Crowdfunding has grown up. In 2017, in Europe alone, equity crowdfunding was worth €211 million. No more just an "alternative" form of funding, crowdfunding has become a major funding and investment stream in its own right.
From the beginning, equity crowdfunding was heralded as a “welcome phenomenon in the startup universe” for private companies; offering entrepreneurial founders legitimate alternatives to difficult angel investors or inadequate business loans, and helping them build their company with the resources of hundreds, if not thousands, of avid supporters. And that shows no sign of letting up.
But what about investors? Is equity crowdfunding as good an opportunity for the investors, as it is for the companies raising funds? These five reasons say it is.
1. You can start small
For many retail investors - so called because they are non-professional investors - the investment capital they have available may not be as substantial as those individuals who invest on a professional basis. Additionally, the capital that they do have may be very much harder to replace if lost (ie. part of a pension or redundancy fund).
For this reason, equity crowdfunding can offer legitimate investment opportunities. It affords them the chance to invest in privately listed companies without having to put down large amounts of capital to do so. In fact, many crowdfunding campaigns allow individuals to invest for as little as €/£10,depending on the prices or type of asset that the company is issuing.
By being able to start small, investors can build their portfolios piece by piece as they learn. It provides an opportunity for them to begin their investment journey without exposing themselves to undue risk.
2. It lets you diversify your portfolio
Even for those of us who are not yet investment experts, the old adage “don’t put all your eggs in one basket” makes logical sense.
In investment terms, diversification means investing in a variety of assets; such as currency, bonds, stocks, real estate, etc. In theory this increases the chances of higher long term gains, and minimises the risk of loss; as if one asset crashes, a well-balanced portfolio should not feel the effects too acutely. In comparison, a portfolio built around only one asset (say, real estate) could be devastated if that market collapsed.
Equity crowdfunding allows investors to invest in different companies with differing business models, and can provide part of a well-balanced portfolio.
3. It’s transparent
Not all of us are seasoned investors, and it’s easy to be put off by the sheer enormity of the investment process. Whilst it is slowly becoming more normal for individuals to invest, it is still very much a world that many feel is reserved for specialists and experts.
The reason equity crowdfunding is such a great opportunity for investors is because it minimises this bureaucracy and increases transparency. Because companies and crowdfunding platforms alike are aware that the majority of their clients are retail investors, and therefore not seasoned professionals, they provide clear details and information on the purpose of the campaign, the status of the company, and much more. This minimises investor confusion and therefore increases the likelihood that they will feel confident enough to invest.
Furthermore, many companies who choose to raise capital via equity crowdfunding choose to do so out of principle; they either wish to disrupt big banking, or feel that the crowdfunding investor can offer them something that a single backer cannot. For this reason they are more transparent as they are fully committed to the benefits of the crowdfunding process.
4. There’s unicorn potential
Coined by venture capitalist Aileen Lee, the term unicorn is used to describe “a privately held startup company valued at over $1 billion”. It’s important to note from the outset that investing in a company that you believe may have unicorn potential is generally advised against by experts, as it can (more often than not) lead to great losses. Investments should always be made carefully, and after exhaustive research into profits and future growth projections amongst other things.
However, to be part of the next Apple or Facebook from the very beginning is a big pull for many investors, both experienced or otherwise, to make speculative investments. And, because crowdfunding often has much lower minimum investment amounts, many investors see it as a more secure way to buy a small piece of a potentially astronomically successful pie. In recent years success stories like N26, BrewDog, and Flixbus, have made headlines as European unicorns, showing just how much potential there is in crowdfunding ventures for a savvy investor.
5. You can invest in your beliefs
The opportunity to invest in something you believe in, in a way that is transparent, straightforward, and minimally bureaucratic, is a real draw for many new investors who are frustrated at being “shut out” of the finance industry.
Because all crowdfunding campaigns are in the public space, and accessible to all, they provide investors with a unique opportunity to view, and invest in, projects or companies which they feel have a social ethos or objective that aligns with their own, without needing to go through a bank or a venture fund. If you think this sounds appealing then you will be pleased to know you’re not alone, according to a 2018 Harvard University study, socially responsible investing now accounts for $26 trillion dollars globally.
Providing they do the right research and ensure that they fully understand every choice they make, equity crowdfunding can prove to be a fantastic opportunity for all investors.
This post has been approved by Oval Money, which is authorised and regulated by the UK FCA. Your capital is at risk, and past performance may not be a reliable indicator of future results. Oval Money is not permitted to provide financial advice, and if you have any questions please consult an expert.