Investors frustrated by flat fixed-income securities and an economic climate wrought with uncertainty are increasingly including alternative investments in their portfolios in an effort to obtain uncorrelated returns. Many have augmented their investment portfolios with angel investments – investing capital in startup companies, in hopes of achieving exponential returns even a fraction of those like early Facebook, Airbnb, and Dropbox investors.
With the passing of the Jumpstart Our Business Startups Act (JOBS Act), startup deals will soon be accessible to the general public. Equity crowdfunding platforms are now in a unique position to offer our perspective on the utility of startup investing as the newest type of alternative investment alongside private equity, hedge funds, real estate, and managed futures.
Even though participating in equity crowdfunding offerings is risky, it could yield high returns when finding winner startups. For example, Peter Thiel, former co-founder and CEO of PayPal, was the first outside investor in Facebook in 2004, receiving a 10.2% stake for his $500,000 investment. During Facebook’s IPO in May 2012, Thiel sold 16.8 million of his shares for $638 million and another $396 million in August 2012, for a total of over $1 billion.
Below are some examples of the returns that a $1,000 investment could have yield for investors participating in the financing rounds of early stage startups.
$1,000 in Facebook in 2005 = $624,500 today (62,450% ROI)
$1,000 in Airbnb in 2009 = $589,667 today (58,967% ROI)
$1,000 in Dropbox in 2008 = $391,500 today (39,150% ROI)
Investors are looking for higher returns, uncorrelated to lackluster traditional markets, as part of a diversified portfolio strategy that includes looking for additional sources of alpha through alternative investments.
Preliminary results from RockThePost’s investor survey indicate that investors’ portfolios contain a lower percentage of fixed income and mutual funds than 10 years ago. Likewise, alternative investments make up a larger percentage of portfolios today.
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