Crowdfunding Investing Basics
Equity crowdfunding has gained immense popularity among startup founders as a means to raise capital, and amateur investors are taking notice. However, for those unfamiliar with its intricacies, equity crowdfunding can be intimidating even to seasoned investors in other circles. Sympathetic to all so many people – even the seemingly experienced – let’s start with the crowdfunding investing basics.
Crowdfunding Investing Basics – What Is Equity Crowdfunding?
To begin, let’s understand what equity crowdfunding entails. In the past, startup founders had limited options to secure funding, typically relying on venture capitalists (VCs) or angel investors. However, navigating these traditional funding avenues, especially for those outside major metropolitan areas, proved challenging. Crowdfunding, on the other hand, is not a new concept and has served as a fundraising method where numerous individuals contribute to or invest in ideas they believe in. Equity crowdfunding takes this concept further by enabling retail investors to invest small amounts of money in exchange for equity in a company, a previously exclusive option for the elite.
Why Should You Invest in the Equity Crowdfunding Space?
Now, you might wonder why you should consider equity crowdfunding as an investment opportunity. Beyond the potential for significant returns, there are several compelling reasons:
- Supporting a Startup’s Mission: If you believe in a startup’s mission and vision, equity crowdfunding allows you to provide them with an opportunity to execute their ideas.
- Return on Investment (ROI): While the likelihood of becoming a millionaire through equity crowdfunding is statistically improbable, there is still potential for a return on investment, albeit not on a massive scale.
- Entry Point for Investment: If you are new to investing and want to start building your portfolio, equity crowdfunding provides an affordable way to dip your toes into the investment world.
- Diversification: Investing in smaller private companies through equity crowdfunding can add diversity to your investment portfolio, reducing overall risk.
- Emotional Satisfaction: Some investors find greater satisfaction in supporting smaller private companies and being a part of their growth journey, compared to investing in traditional stocks.
Who is Equity Crowdfunding Good For?
Equity crowdfunding is a viable investment option for a wide range of individuals. Its low investment threshold, with some platforms allowing investments as low as $10, makes it accessible to those who may not have significant liquid assets for aggressive investment strategies. Furthermore, equity crowdfunding plays a role in promoting diversity and inclusion in the finance industry, leveling the playing field for people of color, ethnic and racial minorities, and women. Moreover, it contributes to the democratization of finance, bringing us closer to achieving true financial democracy.
Crowdfunding Investing Basics Focal Point – Timing is Everything
Determining the ideal time to start investing in equity crowdfunding depends on your individual financial situation. Consider the following questions:
- Risk Assessment: Evaluate how much you can realistically afford to lose. Equity crowdfunding carries inherent risks due to the volatility of the business environment. Startups, even the most promising ones, can fail unexpectedly.
- Investment Horizon: Can you afford to wait years before seeing a return on your investment? Unlike public stock exchanges, there is no secondary market for equity crowdfunding. Until a company is acquired or goes public, you may not see any returns, except for rare cases where startups provide investor dividends.
- Alignment with Personal Ethos: Investing in a startup that aligns with your personal beliefs and values can provide a sense of satisfaction, knowing that your money is being used to make a positive impact.
- Early bird gets the worm. Can you score additional stock for getting on board early? These are called early bird perks.
5. Day late, dollar short Equity crowdfunding campaigns have an expiration date. Don’t overthink your decision. Avoid paralysis by analysis. Indecision can spoil the milk.
Where Can You Invest?
There are several equity crowdfunding platforms available for amateur investors to explore campaigns and make investment decisions. Each platform has its own style, specialty, and approach. Here are some notable platforms:
Republic: Championing diversity and inclusion, Republic is at the forefront of the crowdfunding industry’s fight toward equality.
Wefunder: Instrumental in the passing of the JOBS Act, which made it legal for nonaccredited investors to invest in startups.
StartEngine: Entrepreneur- and startup-centric; StartEngine believes in helping entrepreneurs achieve their dreams.
NetCapital: Specializing in funding innovative startups.
Fundable: Hosts the largest amount of equity crowdfunding campaigns with a wide range of investment terms and deal structures.
SeedInvest: Hosted the first unicorn exit for retail investors.
How to Evaluate Risks When Investing Via Equity Crowdfunding
The potential for high returns is not the only factor to consider when evaluating investment opportunities on equity crowdfunding platforms. Crowdfunding investing basics must also cover the risks to be aware of, including:
- Illiquidity: As mentioned earlier, there is no secondary market for equity crowdfunding, which means that investors may have to wait years to receive a return on their investment or may never see a return at all.
- Lack of information: Many startups raising money through equity crowdfunding are in their early stages and may not have a long track record or extensive financial data available for investors to evaluate. This lack of information can make it difficult for investors to assess the potential risks and rewards of investing in a particular startup.
- High failure rate: It’s no secret that many startups fail. In fact, some statistics suggest that as many as 90% of startups fail. As an equity crowdfunding investor, it’s important to be aware of this high failure rate and to consider it when evaluating potential investments.
- Dilution: When a startup raises money through equity crowdfunding, it typically issues new shares of stock to investors. This can dilute the ownership stake of existing shareholders, including other equity crowdfunding investors, and reduce their potential returns.
To mitigate these risks, investors should take the time to research the startups they’re considering investing in and to evaluate their business plans, financials, and track record. KingsCrowd is far and away the best research tool.
As holds true with investing in stocks, it’s a good idea to diversify investments across multiple startups to reduce the risk of any single investment negatively impacting overall returns.
Equity crowdfunding can be a powerful tool for both startup founders and amateur investors, but it’s important to understand the risks and rewards before diving in. By asking the five W’s – What, Why, Who, When, and Where – investors can gain a better understanding of equity crowdfunding and make more informed investment decisions. As with any investment, it’s important to do your due diligence and consider the risks before committing your money.