Crowdfunding Can Be Risky. iSelect Has the Solution

The JOBS Act has opened the door to an exciting new time for venture investors, allowing nearly all Americans to invest in high-growth startup companies via online crowdfunding platforms like Kickstarter. But this new access comes with a downside, that has opened up the equity crowdfunding sector to potential fraud.

That’s what keeps SeedInvest founder Ryan Feit up at night, according to a recent story on equity crowdfunding in The New York Times. In it, Feit explains that his experience founding SeedInvest — which is one of the first websites that was set up to list companies that are trying to raise money from investors — opened his eyes to the risk that is inherent in the crowdfunding model. Since its founding two years ago, SeedInvest has turned away dozens of companies due to what he calls “clear red flags for investors,” only to watch those same companies later show up on other crowdfunding platforms.

“I’m legitimately concerned that a lot of people are going to be losing money,” Feit said. “Investing in start-ups is really risky, and it’s very different than buying a used couch. We definitely do not think you should treat it like Craigslist.”

Some of the companies involved, he said, have raised hundreds of thousands of dollars from unsophisticated, misinformed investors.

“Even though a lot of people want to come to the party early, they may ruin the market if the market gets a reputation for being one where people don’t comply with the rules,” saud Joan MacLeod Heminway, a law professor at the University of Tennessee. “There are certain issuers who are definitely engaging in practices that I would consider to be dangerous to a vibrant market.”

The iSelect Solution to Crowdfunding

This story exemplifies exactly why we started iSelect and the thought process that goes into the iSelect Fund. In truth, venture investing is risky. The vast majority of startup companies go bankrupt, never returning any capital to their investors. But those that make it often deliver outsized returns, yielding 22% net IRR over the 25-year period ending 2014, according to the Ewing Marion Kauffman Foundation.

That’s why two factors are of extreme importance to venture investors: due diligence and diversification.

Research has found that time spent on due diligence is significantly related to investment outcomes, and investors who spend more than the median of 20 hours on due diligence get better results than those who spend less than 20 hours. Furthermore, those who spend more than 40 hours conducting due diligence, perform even better, reporting investment returns north of 7x. iSelect’s Venture Team spends about 120 hours conducting due diligence on each of our portfolio companies.

Crowdfunding investors, typically, do not do this level of diligence.

What’s more, the iSelect Fund allows investors to easily diversify their venture investment capital across a diversified portfolio of startup investments in industries including agriculture, healthcare, energy and software.

If you are interested in the wealth-generating and innovation-creating aspects of venture investing but don’t have the time or expertise to conduct the appropriate amount of due diligence, please click here. iSelect was founded with people like you in mind.

Read the full story in The New York Times.

Consideration

With 2021 well underway and with public markets still strong, we think it is an important time to highlight some of the key private market, venture investment themes that iSelect fund has identified for the year. We believe technologies transforming the Agriculture, Food and Wellness markets will flourish, with a focus on four areas: technologies that enable better food choices to drive better health outcomes, technologies that drive better, more profitable farm operations, technologies that drive the Consumerization of Healthcare, and biome-based treatment technologies. At iSelect, we invest for impact AND performance. We offer qualified investors access to emerging growth companies through our national venture capital strategy. Our unique structure allows our investors to continue to invest in these companies as they develop.

Timing

Why is now the right time for venture? The answer is that now is not explicitly the right time. Venture is something we need in our economy at all times. Now is not better than any other particular time. The question is, why ever stop? When we look at the challenges we’re facing in food and healthcare the reality is there is someone, somewhere who has an insight about how to build a product that will solve those problems. And if they put the right resources to it, they will succeed. As long as we need new technology to make life better or make our lives more enjoyable, we need venture capital to help fuel those entrepreneurs.

What is iSelect as a product?

iSelect is a very unique product, but when you break it into its parts it’s fairly easy to understand. On the front end we’re a traditional venture capital fund. We have a diligence process. We have an investment process. We have categories of industries where we have focus and real expertise, and we invest in companies in those areas that meet requirements for the fund. On the back end we’re unique in that we don’t raise a large amount of capital at one time and deploy it over the life of our fund. Each deal that we bring onto the fund, our investors have to prove and determine to invest in that deal. We have to constantly prove our diligence standards. It’s accessible, transparent and easy for investors to come in and see our comprehensive process.

What is the ideal iSelect company?

We are looking for founders that are passionate and we want the problem they’re trying to solve to be big, real, and painful. We want the solution to be revolutionary and we want our capital to be able to help them solve that problem. We want to know that they have customers involved and that the solution they’ve come up with actually meets those customers’ and market needs. And we want the team to be capital efficient with the money they’re spending.

What does the ideal iSelect company look like?

We’re looking for a company that has an opportunity to have a 10x return to our investment or greater in a period of three to seven years. What excites us at iSelect are companies that are solving big problems. We want companies that are going to be the Monsantos of the future. Not just in the size and the scope, but the impact they have on people’s lives. We want to create positive impacts on people’s lives, so we invest in areas like agricultural production and areas like producing healthy foods for our kids. They are problems that impact real people’s lives on a daily basis. That’s what we’re trying to do at iSelect. We’re trying to solve the big problems out there. Find ways to bring capital to the entrepreneurs who are the real heroes out there getting up every morning, beating away at these things that are problems that you and me and everyone else faces in their everyday lives.

What is iSelect?

iSelect is a venture capital firm. What that means is we look at hundreds and hundreds of different companies and we apply tough diligence standards to each of them, looking at whether the team has a good plan for growing the business, whether the team is qualified and credible, and more. We do that to resolve the few who provide the best opportunities for investors. And then iSelect takes that smaller set of investments and goes to investors who are interested in venture capital and provides a way for them to invest in these companies, either individually or all at once. We co-invest alongside other venture capitalists. We source transactions through to an exit where the company would become public or get bought. And we manage that whole investment process on behalf of our investors.