Monday, September 26, 2016

Tax Incentive and Seven Outstanding Suggestions for Prospective Crowdfunding

Similar to other countries, the United States needs to introduced tax incentives for Angel Investing on Crowdfunding Platforms that include exemptions from capital gains tax on shares in early-stage companies held for between one to ten years with around twenty percent of the purchase price of these investment being claimed as a tax offset if invested in the first 3 years.

Angel Investing in small business startups is a huge driver in economic recovery and job growth and requires a very different way of thinking. Typically, you need radical incentives or tax breaks for start-up investing in unlisted, early stage companies that need capital to get an idea off the ground.  We need to encourage more targeted risk-taking in entrepreneur endeavors. 

The global gaming research firm Gambling Compliance estimates $95 billion is expected to be bet -- mostly illegally -- on NFL and college football this season, but the Massolution Crowdfunding Industry 2015 Report stated in all of North America only $17.2 billion will be invested in Crowdfunding for business start-ups.  While it is not gambling, to be successful Crowdfunding investors typically back a range of ambitious companies, expecting most will fail and a small proportion will be so successful that they will make up for the losses and still provide a compelling return. 

This is a stark contrast to legendary investor Warren Buffett’s well-known line on the two rules of investing: “Rule 1: Never lose money. Rule 2: Never forget rule 1.”  With his recent argument that "an accumulation of money has no utility" I suspect Buffett could have invested in thousands of business startups and while many may have failed, many others would have succeeded.  Not only creating a positive overall return on his invested capital but would have stimulated unprecedented economic growth.  Many of the failing companies would still have inspired innovation and technological improvements, which are then absorbed into the ethos.  

Here are seven suggestions for prospective Crowdfunding to think about before getting started:

1. Aim to diversify - Just as a serious investor wouldn’t pick a single stock and consider their portfolio complete, picking several start-ups instead of only one is a way of spreading risk.  “We know a large percent of these companies will never see the light of day,” points out Michael Quatrini, who is President of Blackwood Holdings Group and Venture Capital Firm based on Orlando, Florida. 

A former Merger and Acquisition Specialist, Quatrini recommends investors only spend money they can afford to lose when backing early stage companies but also spread the risk.  “If you’re not willing to lose a cent then you should definitely not be in the Angel Investing game,” he told Inc Magazine. “If I wanted to invest $250,000 in start-ups, I would — $50,000 in five start-ups rather than $250,000 in one.”

2. Back the person, not necessarily the idea - Many start-ups begin with one idea and then refine or completely change their product as they take feedback from customers. For example, social network Twitter began life as a pod-casting company, while photo-sharing service Flickr started as an online game.  Do the founders you back have the skills and experience to execute their idea? But more importantly are they able to pivot if their original idea doesn’t work?  

3. Think about your own expertise - Is there an industry you understand where you might be better able to evaluate prospective opportunities? For example, a background working in finance could offer an edge in Fintech investing, while experience in agriculture could suggest a focus on Agtech. Also consider if there are opportunities for you to partner with a start-up you invest in, by joining the board or acting as a mentor. Many Venture Capital executives join the boards of companies they back and help coach their executive teams.

4. Be prepared to say no - If you’re investing for a return and not to maintain a relationship, expect to see a number of average ideas or ill-suited teams. Every start-up worth its salt will tell you that it is the best in its space, but in practice most will not be and are doomed to fail.  Quatrini, recommends to his friends who are new to Crowdfunding that they evaluate at least 100 companies before investing in one.

5. Double down -Quatrini, who founded, an equity based Crowdfunding Platform funded by Blackwood, points out that professional venture investors make more than one round of investment in a single company.  “Keep backing the ones who are succeeding,” rather than only making one investment and later concluding crowdfunding doesn’t work, he says. He offers the analogy of someone at a horse race who backs a range of horses before the start, then halfway through the race puts more money on those out in front, then late in the race puts even more cash on the top few.

6. Keep learning - Insiders recommend reading the tech press and going to networking events to build knowledge and keep up with the industry. Organisations such OurExchange's - OurEx Live Events also offer educational resources for new angel investor members. Instead of looking to Warren Buffett, angels might be better served to study the writing of Paul Graham, co-founder of the well-known Silicon Valley accelerator, Y Combinator.

7. Consider your reasons - Imagine a family member or family friend approaches you and pitches their new business idea. In this situation, are you investing to support someone you care about, or are you investing with the hopes of generating a financial return?  “If it’s for relationship reasons and because you just want to be a supportive person, that’s completely valid,” says Quatrini.“But just be honest with yourself and write off that check from day one.”  If you don’t expect a financial return, then you won’t get frustrated and ruin the relationship when a financial return doesn’t materialize, he says

“The most successful angel investors using crowdfunding platforms are all basically good people. Once they invest in a company, all they want to do is help it.”, says Quatrini.  If these efforts were reinforce by real tax incentives the United States might see business and innovation flourish in ways we can't even imagine. 

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