Over the last couple of years, one of the most exciting developments in the investment world has to be the growth of investment crowdfunding. There is a possibility of making money from expanding businesses, startups, as well as real estates in a way that wasn’t possible in the past thanks to this new mode of investing.
But before directing your money to crowdfunding investment, you must examine the situation to find out whether it’s the right one for you. It is usually a general rule whenever you make any investment.
What is Crowdfunding Investment?
Crowdfunding investment is the process whereby individuals, i.e. the ‘crowd,’ invest in an early stage of an unlisted business (a business that isn’t listed on the stock market) in exchange of shares or returns in that company. A shareholder is entitled to partial ownership of a business and stands to get a percentage of the profits whenever the business performs well in the market.
On the other hand, investors can lose their investments whenever a business makes some losses. Before the enactment of the JOBS Act 2012, only venture capitalists, wealthy individuals, as well as business angels that had the ability to investing in startups. Crowdfunding investment has streamlined the investment process by opening the doors for a larger pool of prospective investors.
The Major Categories of Crowdfunded Investments
Several forms of crowdfunding investments have emerged over the last couple of years. These include;
This type of crowdfunding is basically when you invest in equity of a particular company, especially a startup. Equity crowdfunding is primarily performed via a convertible note, which is a debt instrument that can transform into equity at a particular time or milestone. From the company’s note agreement, you can see how they convert the equity.
You may come across some of the following terms:
Interest Rate – it is the yearly rate at which the loan accumulates the interest.
Valuation Cap – it is the maximum amount which is convertible to equity.
Conversion Discount – it is the discount that one gets from the equity on conversion. For instance, you get shares at $ 0.9 for equity conversion of $ 1 for a company giving a 10 % discount.
Term Length – it is the amount of time that the company needs to have a conversion event or pay back the loan.
Real Estate Crowdfunding
This is another area that has taken the world with a storm over the last couple of years. Just like the investment crowdfunding, the real estate crowdfunding offers investors a chance to invest in the real estate world for low minimums in various ways. When it comes to real estate crowdfunding, there are 3 primary ways to invest: preferred equity, direct equity and debt.
This mode is quite complicated. Preferred equity is given as an investment in the realty fund for a particular term. These funds pay the preferred equity holders a specific return, usually yearly or monthly. If there’re any profits at the end of the term, they’re fully paid out to the equity holders.
In some instances, the term is founded on an exit such as refinancing or sale. In other cases, the occurrences of the event determine the payments. As you can see, preferred equity deals are quite intricate, and you certainly need to comprehend the deal’s terms.
It is similar to crowdfunding investment, where you own equity in a given property. Here, you’ll get shares equivalent to your investment in a brand-new entity handled by the crowdfunding backer to hold the title straight to the property.
It is the most common in the world of real estate, as it’s available in the form of a mortgage. Nevertheless, as opposed to a mortgage, the debt-equity means that you will invest in realty crowdfunding in the form of short-term loans -usually for development, bridge funding, or rehabilitation.
When lending out, it is essential to research the sponsor’s track record. Also, think about the LTV (Loan-to-Value) ratio. It is necessary to go for an LTV of about 65 % to 75 %. The amount that the sponsor is bringing on the table also needs to be considered.
Peer to Peer Lending
It is the oldest form of crowdfunding investment. The leading platforms in the space, LendingClub.com and Prosper.com, both opened doors in 2006. These platforms offer loans for pretty much everything, and the loan amount is typically lower than what you get in the real estate space.
The peer to peer crowdfunding loans are similar to personal loans, and they range between $ 1000 and $ 40,000. You can use these personal loans on anything from undertaking home refurbishment projects to refinancing the student loan debt.
On these platforms, you’ll be looking at an individual instead of looking at a company or property deal. You should examine the loans depending on the individual’s history and credit score, as well as what you think about their capability to repay.
Specialty Crowdfunding Investments
There’re a couple of forms of crowdfunded investments that do not fit in a specific category, and that’s why they fall under this category. Usually, most of these platforms do not market themselves as an investment. You’re regarded as a buyer or sponsor upon investing on these platforms instead of an investor.
The companies under this category include Kickfurther. Here, you can either invest in an organisation’s inventory or the Kickstarter, where you can sponsor a venture in exchange of getting products in return.
Nonetheless, they’re seen as crowdfunding since they bear similar principles, where individuals pull resources together to fund a project with the hope of receiving money. These types of investments are the riskiest in comparison to the other types of investment crowdfunding.
What are the Main Metrics of Crowdfunding Investment?
As you plan for crowdfunding, you must know what to expect from the deal. A significant part of setting your expectations and your team is understanding the success of crowdfunding metrics and how you need to define them.
The Number of Investors
You must think about the number of investors on the platform. Crowdfunding links the investors with projects. In this case, the project owners tend to publish their adverts on the maximum number of platforms as this boosts their opportunities of getting much more funds. Nevertheless, the number of investors on the platform plays a significant role in the success of a project and outlines the conversion rates.
A project that has a higher number of investors tends to lure more backers to the platform. With this, the chances of conversions are also high, and this leads to more investors and projects.
The Ratio of Investors to the Projects
With a proper network connection, the new projects bring new investors. But for a project to be adequately funded, the project backers need to be sufficient enough to fund a considerable section of the project. Therefore, the ratio of the investors to that of projects needs to be as high as possible for a platform to show a tremendous campaign success rate.
What are the Benefits of Crowdfunding to the Investors?
