work to do! Crowdfunding isn’t just about “risky” start-ups, and neither is Crowdability...

Today, I’m going set the record straight for everybody – but this one is especially for you, Uncle Tim!

We’re Not Just Talking About Startups

Again, to be perfectly clear: Crowdfunding and Crowdability are not just about high-risk investing.

They’re about a range of opportunities – from higher-risk start-ups to lower-risk income generating deals – that can lead to attractive risk-adjusted returns. The biggest difference is that these opportunities are privately held.

That generally leads to opportunities with higher returns because you’re either:

A)    Getting in earlier, or

B)    There are fewer “middlemen” involved to take a cut because the deals are a bit smaller

So what I’ll go over today are a few lower-risk asset classes that all fall under the “crowdfunding umbrella”:

  • Crowdfunded Real Estate Deals
  • Crowdfunded Loans
  • Later Stage Private Companies

Crowdfunded Real Estate

Along with the startup deals we usually feature, there’s another corner of the crowdfunding market that has us equally excited: Crowdfunded Real Estate.

Crowdfunded real estate deals – which you can find on portals like Realty Mogul and RealCrowd – are the same types of investments you’d find in a REIT.  The only difference is that these properties are generally a bit smaller and not bundled with a bunch of other properties.

Due to the size of the deal and the lack of middlemen (e.g. brokers, REIT companies, advertising, etc.), the yields are fairly high.

For example, there was a deal listed on RealtyMogul just last month that was yielding 16% - 17% per year.

Where are you going to find deals like that in this market?  Not at your bank, and certainly not in publicly traded REITs.

Crowdfunded Loans

Another alternative crowdfunding  asset class can be found in the debt markets.

You have plenty of options to choose from here.

For example, you could make “Peer-to-Peer” loans on sites like Lending Club.

Lending Club is fantastic because it simply acts as a middleman.  The website allows lenders to find borrowers who need small loans.  Both parties get better terms than they would at a bank.

For instance, lenders can typically see returns in excess of 6% - 7% per year.

As for risk, Lending Club recently released a study showing that over 99% of their investors had positive returns if they held more than 100 notes in their portfolio.

Again, these are just a few examples of how crowdfunding and Crowdability are focused on more than just start-up opportunities.

Crowdfunding for “Companies” (not start-ups)

You may be like my Uncle Tim and believe that growth equates to risk.  But you and he should both know that there are a couple of ways to find growth in the crowdfunding market without taking on any undue risk.

The first way to do that is to look for crowdfunding opportunities in later-stage companies.  In traditional finance this is referred to as “Private Equity.”

These companies were once start-ups, but are now generating millions in revenue with hundreds of employees.

You can find them on sites like SharesPost and even on one of the sites we cover in our Monday Digest: Microventures.

Both of these sites have allowed investors to purchase shares in popular, fast growing private companies.  Many of which have gone on to go public.  Companies like LinkedIn, Twitter and Facebook were all available on these websites before they ever touched the stock market.

So if you’re looking for the upside of investing in high-growth companies, but aren’t comfortable investing when they’re very young, these websites offer a great alternative.

Investing Early Doesn’t Have to Be Risky

And as we’ve said before, if you do invest in the earlier-stage companies we feature here, there are ways to do it without the risk of going broke.

We’ve shared several studies over the last few months that show how a diversified portfolio of 50 or 100 well-chosen startup companies virtually guarantees a positive return on your investment.

The guys that take risks are the ones who try to cherry pick those one or two winners and bet the farm on them.

So I hope I’ve helped you understand a bit more about crowdfunding and Crowdability.  Both offer you (and Uncle Tim) a wide range of opportunities with fantastic risk-return profiles.

Happy Investing!

Best Regards,
Wayne Mulligan
Wayne Mulligan


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Tags: Equity Crowdfunding Crowdfunding MicroVentures Income Yield Pre-IPO Lending Club Real Estate Realty Mogul

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