Choosing the right crowdfunding company to invest in can seem like an overwhelming task. With this article hopefully, we can clear the air for investors who may be on the fence about what company or industry to invest in.
What is Crowdfunding?
Crowdfunding is when startups or businesses want to raise money for a project or cause. These crowdfunding sites are helpful because it allows those small businesses and startups to generate investors and people who wish to donate their own money, for a relatively small price and a short amount of time.
Crowdfunding is usually done online instead of networking in person. This means that the use of social media makes it both easier and harder for projects to earn money. It can be tough because there are so many brands trying to start up but not enough supporters for everyone.
The Two Types of Crowdfunding
- Donation fundraising
- Donors, usually in small amounts for a couple of months, give money for the startup
- Business usually offers incentives or rewards within their campaign
- Investment crowdfunding
- Businesses that are in need of financial support sell ownership stakes with these sites using equity or debt.
- Investors become owners or shareholders
- Financial return potential if business takes off
Investing into a company can be a smart choice for those looking to support businesses that they believe will grow exponentially. Looking into investment minimums is the first start to beginning a manageable deal structure. Crowdfunding sites are popular nontraditional startup options for brands that are in the early stages of setting up. It is a compelling platform for both sides of the coin.
Risks Associated with Investment Crowdfunding
There are great risks that come with any investment. It’s good to know what they are and decide if the pros and cons of investing are right for you. Knowing all possible outcomes helps you make an informed decision with your money.
Fraud and Scams
One of the most common tactics that scammers use is that they pretend to be a crowdfunding business. Since crowdfunding sites reach a variety of people, not everyone will have your best interest in mind when it comes to investing your money. Fraud on social media runs rampant because it’s easy to attract equity investors who are just starting out. They trick first timers who skip or forget about investigating, auditing or reviewing the facts based around the startup.
Always make sure to practice due diligence before investing to avoid fraudulent crowdfunding projects.
Beware of Hackers and Cyber-Criminals
Crowding funding sites are great places for both startups and investors to use but don’t let your guard down when it comes to your internet security. Hackers are rising at a rate that is worrying.
- In 2019, the banking industry had an average cybercrime cost of $18.3 billion
- Smaller Businesses are most at risk
- 60% of businesses suffered from phishing attacks in 2019
- .exe file type is the most hostile to receive
This can be a huge problem on crowdfunding sites if hackers start to target vulnerable investors. This means that when practicing due diligence, don’t stop at just the company, but also examine the funding platform carefully.
Five crowdfunding sites that are worth taking a look at:
The Risk of Failure is Always Near
When startup businesses are funded through this equity crowdfunding, there runs a greater risk for failure upon their launch into the market. Venture capital is a less risky investment because it usually provides companies with seasoned professionals to assist them through challenges they may face in the beginning stages of their startup. A business plan and support structure must be done properly in order for them to have the opportunity to succeed as funding is just the tip of the iceberg.
It Takes Time
Investing in new startups is exciting but it takes time to actually see major results. When investing, most expect some return in the future, however it may take a great amount of time before seeing any reward. Many things can put a hold on the project or delay it.
Delays can be caused by:
- Deviation from business plan
- Differences in project ideas from owners
- Failing market value
- Lack of public interest
Advantages Associated with Investment Crowdfunding
When starting out as an investor, there are great advantages that come with the risks. Being smart and cautious can help increase these advantages. Investing in the correct crowdfunding startup will be a win-win for both parties due to the fact that as the startup strives and grows, so does the investor.
High Satisfaction Rates
Personal satisfaction is a common theme for why investors choose a certain startup. When a startup company has a project or service that correlates well with the investors values, the satisfaction rate is increased. As an investor, choosing businesses that align with beliefs or ideals is crucial for properly feeling as if you are getting a return.
For example, if an investor cares a great deal about no children going hungry, they may decide to invest in a startup that has a plan to help this problem. This creates a deeper connection between both the startup and the investor, leading to better outcomes and growth.
Investing is No Longer Entitled to Just Accredited Investors
As the social network of the internet grew, so did investors. Before the Jobs Act in 2012 and crowdfunding began, only accredited investors (individuals with a high net-worth who earn or own a high amount of money or funds) were allowed to invest in startup companies. The Jobs act encouraged crowdfunding of small businesses and made it available to more than just accredited investors. This hindered a lot of private investors from putting money into businesses that needed it. Investors needed to invest a large sum of money in order to meet the threshold, but now, equity crowdfunding permits the average everyday person to become an investor with smaller increments. This has created an equal opportunity for both parties of investors.
Opportunity For Financial Return
Investors have the opportunity to gain huge returns from equity crowdfunding. For example, take a look at Jason Calacanis who invested $25K into Uber when it was just starting out. He made $125 in their IPO (Offering shares of private companies to those in the public) which is a major return. Finding the right investment opportunity can generate a huge change in direction for investors. Keeping a close eye on how the startup is doing and knowing when a loss is bound to happen will prevent investors from damaging their earnings.
Overview: How to Assess Startups for Investments
- Due Diligence : Research company statistics and growth prospects along with the crowdfunding site
- Evaluate other investors and competitors
- Assess the founder and the teams industry skills and knowledge
- Have some experience in the desired startup industry
- Understand industry trends and how the startup falls on the line
- Set expectations years in advance
- Set your risk tolerance and investment strategies