Ok that might be a very controversial question and I think the answer will really depend on who the investor is. A few weeks ago I posed a similar question to a friend of mine who is a day trader. Basically I asked him if day trading was really a science or investing or just sophisticated gambling. Now I have never day traded and I don’t really know what these traders look at when they make their decisions but from what I did learn in school is that it is basically based on technical analysis which in itself personally never really made sense to me. I sensed he did get a bit defensive about the question and rightfully so being that is his profession. But the same question can be asked when it comes to investing in start-ups.
When you login to a platform and see a dizzying array of start-ups with no revenue where do you start? I know the first thing I would do is look around and see what kind of start-up idea or innovation makes sense to me. You will be surprised many of these ideas you will find to be pretty stupid and you will think they have no chance of ever turning profitable. That doesn’t mean to say that these companies won’t succeed after all there were VC firms that thought Facebook was stupid too and they are probably kicking themselves now. But if you don’t think the idea makes sense I don’t think you could or should invest in it. So great, you have found some start-ups that seem like they have a great idea now what? Well I guess you could do some market research although that has probably been done by the platform depending on their model (see article on platform models curated vs. non). Many sites allow you to see who else invested in the start-up which might help you decide. But in the end of the day the small investor has really no way of deciding whether this is a good investment or not. So you like the idea. Now obviously there are VC firms and savvy angel investors and they are not just investing millions of dollars based on a good idea right? Well that may be true if you are investing large sums then you can have a team of analyst model various projections and determine how this idea stacks up against others. These firms usually have experts in the field they are investing in and they really understand the ins and outs of the industry and the possibilities of the idea. These firms and investors can therefore make a much more educated investment. I would still bet that the majority of the investments are driven by the fact that the investors no matter how savvy they are like the idea. So take the “Regular Joe” who wants to invest in a start-up what does he have to rely on? I think it comes down to does he think it is a good idea? This question remains the most important. It might not be gambling after all we do many things in life because we think it is a good idea even though we may not have any past experience to base it on. But you must realize the risk in such an investment. I don’t see this becoming a real asset class for the regular investor to pursue especially if they are looking to invest only a few hundred dollars. Even if they are able to diversify a small amount of money across a wide spectrum of start-ups I would still wonder what kind of return they would have in the long run.
Why do I think lots of people will still invest even if they aren’t sophisticated investors? I think people like the thrill. It makes the financial news much more exciting for the small time investor when they hear the start-up they invested in is becoming very popular or contemplating an IPO. Imagine telling your friends that you were one of the early investors in Waze. I would compare this to watching the Super Bowl and watching the Super Bowl after you placed a bet on the game for $25. If you win or lose you won’t become rich but the $25 wager makes the game that much more fun and exciting. I am not sure that this type of investing will offer the small unsophisticated investor much more value than that though.