How to Crowdcube
Everything I’ve learned about generating wealth through crowdfunding investing
- Be very, very, very hard to please.
The truth is that most companies raising money on crowdfunding sites are going nowhere very exciting. Or perhaps its fairer to say, you are in the business of finding rocketships, not ’solid businesses’. You are hunting for the needle in the haystack, that rare rare gem that can actually disrupt an industry. In the whole time Crowdcube has been around it has generated 3 Unicorns; think about that against the thousands of companies that have raised through the platform. You want to be in those Unicorns, not spread thinly across dozens of mediocre companies. Look to the pros on this one — Seedcamp, of the of the pre-eminent early-stage VCs in the U.K with a truly outstanding record, will invest in 1–4 companies for every 600 opportunities that come their way (this pattern will be the same at every great VC). That is the mindset you need to adopt. Say no to very nearly everything. Patience is the name of the game here, calm, steady patience, and a faith that you will know when the the opportunity is right.
2. Only ever invest in consumer companies.
VC money is a lot less admin than crowdfunding, so why do start-ups crowdfund? The bad reason is because crowdfunding is ‘dumb money’ so start-ups can raise that way where they can’t get money from VCs. The good reason is they are creating a mass-market consumer product, so the marketing windfall they get from tens of thousands of people seeing their product outweighs the increased admin. A new organic lemonade company will get a spike in new orders for their product; a savings app will get a surge in downloads. The reason you are getting a rare chance to invest ahead of VCs is because the free promotion tilts the scales in favour of crowdfunding in this case. The three Unicorns that Crowdube has created are all mass-market consumer products*. That’s no surprise. The test is: can I buy and use this product myself? If the answer is no, cross it off your list.
3. Only invest in products that you use and love.
The most powerful signal that you have access to is your own feeling towards the product (the product, not the investment). This signal is so strong you can allow it to swamp nearly all the others. Invest in companies where you can feel why the product is so valuable, where you cry out ‘I’ve been waiting for this for years, finally!’ and scramble to get your phone and download it. You sign up to the newsletter, follow them straight away, start telling your friends and family. You should be excited by their very existence, and be able to effortlessly describe why your world is made so much better by using their product. You have an advantage over VCs here, because you can lean into an intuition and feeling that can be powerful enough in itself to propel companies to huge success. It follows from this that you should always at the very least try the product yourself first before investing. Buy some samples to test, download the app. The only thing you need to temper this with is caution about whether your tastes generalise to a large market — maybe you love non-alcoholic sour cherry beer but its probably not going to hit the big time. It is also wise to see what your friends think (send them a few samples, why not?), which can help to corroborate your feelings and correct for where you might be sub-consciously muddling passion with avarice. Don’t infer these feelings on the behalf of other people — hmm I guess cyclists would want smart bike lights, surely? This isn’t signal. The sense has to come from inside you, from your own first-hand lived experience.
4. Never invest in things you don’t understand.
Crowdcube is littered with companies leading their pitch on the grounds of some kind of technical innovation. Why? Because its is dumb money, and people get taken in through this sort of thing because of naivety and greed. Don’t get taken in. If you cannot explain how the technology works yourself don’t invest, because you don’t understand it. Warren Buffet’s mantra was to not invest in things he didn’t understand; and if its good enough for him its good enough for you. The flashing around of voguish terms like AI, Blockchain, Genomics etc are most likely a bad sign — snake oil to take in naive punters. Did Monzo bang on about their AI platform? No, they talk about the product and what it does for people; which is what matters. If you want to invest in these advanced technical trends then give your money to professionals who understand them deeply, for example the ARK ETFs run by Cathie Wood. It doesn’t matter how genius that invention to store renewable energy using heavy weights suspended in old mine shafts is*, you don’t know anything about the energy storage industry and you shouldn’t be putting your hard earned savings into it. That’s called gambling.
5. Don’t follow the money.
Again, most crowdfunding money is dumb money. So why would you take that as signal? Its easy to see a campaign that is over-funding and think there must be something exciting there; and that this is a good sign the ‘crowd’ is on to something. Well not really. It’s dumb money, driven by greed, and its easy enough for companies to manufacture this outcome by lining up big investors, and carefully calibrating the target amount to sail right past it, as if taken aback by the event — ‘wow, look!’. Its just stage craft. The converse signal however is important — if a company is really struggling to get towards their target that is a bad sign, and a very good prompt to reassess your feelings towards their offer.
7. Don’t wait. Hunt.
Monzo is one of the all-time great Crowdfunding success stories, currently up 15x on their 2016 funding round, and with luck that could increase many more times over as they gradually work towards an IPO. Well that 2016 raise took place in….1 minute 36 seconds. Blink and you missed it. Monzo’s 2018 raise took 2 hours 45 minutes. You cannot sit around and wait to get an email from Crowdcube about these things. The very best start-ups, and these are the rare rare gems you really need to know about, will often raise money incredibly quickly. The trick is to know in advance that they are going to raise, and to have pre-registered. How to do this? Ideally you know about the company from elsewhere — which is a prompt to cultivate your awareness of early stage start-ups via twitter, forums, newsletters etc — but the hack route is to routinely (every week or two) go to google and search something like ‘crowdfunding first “pre register”’ with a time filter of past month. This will surface companies that are currently in pre-registration, once you put your name down your in the loop and will be ready when the time comes. It also buys you plenty of time to try the product yourself first
8. Keep calm and follow the plan.
The biggest risk to the quality of your investment portfolio is you and your monkey brain. Everyone has an extremely well-trodden network of greed neurons in their brain and is liable to cloud and take-over your judgement at any point. This is where you get excited about some new, shiny, AI start-up with a whiny pitch that seems so compelling and the opportunity circuits start firing and it seems like a sure-fire winner, how can it not be? Your brain right here is just being flooded with emotion, really, the same emotion that carried thousands of Americans across the continent to the gold rush, or drove people to invest their life savings in dutch tulips (Newton lost a fortune in the south sea bubble of 1720). The problem with this is all the signals about the company are getting distorted, and clouded. Your own passion and excitement is both your greatest asset, since you are operating in an environment of extreme uncertainty, but also your greatest liability. The trick is to keep calm and apply the rules, and to make use of devices that temporarily put a hold on the animal spirits and invite forth the sceptical part of your brain, the bit that keeps you out of trouble. Would you recommend your mum invest in this start-up? That’s a good test of what you really believe. If this was the only company you could invest in this quarter, would you still invest? The other thing you can do is to discuss it with a buddy, talking it through helps to rinse off the unmediated thought loops that greed has set spinning. Alternatively write about it, or some other way of externalising your thought process.
9. Go as heavy as you can.
This one is the most subjective, since it plays to your risk/return profile for which there are no rules; it is a matter of deciding where on the spectrum you personally feel most comfortable. But generally speaking, if you are seeking to generate wealth (as opposed to conserve it) then concentration is your friend. You don’t generate outrageous returns by spreading your capital thinly across dozens of companies. The more you do this the more your returns will track to the average returns across all companies raising crowdfunding, which are decidedly unremarkable. The 15x (at today’s valuation) gain in Monzo is the bulls eye, but if you’ve only invested £50, that’s not bad at all, but you’re going to wish you invested £500 right? By applying the process above you can come to have much more confidence in the investments you do make, which allows you to lean into them more heavily. Pick a number that scares you a bit, then round it up. Of course the usual advice applies here — which is that start-up investing is incredibly risky and you can lose all your money, you should not be investing money you cannot afford to lose.
If you’re investing for love, or for ethical reasons, or some other motivation like that then ignore all the above and follow your heart.
