Unless you are a venture capitalist, most of us will never have the opportunity to fund a startup directly. However, there are other ways for investors to get involved with exciting new businesses and their growth potential. In recent years, the popularity of crowdfunding has grown significantly. In fact, in 2017 alone, global equity-based crowdfunding grew by 44%, topping over $400 billion raised across more than 250,000 deals globally.
Crowdfunding is a great way for startups to get initial funding and build awareness around their business. It’s also an excellent opportunity for savvy investors to get in on the ground floor with some promising ventures and grow their portfolios simultaneously.
If you consider becoming a crowdfunding investor in a startup via equity investment, consider some pros and cons first.
Why does crowdfunding work for investors?
The fact that crowdfunding is a relatively new concept makes it all the more attractive to investors. There’s a certain allure in being a part of the “ground floor” of what is sure to be a future industry leader.
Crowdfunding is also very accessible for investors who might not otherwise have the capital available to fund a startup. You can invest as little as €100 or €1000 in equity crowdfunding campaigns, which makes it an accessible way to build a diversified portfolio with very little money.
You’ll also be able to track the progress of your investment and see how it’s doing overtime. Crowdfunding platforms also allow you to be picky about which campaigns you invest in. If you want to steer clear of startups in controversial industries, you can.
You can also choose to back only businesses with leaders who you feel are trustworthy and have a proven track record. Here are four crowdfunding platforms that will help you make the best investment decisions.
- CrowdCube: CrowdCube has already become a household name in the UK and beyond, thanks to its extensive PR outreach and constant media presence. Founded in 2011, the platform is currently the oldest of the bunch and has facilitated over £1 billion worth of investments to date. Despite being one of the best-known equity crowdfunding sites in the UK, CrowdCube’s focus on SMEs may be a drawback for startups looking for a larger investor pool. Key facts about CrowdCube – Year founded: 2011 – Countries with a presence: UK, Ireland, Australia, Singapore, New Zealand – Funding amounts: £5,000 to £1 million – Investors: Individuals, financial institutions, funds – Fee structure: 3% of total investment amount – Payment method: Bank transfer, cheque, credit card.
- Funding Circle: The fact that Funding Circle is owned by one of the biggest banks in the UK, Santander, may put off some investors. However, the fact that it focuses on larger sums of money and has a well-established presence in the country may be a good fit for both investors and startups. Another thing to consider is Funding Circle’s focus on SMEs: while most equity crowdfunding platforms target all types of startups, Funding Circle’s main focus is business-to-customer (B2C) lending. Key facts about Funding Circle – Year founded: 2010 – Countries with a presence: UK, Ireland – Funding amounts: £100,000 to £5 million – Investors: Financial institutions, funds, individuals – Fee structure: 5% of total investment amount – Payment method: Bank transfer, cheque.
- Seedrs: Seedrs has seen significant growth in recent years, thanks in part to its focus on smaller investments. The company has received significant funding over the years, and currently has offices in the UK, USA, and Australia. Seedrs’ focus on smaller investors may be an advantage for startups looking for a wider pool of both investors and funds. Key facts about Seedrs – Year founded: 2011 – Countries with a presence: UK, Ireland, Australia, USA, Italy – Funding amounts: £100 to £250,000 – Investors: Financial institutions, individuals – Fee structure: 6% of total investment amount – Payment method: Bank transfer, cheque, credit card.
- Syndicate Room: Syndicate Room is another established name in the equity crowdfunding industry, with a large number of successful campaigns under its belt. However, the fact that the platform is currently only accepting applications for its crowdfunding platform from companies with a proven track record and a strong business plan may be a drawback for some startups. Another thing to note is that Syndicate Room is currently working on an app that will offer investors the opportunity to invest directly on the platform. Key facts about Syndicate Room – Year founded: 2011 – Countries with a presence: UK – Funding amounts: £100,000 to £10 million – Investors: Financial institutions, funds – Fee structure: 8% of total investment amount – Payment method: Bank transfer.
Pros of equity-based crowdfunding for investors
- Access to high-growth startups – As an equity crowdfunding investor, you have the chance to invest in emerging startups that don’t yet have a proven track record or access to traditional financing. As such, these are businesses that could have the highest growth potential.
- Potential for large returns – If a given startup thrives and begins to grow, there’s a very real possibility that your initial investment could multiply significantly. In fact, some equity crowdfunding campaigns have resulted in a 200X return on investment (ROI).
- Tax advantages – While equity crowdfunding is definitely not risk-free, it’s also not considered a traditional investment. This means that you won’t have to pay capital gains taxes on any profits you make from your initial investment.
