Seedrs, my adventures as an angel (investor)

The early days

My relationship with the start-up world had some highs and lows. Ten years ago I was dating this girl that had some friends involved in Rocket Internet: in her eyes, it was the chance to join the Silicon Valley in Europe…for me, it was a bunch of as***les copying someone else ideas. I guess we were both right, the owners are still billionaires while the investors…are not there yet:

Investing is more (contemporary) art than science

Years later, I was living in Geneva working for a company that had been a tech giant; despite the main business failures, they still had a quite thriving internal VC fund and the guy running it was sit just few chairs far from me (when he was not travelling, which means one third of the time). It was the aftermath of the very first jump in Bitcoin price and for whatever reason Swiss embraced it from there. Geneva is a small city but there were lot of events like boot-camps and conferences organised by universities and start-up hubs; the beauty of living in a small place is that if you are into something, you end up close to everyone that share your interest and meet them constantly, even if you were just out for a drink with other friends.

The ugly aspect of living in a small place is that there is not much going on, so you tend to get involved in whatever is going: it just happened that it was this start-up buzz. The ugliER aspect of that place being Geneva, is that half the population is filthy rich: you can either be the hustler that use someone else money or you are the guy writing the checks. I was neither of them.

This is when a friend of mine living in Italy told me that a guy he knew was launching a contemporary art platform and was raising money. Even if I have literary zero artistic capabilities, art has been always present in my life: my parents are obsessed with it and in Geneva the only interesting events were happening next to contemporary galleries. Switzerland also host the world biggest contemporary art fair, Art Basel, which would be something nice to see at least once in your life even if you do not happen to live in a place where there is nothing else to do anyway (now they do the same thing in Miami as well, so you can have fun inside the fair and outside at the same time).

The alluring part of contemporary art (at least, for me) is that you can buy something nice that is not a depreciating asset, like a car (I guess until today, when used cars cost more then new ones?). The less alluring part is that everything price-related is extremely opaque, by design. There is a huge asymmetry of information between the seller and the buyer…or as I once put it “why don’t you bloody put a price tag next to a painting like every shop in this world?”. Part of Artvisor mission was to enlighten its users (and show the damn prices as well).

The price tag is quite hefty, close to 25% of the cost of a top European MBA program…and that’s how I saw it: you get direct access to the founders, to all the legal docs and presentations and you even get homework, i.e. you can (and should) try to help them to grow the business; I preferred to see it this way because the chances of financial success are quite slim, if you do it thinking “I will be investor #10 in the next Google”, better turn your attention to those TikTok investors videos, at least you would be entertained.

There are two main issue in becoming an angel investor this way:

• the pool of opportunities is strictly limited by the people you know. I liked the Artvisor pitch but if I had the chance to decide between it and Artsy, I would have chosen the latter. Artvisor was the best I could get, definitely not the best out there. Jason Calacanis became rich and a role model (?) in the VC world simply because his best buddy at school was Travis Kalanick (the Uber guy); he became rich because he was born in the right part of the world at the right moment. These two aspects had more relevance in his personal success than the fact that he wrote a check for a taxi company.
• the size of the minimum check is too big. Let’s say you want to dedicate 10% of your Net Worth to angel/VC investments; let’s then consider a bare minimum diversification: you want to have 20 investments. If the minimum amount for a single investment is 10k, you need a NW of 2 million!

This is why I get crazy when I read if you invested 10k in Uber, now you will have XXX millions. Only a reckless (or already rich) person would have done that. My above calculation is very conservative. There are so many ‘alternative investments’ out there (crypto, p2p, real estate, collectibles, art, etc), if you use the standard 10% allocation for each of them you will have your traditional portfolio at…30%? For this reason the only way you can invest a significant, i.e. 10k, amount is either you are rich, and whatever you earn should evaluated in that context and not in absolute terms, or you decide to focus on that particular niche and forget about all the other side bets you might be interested.

The peril of going all-in in a single category of the above alternatives is that most likely you will feel FOMO when another one will catch fire and go to the moon. Consider the “crypto winter”, how Packy McCormick calls the period between 2017 and 2020 when BTC and other coins went basically no where return wise. Would you have stayed invested in crypto or moved to p2p, where getting double digit passive income returns was as easy as two clicks? The issue here is always the same: it is easier AFTER a huge run to say you should have put a big amount on a certain investment, it is less obvious considering all the possible alternatives you have at the beginning of your journey. Jumping between these alternatives will most likely result in selling low and buying high, not a profitable strategy.

