Traditional private investing by VCs and institutional investors has long been perceived as a place for the head, not the heart. Sure, a VC might really like a company and believe in its mission, but ultimately his or her investment decision is a matter of money, not passion… right?
Well, yes and no.
“There are lots of factors that go into any investment decision – team, market, product,” writes David Hornik, a successful VC from August Capital. “But in the end it is all about passion. Am I passionate about the company or not? Am I passionate about the team? Am I passionate about what they’re building? Am I passionate about the problem they’re trying to solve?”
Turns out, we haven’t been giving investors – institutions and individuals alike – enough credit for supporting the companies and projects that drive their passions. Consider the data:
- Socially responsible investing (SRI) – also known as “sustainable investing” – reached $3.74 trillion in total managed assets in 2013, a 22% growth over a two years period.
- Impact investing, a subset of SRI focused on generating a measurable, beneficial social or environmental impact, is also on the rise. According to a recent survey from J.P. Morgan Securities and the Global Impact Investing Network, a group of 125 impact investors committed $10.6 billion in impact investing in 2013. They plan to increase that by 19% in 2014 to $12.7 billion.
- Retail investors, high-net-worth individuals and family offices made up 32% of the impact investors in the study referenced above. Pension funds and insurers made up 22%, and the rest included foundations, banks, and other financial institutions – proof that it’s not just first-time angels or friends and family investors who are funding projects near and dear to their hearts.
Importantly, passion investments are often a smart, return-driven, and well-researched addition to an investment portfolio.
Investments in so-called alternative assets (which include anything other than publicly traded stocks, bonds, or cash) have long been a staple of the portfolios of the wealthy. Common alternative investments are luxury items: art, wine, jewelry, classic autos, and the like. Those may sound like little more than collectibles or “toys,” but they’re actually oft-profitable investments. According the Coutts Index released earlier this year, investments in classic cars, watches, and luxury properties have returned 77 percent since 2005, compared an industry investing benchmark of 53 percent returns.
Making passion work for you
Now that the ban on the general solicitation (or public advertising) of investment opportunities in private ventures has been lifted, individuals can invest with passion into private entities in addition to public SRI initiatives or luxury items. So how can you capitalize on the passionate investing trend?
If you’re an accredited investor
Diversify your portfolio by funding private ventures you believe in. Start by getting informed on the new opportunities available to you.
Access educational resources to understand the rules for Title II of the JOBS Act and consider what kinds of companies and industries spark your interest. Read blogs by successful VC investors to find out what sectors experts think are poised for growth, then browse open opportunities on platforms like EarlyShares to get to know the missions and visions of various companies raising capital.
If you believe in a particular business that’s conducting general solicitation and want to be part of it, do the necessary research, due diligence, and investment transactions online to join the ride of that company’s future. (It may sound simple, but it’s actually unprecedented; individual investors were largely barred from publicly participating in the private finance market for 80 years under the US securities laws.)
If you’re an entrepreneur raising funds
Lead with your passion and commitment to making your business a success. No investor will be passionate about your business unless they believe in your drive as a leader.
“70 percent of my investment decisions are based on the quality of the entrepreneur more than the idea,” writes VC and former entrepreneur Mark Suster. “I simply won’t fund if I don’t believe the entrepreneur is authentic and passionate about the problem he or she is solving.”
Suster is far from alone in this mentality. Successful VCs often say they invest in the people, not ideas, behind a company. If you conduct a general solicitation investment offering, every accredited investor will be investing like a VC – so give them every reason to believe in you.
Showcase your mission, vision, and entrepreneurial ‘story’ strongly in your offering materials to captivate investors’ passion. And – difficult as it may be – turn away those investors whose mentalities, attitudes, or time horizons don’t align with your business. The greatest value a passionate investor brings to the table is not his checkbook; it’s his zeal to help your business succeed.
As David Hornik writes, “that kind of zeal is rare, but it is unbelievably exciting.”