Why I will probably not be investing via Fundwise

Today the first equity based crowdfunding site in Estonia launched, and while I fundamentally like the idea of investing into growing companies (more than giving them loans!), then I will probably not be investing through Fundwise for a while still, since I see some key issues in their whole model of working.

fundwise

Is equity funding smart money?

In the world of investing there exists an idea that some of the money invested is so-called “smart” money. This generally refers to angel investors or venture capital in terms of the investment being linked together with know-how. The problem with Fundwise being, they (either team or the businesses) believe that they are gathering up smart money, but inherently accessible-to-all crowdfunding will never be smart money. Especially in their model where the people who buy a piece are absolutely “silent” owners.

So, there is a fundamental issue here as to the actual plan of how Fundwise should work. Smart money investments are generally bigger in therms of the sum due to the investor knowing more, or being more aware and therefore trusting the project to be a bigger % of their overall portfolio. However, since crowdfunding is fundamentally accessible to all, then you can’t consider it smart money, therefore the large buy-ins for Fundwise start to work against them. (They buy-ins are as high as 600€ per piece).

How to diversify in equity?

This is obviously a trick question – you diversify like in most other crowdfunding investments, reasonably widely. This is where the problem arises with big buy-ins.

Let’s assume that they have 2 projects every month, the buy-ins are an average of the current projects, let’s say 300€. The person might not like all projects, so let’s say the invest into 20 projects per year. The projects last about 5-7 years, meaning that to run 20 investments per year for even 5 years, that makes the total portfolio value 30000€ before the money starts to recirculate. (Yes, I know this is very oversimplified)

This is why Fundwise will likely struggle to include small scale investors such as myself. To achieve meaningful diversification you have to invest so much money, and the delay for returns is so much longer than other similar investments (like social lending or the current real estate projects).

Especially when we talk to people who are just starting and have like a 5000€ portfolio – completely respectable after a couple a years of investing. Just a few investments into Fundwise would very quickly make up 10% of your whole portfolio. I don’t think that’s a reasonable risk level.

What I would invest in

Since it’s currently somewhat unreasonable for me to aim at building a portfolio (since in theory a diversified portfolio would work well enough), then I’d only invest if I saw a project that I’m personally in love with. For example I like the game building project, and that’s something I’d support but in terms of investing it’s a bit closer to a Kickstarter type investment than an actual make-money investment.

Also, I would make a portfolio if the buy-in was sooooo much smaller. I don’t understand why the pieces have to be so big since the people who buy into the project are absolutely silent partners anyway. Also, since you use crowdfunding such as this partially as a marketing tool, then why would more investors be a bad thing?

Expectations vs investor capability

I’d say that the easiest theoretical fix for them would be to realign the idea of who their ideal investor is. If they want so-called smart money they should be heavily marketing towards medium-portfolio investors (100K+), who wouldn’t care about the bigger buy-in and also bring some know-how to the table.

Another option would be to go truly crowdfunding and drop the buy-in like they have in some other crowd-funding portals to like 10-50€, max 100€. That would make it accessible to small scale investors in a way that it isn’t right now. This would also make more people invest – investing 600€ into a project might be above a lot of people’s comfort level, but investing 100€ into something you think is cool, would be a lot more viable.

Also, more work in marketing and communication would definitely help, but that’s the case with all current crowd-related investment portals.

9 thoughts on “Why I will probably not be investing via Fundwise

  1. The reason behind min stake being so high is due to valuation. You are buying 1€ par value equity note and if the equity size is only 3000€ (and they offer 300€), that keeps the min stake rather high. I’ve been in contact with one team who is listed on Fundwise and hopefully soon enough I can put up to Rahapuu blog one post about this valuation topic.

    Same here – I’m too small for Fundwise to invest in. Hopefully they can find a way to lessen the min stake barriers down to 10 or 50€.

    1. I’m not sure I follow that logic behind that. The total valuation would still be the same, even if the sum is gathered from investors in small parts.

      1. The case in here is that minimum part for OÜ is 1€ par value. If you have 3000€ worth of ‘parts’ then 1€ part value defines the valuation. You can’t cut the 1€ part smaller. Seedrs in UK is doing things bit differently (Seedrs is the owner of the whole part and inside the deal they divide this 1€ as small as they want).

  2. I believe equity crowdfunding will be a significant source of capital for the startups and SMEs and in that context, Fundwise is a great idea.

    But there are two major issues that have stopped me from trying this platform out.

    The first one is valuations. UK-based research has brought out the fact, that crowdfunded equity deals have much higher valuations that similar deals done by venture capitalists or private equity teams. I generally would not have any problem with that as crowdfunders are passive investors vs VCS/PEs doing the actual value-adding work. Browsing the projects on Fundwise, I almost fell off the chair seeing any business idea being valued 500k+ EUR. IDEA! Not a company or business, because the financial statements show no current (or future) value. You really have to believe in the idea and team to make your bet.

    The second one is the financial illiteracy. It is a bit insulting to see a 1/3 A4 called cash flow statement, that is mainly composed on text). There is no way to understand the financial side of the business. And if the finance side is so weak, how:
    – should I understand the current and future valuations of the business?
    – can I be sure that people who are not able to draw up a simple financial plan can grow my money wisely?

    Equity crowdfunding should be done properly to ensure the industry’s success. Quality checks and proper business plans with adequate financial statements could be a good starting point for Fundwise. I will keep my fingers crossed and hope to see some well prepared projects!

    1. I agree on that, and I forgot to point it out, though I mentioned it in the panel discussion – we’re used to absurd valuations, mostly from the US side, so it seems like a company should be valued highly, but in Estonian context I was also surprised by the optimistic numbers. In regards to cash flow – the profit predictions were quite amazing as well! Your mentioning of cash flow illustrates the smart money problem though – there isn’t enough info to make this a smart money investment at the moment.

    2. Hehe, Loit, maybe an idea for widening your spread also to equity business (though some deals have been that already)? I must say that Crowdestate has offered the most detailed information so far on their projects to real estate (I don’t mean word count, but quality over quantity with examples how the numbers are being caluculated exactly). Or if now to think about it again – maybe Fundwise is Crowdestate chance to raise some capital for expansion outside Estonia?

      Fair point also about valuation. I’ve thought about it several times and some of the cases I’m not sure if the true valuation is really that number described on the listed data. Therefore for me as a lazy investor it is much easier to choose projects that show viable return now, not in after 5 years (or even never). At the moment I am also out, but that doesn’t mean I wouldn’t get in in some point of time. Equity crowdfunding is cool new way to invest money, but nevertheless I wouldn’t throw my money into projects that have so big min stakes. I am not that competent evaluating games, ciders or e-magazine distribution that I would take unnecessary risk to my portfolio with such a great amount.

      Anyways, Kristi, good post (as usual). :)

  3. I would like to draw your attention that according to the feedback we have gotten (that includes you, too) we suggested the companies with the highest buy-ins lower their minimum buy-in. And so they did – FlexiBell’s is now 283€ and Siidrikoda OÜ-s 200€.

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