Seedrs

Moving to London meant I could start to invest in early-stage companies in a smarter way: welcome to Seedrs. Seedrs is a marketplace for start-up investing and crowdfunding campaigns; I will refer to them simply because is the only platform I have real experience with, in UK there is another one called CrowdCube that looks basically the same (in fact some months ago they tried to merge and the Competition and Markets Authority did a Mutombo).

Seedrs offer good solutions to my issues:

• Start-ups from all over Europe raise money on the platform. Your pool of opportunities is not like AngelList but it is multiples better than your network alone. Opportunities in the VC space are inherently limited: every time a founder raise funds, they give away part of their equity. Investors do not bring only money on the table, they provide their knowledge and their network: 10k from you are not equal to 10k from A16Z. This creates a pecking order in the fundraising process: top VC funds, famous investors/rich dudes, VC funds, AngeList, Family Offices, ‘local’ platforms like Seedrs, non-famous rich dudes…you. If you consider that VC funds ACTIVELY pursue investing opportunities, you can understand that what gets filtered down to you is just desperate peoples with a nose flatter than Conor McGregor (because investors slam doors in their faces Carl!). Seedrs has a small advantage for B2C companies: raising on their platform is free (sort of) marketing.
• The minimum investment amount is so low that everyone can adopt the best VC strategy: spray and pray. OK, the real best investment strategy is to find founders that are great at execution but this is one of the best five. Unless you decide to make it your second (or first) job, you do not have the time to make the proper due diligence anyway; spray and pray is a sort-of index investing for start-ups, with Seerds acting as an index provider with skin in the game (they get paid only if the company has a successful exit).

In the UK investments in start-ups have some tax advantages, you can deduct the investment from your taxable income and also avoid part/all capital gains in case you have a profitable exit. (I am not a tax expert but the idea I got so far living here is that the main ‘issue’ is the high rate you pay when your are an employee; when you invest, between the ISA, the capital gain allowance and private pension, you basically never pay any tax).

Some time ago Seedrs introduced a secondary market on the platform. There are some restrictions, you cannot buy shares in some companies if you were not part for the initial campaign and there is an upper and lower limit on the prices you can trade, but overall the feature works well.

All of these does not come for free: Seedrs will take 7.5% of the gains you make on the platform. While this fee might seem high, it aligns Seedrs interest with his users because they get paid only when you are. They are incentivised to promote only companies that they think have the highest exit-potential, otherwise they risk to dilute their gains considering that their users investable pot is not infinite. Unfortunately on May 2021 they introduced a 1% initial fee, which works a bit against this logic: if they promote a scam, now they get paid. I hope this is only a reaction to the failed merger with CrowdCube and will be later revised (they still have a better fee profile than CrowdCube in this sense).

It’s been four years that I use it, time for some early lessons:

• you do not have an idea for a start-up that does not exist, someone else had your same idea but executed poorly or they were too early. The number of people trying to be successful entrepreneurs out there is huge, if you do not know it is simply because you did not look for it. Seedrs offers you a window on this world.
• Seedrs does not allow you to access some company info if you are not a shareholder; this means that there is an asymmetry of information in the secondary market: it is harder to understand if a company is sold at discount because their business model did not work or for a more temporary reasons (in theory you can always buy a small amount, check and then buy more later but again, not a way I would suggest if you want to be ‘passive’).
• I started considering only companies with a valuation lower than 10M: this way even if I do not catch a unicorn, I still have a chance of doing 100x. Lately, I tried to refine this even more, buying shares on the secondary market of companies that did multiple raises, at growing valuations, but are still valued less than 10M. I do not have any data to prove that my strategy has a better risk-adjusted performance than any other, I want to avoid companies that are in the ‘not reasonable hype’ phase. At such an early stage valuations feels quite random to me, I cannot really tell you what drives the difference between 1M and 10M. I am here to learn and I think it is more productive to test an hypothesis than going completely in the dark.
• I stick to my competences, investing in fintech and insurtech..but sometimes I like to chase themes that intrigue me: ghost kitchens, nutrition supplements, marketplaces, I even invested in a nursery after I learned the barriers of entry for the sector.

And then the usual lesson: the more you learn, the more you realise how stupid you are. For example, if you invested in FB at 10B, you could have still made 100x. There is no more effective way of learning than putting your money where your mouth is; with Seedrs, and its competitors around the world, you can do it in a nice and cheap way. Before the pandemic, they were also hosting live events that were really cool (free beers!) and I really look forward for them to come back. As far as investing goes, this is the funniest way to do it.

Consider that an optimal amount of bets is around 200, so size your investments correctly. I wrote ‘early’ lessons because four years might look like a long time but it takes at least ten to have an informative opinion. To conclude on a high note, so far I had zero exit and one company that went to the cemetery.

What I am reading now:

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