Crowdfunding is one of the easiest ways to introduce yourself to the field of venture capital investment.
Investors are now finally discovering crowdfunding as a lucrative and attractive investment opportunity. But despite having numerous successful case studies, there are a lot of people still sitting on the fence.
If you are one of those who are still not sure about crowdfunding as a way of building wealth, don’t worry, it is normal to be cautious when it comes to investing.
One of the reasons you still doubt crowdfunding might be a lack of clear information about its potential.
If so, you have come to the right place because the objective of this article is to examine the potential of crowdfunding as a source of income.
What is investment crowdfunding?
In simple words, investment crowdfunding is a way of acquiring funds for a project by asking a group of backers to each contribute a small amount to it, and in return, the backers receive equity shares of the project or company.
Initially, this investment was restricted to accredited investors, but with the new EU crowdfunding regulations, even non-sophisticated investors can take part in investment crowdfunding.
This type of investment can also involve obtaining debt and equity stakes. In this case, a large number of individuals invest in a small portion of a larger loan through micro-loan providers.
Lenders will most of the time know the terms and the purpose of the loan as well as the credit rating of the borrower. Also, lenders will receive higher interest rates relative to other debt instruments because of the credit risk of the borrowers. Nevertheless, they can hedge the risk by spreading a large amount incrementally across a large number of loans. Borrowers on the other hand may find this type of financing appealing when a conventional method of borrowing is not an option or it is too costly.
How does crowdfunding work?
Visit a crowdfunding website to find listed projects. You may need to register or create an account with the platform in order to see details about the project including pitches, location, and the amount to invest.
Some platforms charge investors a small fee in form of a percentage of profit made.
If you find a pitch that you like, you can go ahead and invest, provided you have deposited funds to your account.
Typically, a crowdfunding platform should provide the following information:
- How much the project wants to raise
- How much it is raised
- The equity in business offered
- The use of the money
- How long the pitch runs
- The number of investors to already invest
- Your earning
How can you invest successfully?
If you seek to make money, rather than losing, here are tips to help you out.
Limit your exposure
One of the first things investors need to do in order to create wealth through crowdfunding is to restrict their speculative investments to less than 5% of their overall portfolio, especially if you have an income lower than $100,000.
But if you have money to spare, you can increase the limit of your speculative investment to maybe 10%.
Invest what you will not need for at least five years
Investing in crowdfunding projects tends to have very little liquidity, therefore you will need to hold on to your assets for the long haul. Usually, finances startup are expected to exit after 5-7 years, so your investment will be blocked for a considerable time.
Assess the platform
Avoid platforms that act only as a mediator and listing service. Instead, go for ones that work with or are broker-dealer to access offerings that are best of the best.
Some platforms like Seedrs only accept 1% of applications to their portal, but there are many other selective crowdfunding platforms out there you can trust.
You can also consider searching for the experience of the management team of the platform. An experienced team behind a platform means they have the best opportunities that can earn you a lot of money.
Will the platform be around for at least five years? Make sure you vet how long the platform will be operational since your investment will be locked up there for at least five years.
It won’t hurt to also find out how the platform vet projects before listing.
Vet the project
After vetting the platform, research the project you want to invest in. Luckily, you can find just about anything on the internet, therefore, it will not be hard to do due diligence on the company.
Learn about the person behind the project and their background and find out whether they have experience and knowledge in the industry.
The best crowdfunding platforms to make money
A crowdfunding platform plays an important role in investment crowdfunding and works well for all parties involved.
Here are some of the most popular platforms offering equity crowdfunding services.
SeedInvest is known for listing startups that promise to become the next big thing in the tech industry. The platform usually handpicks the best early-stage companies in the hottest industries including 3D printing, robotics, AI, and augmented reality.
According to Business Insider, investors in SeedInvest have generated an unrealized net annual return of 17.4%, which is more than the VC industry median IRR of 11.7%.
This one of the oldest crowdfunding platforms and thus, the one you should be looking at in case you want to make money from crowdfunding.
This platform has higher returns compared to the top quarter of venture capital firms. For instance, as of May 2021, if you invested $25,000 in each company the platform funded between 2013 and 2016, you would have earned 29% unrealized net IRR2.
Fundable was found in 201 and since then, it has been offering a comprehensive list of handpicked companies in nearly all industries, from solar power to 3D printed prosthetics.
The platform offers both equity crowdfunding and donation campaigns, and investors can get either convertible debt or equity.