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Fintech had a breakout moment during the pandemic. Companies like Robinhood and Coinbase became some of the most public success stories, adding millions of retail investors throughout the pandemic. However, in a world not all distant from these, there is a new class of fintech catering to a new asset class: private companies.

Crowdfunding sites such as StartEngine, Republic and Fundable are some of the players at the forefront of the “private investing” space. Their platforms serve as a marketplace to help startups raise from the masses and help working-class people access an asset class that has historically been limited to the wealthy. But a federal regulator’s recent changes means that crowdfunding might be about to get a lot more popular: Private companies can now raise up to $5 million from crowdfunding.

The decision to allow companies to raise more money from more people is a great thing for companies. It might even be a good thing for people who invest in companies that are successful. In that sense, these changes are welcome ones. However, it does give us pause: Should working-class people be investing in private companies at all? 

In the traditional “big money” venture model, partners raise money for large funds. They then use the money raised (mostly from high net-worth accredited investors) to write checks. Those checks are investments in companies, which could be at varied points in their journey. These venture capitalists generally spend hundreds of hours on due diligence, research and meeting the team before investing. But no matter how much work they do, it’s a reality that three out of four startups will fail. This number might vary from fund-to-fund. Some VCs and accelerators are particularly talented at ‘picking’ winners. However, there is always going to be some attrition. Some investors morbidly refer to it as “infant mortality.”

Statistically, they only need a handful of companies to succeed in order to break even or get a return in their fund. The winners might generate cash flow (from dividends or ownership interests) or sell for many multiples more than their original investment: 5x, 10x, maybe 25x. Some especially lucky, early-stage investors might see 50x or 100x checks if a company goes public or gets bought.

To most people, that risk/reward sounds great. But those high net-worth individuals and VCs have the luxury of a lot of money and plenty of checks to write. Most working-class people do not. 

This is not an attack on working-class people having options. I think we can generally agree that having freedom to do more is a generally positive thing. Private investments are notoriously illiquid, generally take time to generate a return and have a high likelihood of failure. So it’s quite possible that working-class Americans would be better off investing in more liquid vehicles such as stocks or crypto, accruing the kind of wealth necessary to start writing checks like the big boys. 

Private crowdfunding is likely still in its early stages, and we will see larger, more reputable companies opting to crowdfund on these sites. That shift is already taking place and visible with high-profile brands like Gumroad, which sold out their raise on Republic at the new $5 million limit. As more big players get into this space, there will be an increased interest in startup investing. However, with that will come scores of opportunistic people investing in private companies, not having a clue what they’re doing, because it’s “trendy” or because they think they can become the next Peter Thiel

If or when that day comes where private investing is simplified into TikToks and waters down the risk — look for lessons in the history of crypto speculation, SPACs, and momentum stocks. Value is arbitrary. Invest in what you think is valuable. 

The problem is that most working-class people are easily sold at the sight of dollar signs. They’ll think this is “their shot” and throw their money in. For some, this will work. But for most, they will lose.

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Noah Weidner

Noah Weidner is a restless self-starter with a vehement interest in all things that make the world go around: culture, politics, economics and all the people in between. He writes the Bullish Rippers series and covers other interesting trends and happenings at Bullish.

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