Cons of equity-based crowdfunding for investors
- High risk – It’s important to note that any given startup could fail and your investment could be lost entirely. If this happens, there’s no way to recoup your initial investment and no way to sue for damages.
- Battle for attention – It can be difficult to stand out as an investor on a crowdfunding platform. There are often dozens of campaigns to choose from and only so much attention to go around. The more money you’re willing to put forward, the more likely it is that your investment will be noticed.
Risk of fraud – Unfortunately, crowdfunding has also become notorious for fraudulent campaigns. As an investor, you’ll have to do due diligence and make sure the company you’re investing in is legitimate and has a workable plan for success. However, crowdfunding is not as “scammy” as the crypto space because it is mostly regulated and the crowdfunding platforms mentioned above are highly regulated with some requiring that you have up to 40% of the round committed through private deal-making.
Investment requirements for crowdfunding
It’s important to understand that investing in a startup via equity crowdfunding carries more risk than investing in an established company or getting involved in P2P lending. Because of this, generally, crowdfunding platforms require that investors have a higher net worth and a higher level of income.
This is because equity crowdfunding platforms are trying to attract only the most committed investors. These platforms require that you be at least 18 years old and have a net worth of at least £79,505. These requirements vary a little from one crowdfunding platform to another, so make sure to do your research on each platform before investing.
Equity crowdfunding platforms are designed for accredited investors. Accredited investors are individuals who meet a certain net worth requirement and have a certain level of income. In the United Kingdom, some platforms only allow accredited investors while some platforms will allow you to register as an investor very easily.
How different types of crowdfunding affect investors
Crowdfunding has been a very successful fundraising method for entrepreneurs, nonprofits and small businesses since the early 2000s. The concept has expanded to include equity crowdfunding, where investors get a piece of a company’s equity. This option provides an opportunity for individuals with limited funds to become involved in start-up companies. Before you jump into investing in a crowdfunding campaign, it’s important to understand the risks involved and do your due diligence.
Here’s an overview of some types of crowdfunding, how regulated they are and their effect on investors.
- Equity Crowdfunding
Equity crowdfunding is the sale of equity to investors using online platforms. Equity crowdfunding is a way for startups and small businesses to raise capital from a large number of people. It is different from traditional venture capital in that people can invest a small amount of money and get a share of the profits instead of a large chunk of cash upfront. These kinds of crowdfunding campaigns are regulated by the federal Securities and Exchange Commission (SEC). This means that you must pass several criteria to be able to raise money this way. It is important to remember that you are selling shares in your company, so if you fail, shareholders could sue you for any money you earned while running the company. It is important to be careful and make sure you are completely honest about what you’re selling from the very beginning. An equity crowdfunding campaign will include information about the company, the people running it, what the money will be used for, and where the money will go if the company fails.
- Reward-Based Crowdfunding
A reward-based crowdfunding campaign is used to raise money for creative projects that don’t fit into a financial return model like equity or a fixed return model like debt or equity loan. It’s a way for people to raise money for projects that don’t carry the same kind of risk as a business would. A reward-based crowdfunding campaign will often offer incentives such as gifts or free products in exchange for a donation. This kind of crowdfunding is not regulated by the SEC. That means you don’t have to pass any sort of criteria to use this model. That also means that you don’t have any legal protection if people don’t get what they’re promised or if the project fails.
Peer-to-peer lending is when one person loans money to another person or business. This is very different from a bank because it is not underwritten or guaranteed by the state. It is a way for people to get a lower interest rate on their loans. P2P websites have been around for a long time but have only recently become more popular with regulatory changes that make it easier for people to use them. Peer-to-peer lending is a fixed-rate investment that doesn’t seem risky in the way that equity and reward-based crowdfunding does.
4. Fixed investment crowdfunding
A fixed investment crowdfunding campaign is an investment opportunity where the investor knows exactly how much they’ll make and when they’ll get it back. This is usually in the form of debt like a loan or asset-backed financing. In this case, the investor knows exactly how much they’ll get back and when they’ll get it. The campaign creators on these platforms usually promise to repay the debt quickly. If they don’t, the investor can take them to court to get the money back. This is where you know exactly what you’ll get back.
So is crowdfunding worth it?
Yes, crowdfunding is worth it!
Let’s put aside all the technical explanations for crowdfunding. It is simply a way we can help people achieve their dreams, so why not? Many visionaries out there have solutions to disturbing socio-economic problems but funds have killed more dreams than we can imagine. It is essential that investors from all angles help other people to rise, while also enjoying the dividends of equity.