Equity Crowdfunding Investing – Investing in Startups Was Never More Exciting.
Equity Crowdfunding Investing Highlights as of July 25th..
Startup Investing is Now Democratized
Investing in startups is usually more nerve wracking than it is exciting. Equity crowdfunding investing adds an exciting twist to startup investing because now the average Joe or Jane can gain access to the hottest new startup investing opportunities like never before.
Investing in startups can be very lucrative but it is always fraught with risk. As the old business maxim goes; the bigger the risk the bigger the reward. Truer words were never spoken when it comes to equity crowdfunding investing.
What Are the Risks and Rewards?
- Equity crowdfunding investing lets individuals invest in private companies in return for an equity stake getting in at or near the ground floor.
- You can invest via equity crowdfunding platforms or directly with some companies that do DIY crowdfunding.
- Equity crowdfunding investing is far riskier with much less liquidity than investing in publicly traded securities.
Investing in startup companies is a very risky business, but it can be very rewarding if and when the investments do pay off. The majority of new companies or products simply do not make it, so the risk of losing one’s entire investment is a real possibility. The ones that do make it, however, can produce very high returns on investment.
By its very nature, equity crowdfunding investing means you’re getting in early before the company IPOs. If the business does well and grows, you can make a lot of money on your investment in the future. Investing in startups is not for the risk averse ; wearing a pair of brass balls is a requirement. Founders, friends, and family (FF&F) money can easily be lost with little to show for it. Investing in VC funds diversifies some of the risks but also forces investors to face the cold hard that 90% of companies funded will fail to make it to IPO. Ditto angel investors.
For those that do go public, the returns can be in the thousands of percent, making early investors very wealthy indeed. Just bear in mind that for every Apple, Tesla or Snowflake are a thousand companies who fail.
Types of Equity Crowdfunding Investments
Equity crowdfunding investing means you can buy different forms of financial securities. These include:
- Common stock. This method may come along with dividends, depending on the company’s maturity and success. Later-stage startups are more likely to offer shareholders returns in the form of either fixed dividends per share or a percentage of profits.
- Preferred stock. Like common stock, but without voting rights for shareholders.
- Debt. This also comes in various forms, with some companies offering simple loans with fixed repayment schedules and others offering revenue shares, which return a fixed amount of money in a time frame that depends on the company’s success.
- Convertible notes. This method will eventually convert your debt investments to stock if the company raises a “priced round” from major investors. A priced round is an equity investment based on a company’s negotiated valuation. Essentially, investors serve as equity-owning shareholders and will see a return if the value of that stock goes up over time and can be sold for a profit on secondary markets or after IPO.
How Much Can I Invest in Equity Crowdfunding?
Anyone can participate in equity crowdfunding subject to income and asset considerations, However, due to the fact these are highly speculative investments — your funds are tied up in untried, unregulated companies and you might not see a payout for years, if ever That’s because equity crowdfunding investing isn’t as fluid as buying or selling stocks or bonds on the open markets. Furthermore, the Securities & Exchange Commission (SEC) dictates the level of activity in equity crowdfunding investments in any given calendar year. Calculated on a sliding scale, the exact amount is based on your annual income and net worth which determines if you are an accredited investor or not. Accredited investors are able to make higher ticket investments and invest more money over all during the calendar year.
Startup Investing Tips
Regardless of the form it takes, investing is investing. You’re putting your money into a company as an investor with hope of realizing ROI. If you want to be a gambler head over to DraftKings or Caesars Palace. If you’re a smart, serious investor follow these tips:
- Don’t make deals under the table.Beware of companies reaching out directly to seek money from you. All transactions should go directly through a credible, SEC and FINRA-registered platform. In fact, many companies use the platform to communicate and solicit investor feedback, with platforms like Republic allowing businesses to regularly survey their many small investors.
- Be aware of the risks. These are usually startups with not much of a track record. The founders and/or management team might be clueless. The fact that they’re not publicly listed means they are unregulated, and therefore can be less transparent. Also, your money is less liquid here than it would be if you bought an investment on a portal like E Trade.
- Do your due diligence. AKA DYOR. Find out exactly where your money is going by reading about how the company plans to use its capital. The Q&A portion of a campaign page can serve as a valuable resource, giving you a sense of how the company’s management thinks. You may also benefit from reading available financial paperwork, where information can sometimes be hidden away. Going further, research trends and determine if the company y want to invest harmonizes with its own industry in terms of its offering.
- Think long-term: Mr. Wonderful does and you should too. Think of equity crowdfunding as a speculative, growth investment rather than one that will offer a current return. With so much uncertainty surrounding early-stage businesses, it’s nearly impossible to predict which will or will not succeed. The amount of time it takes to see a return varies significantly, depending on both the type of investment and the company’s success.
How to Find Equity Crowdfunding Campaigns
Equity crowdfunding investing ordinarily takes place through websites that publish equity crowdfunding offerings that investors can invest in. The most popular platforms are MicroVentures, StartEngine, Wefunder, and Republic in the United States. In the United Kingdom there’s Seedrs and for most of Western Europe check out CrowdCube.
Consider KingsCrowd a valuable resource when it comes to equity crowdfunding research, analyst opinions and more.
In the United States, an equity crowdfunding platform must be either operated by a licensed broker-dealer or registered with the SEC as a “funding portal.” A platform must also become a member of the Financial Industry Regulatory Authority (FINRA), which oversees brokerages. In Europe there are similar regulations and oversight by various governments.
Equity crowdfunding investing has the potential to make you rich or drive you to the poor house. Invest with your head, not over it.
Learn more about startup investing.