Besides the money concerns, there’re much more pros than cons of crowdfunding for investors, that forces them to continue offering support to the startups. Here are the benefits:
A Well-spread Investment Portfolio
Do you remember the phrase that you don’t need to place all your eggs in a single basket? Well, this applies to the world of crowdfunding as well. The experts advise investors to avoid giving all their crowdfunding funds to a single company. Instead, the donors need to choose a few businesses to share their money among the companies.
This aspect is known as portfolio diversification, and you must follow it appropriately. Always research about the business where you want to invest to minimise the risks. Keep in mind that the startups that have a couple of creators develop much faster in comparison to those that have a single owner.
The entire deal process requires little effort and time thanks to the handy crowdfunding platforms for investors. In the real world, you may encounter challenges concerning CDD (Customer Due Diligence) control and examination of a campaign plan if you choose to become an angel who has little experience.
When it comes to the crowdfunding marketplace, the providers are in charge of the process. Besides, you don’t need to have the appropriate connections. With a few mouse clicks, you can access all the fundraising campaigns from the public domain.
All businesses also have a promo page to showcase their capital needs and concepts. The investors can then check at a project and determine whether or not to support it.
Investors are always on the search for opportunities that have lower risks and higher benefits. Crowdfunding sector has a considerable prospect since many campaigns have successfully closed with gratifying returns to the early investors.
A good thing about crowdfunding is its strength. Crowdfunding is independent, and it isn’t associated with other financial markets and therefore remains stable whenever there’s economic instability. The experts allege that crowdfunding performs much better than the traditional assets.
Small Investment Openings
Irrespective of the amount of money that you’ve, there’re always openings for you to become a sponsor. Most crowdfunding platforms outlines a minimum limit which is almost accessible to all individuals according to their business concept. There are some concepts that you can support with $ 10. On the other hand, the smallest possible deal that you can start in the real estate is $ 1,000.
You all know the feeling that comes with tax, the unhappiness and insecurities. Crowdfunding backers benefit from lessening the tax burden. Since the legislative framework is work on progress, the backers need to follow similar guidelines as those used in stock exchange investment.
If you have invested in small businesses, you may enjoy some tax reliefs. For example, some SMEs aren’t required to pay any capital gain taxes. The government also offers tax breaks to the investors that report losses or those that gain nothing.
The Pitfalls of Crowdfunding
Equity Dilution – the stake of the present shareholders may be diluted since crowdfunding investment is associated with the issuance of new shares.
Low Liquidity – prospective investors need to be alert about the securities bought via crowdfunding since they’re highly illiquid.
High Failure Risk – most startups are extremely risk projects. Thus, the likelihood that a business fails is high.
Top Crowdfunding Websites for US Companies and Investors
These crowdfunding sites are available to the US-based companies and investors. While all the websites accept the accredited investors, only a couple of them accepts the non-accredited investors. Most of them are not clear on this aspect, and a specific platform’s investors demand change from time to time.
Started almost two decades ago, AngelList.co is one of the most established and oldest crowdfunding platforms. Previously, it acted as a link between angel investors (tech-savvy funders and high-net-worth individuals) and cash-strapped technology entrepreneurs. The platform offers three main ways in which to invest in funds and companies:
Deal-by-deal Investments – this mode allows registered investors to partner with the investor organisations led by prominent lead investors.
AngelList Access Fund – this fund gives access to hundreds or thousands of individual deals. The minimum investment that one can get is $100,000.
Professional Investors – this packet is restricted to institutional investors and high net worth individuals that can invest at least $ 500,00 at a go.
CircleUp.com mainly links the investors with the consumer-facing stratus, primarily in the food and beverages, technology and fitness sectors. You can invest at CircleUp in two significant ways.
The first is direct company investments. In this, the backers can buy shares through the platform directly from a company that is actively fundraising. The second one is Circles. These are index funds that one can use to buy shares in several companies.
Fundable.com provides equity crowdfunding and rewards-based crowdfunding. Fundable offers assistance on pitch construction, profile building, as well as business plan design. The platform’s wheelhouse is hardware, software, as well as consumer products startups.
Started in 2005, EquityNet.com prides itself as the first equity crowdfunding website and alleges to embrace the only patent for the concept. Its primary focus is on social enterprises and consumer products. It also seems to lure single-asset projects like medical clinics and assisted-living facilities, as opposed to the multi-asset funds and product-based startups.
UK-Based Crowdfunding Sites
RateSetter.com since its establishment in 2010, it acts as a peer-to-peer lending website that allows the public to invest in businesses and households. To date, it has invested over £3.6 billion and has more than 80,000 investors.
SyndicateRoom.com aims to link investors with highly vetted United Kingdom startups. It means that your projects need to fit some outlined measures, but it only takes a couple of minutes to find out whether you meet the standards or not.
Seedrs.com claims to have successfully funded over 1000 agreements via their platform. Regarded as one of the best equity crowdfunding websites, the platform aims at potentially profitable business concepts. The businesses on the platform range from publicly traded companies to idea-stage startups.
Crowdcube.com is a platform that headlined in the United Kingdom as the first crowdfunding website to launch in the region. The platform offers expert advice on how to provide a well-polished pitch, realistic target as well as a communications plan before starting a fundraiser on the platform.
Crowdfunding investment is indeed an outstanding alternative investment for some individuals. It is an excellent way to offer access to individuals only looking forward to investing small funds into alternative assets like real estate and startups.