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Crowdfunding And The Rise Of Private Markets

Facebook filed a public offering earlier this year, valuing the company somewhere in the neighborhood of $70-$100B. This is an astonishing market capitalization, putting the social networking company on par with other entertainment companies like Disney ($70B) and Comcast ($71B). Time will tell whether buying public shares is a good investment or not, but one thing seems certain: private investors are now capturing a much larger portion of the long term value of companies going public.

Consider the Facebook IPO in contrast to the market capitalization of previous high-profile IPOs. Microsoft debuted in 1986 with a valuation of $650M. Amazon in 1997 with $440M. Public investors have been able to participate in 100x rises for each following their initial public offering. Today, as companies delay public offerings because of increased regulations, retail investors are excluded from the significant appreciation. (Duncan Davidson of Bullpen Capital has a great post on this trend, using data from William Quigley of Clearstone Venture


Now back to why you care. Investors have long known diversification is key to managing risk and protecting returns in the individual portfolio. Many investors rightly maintain significant portions of their portfolios in mutual funds or ETFs to gain exposure to a larger number of companies and asset classes. Fixed income, emerging markets, commodities - with a common brokerage account individual investors can gain access to most investment asset classes. However, one area that has traditionally been out of reach for the typical independent investor is smaller private companies, both with larger firms (private equity) and early stage companies (venture capital).

Yet, this is an asset class worth attention. Historically, these investments have outperformed public equities. As of late 2011, Cambridge Associates data show strong outperformance for the US Private Equity Index over public equities in 1-year, 3-yr, 5-yr and 10-yr periods. In consumer and retail, the data show average gross company returns above 18% IRR in both Private Equity and Venture Capital investments for companies receiving investments in the last three years.

So, how can individual investors gain exposure to this asset class as part of a well-diversified portfolio? With $1M to spare, you are likely to be able to get into a fund of funds or a well-managed firm making direct private equity investments. However, if you follow a rule of thumb of less than 5% of your investible assets in this illiquid, direct investments category, the $1M threshold excludes a great majority of the accredited investors in the market. Moreover, diversification within this asset class is especially important, as these investments are higher risk than public market investments so making select Angel investments can become difficult given the traditional minimum investment.

Expanding private markets would enable accredited investors to join the institutional VCs and professional Angels that earn outsized returns from successful investments. While the risks may make investments in small private companies unsuitable for some investors, for others these investments can be valuable addition to an appropriately diversified portfolio.

A well run crowdfunding site solves the problem of access for individual accredited investors. Investors can build a portfolio of early stage private companies with low initial investments. Accredited investors looking to gain exposure to private market investments, and can build a well-diversified portfolio of companies within the asset class, all for less than the typical minimum investment amount for an Angel investment today.

CircleUp will launch soon as a marketplace for private placement offerings from small private companies. We will feature US based companies producing tangible goods and services for US consumers. Through CircleUp, accredited investors will use the platform to find and invest in companies they find attractive, and in doing so, broaden access to these early stage growth companies beyond the small pool of investors today.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Ryan Caldbeck is the founder and CEO of CircleUp