The XXI century has seen enormous changes in the world of investment. One of such changes was the introduction of crowdfunding – an alternative way for businesses and projects to gain funds from a large number of investors. It opened the doors for people from different economic backgrounds to begin their adventure in the world of business and offered much needed solutions in the field of investment in the face of globalization. Among different types of crowdfunding the one of most significance to investors is equity crowdfunding, which will be the main focus of this article. Let’s jump right in.
A short introduction to equity crowdfunding
Equity crowdfunding is the type of crowdfunding where people invest in early-stage companies and in turn receive unlisted shares in the venture – hence the name equity. Partial ownership of the business means that shareholders will profit along with the company once it starts gaining traction and sees some success on the market. If the business performs well, the value of those shares will rise. If the shareholder one day decides to sell their shares, they gain from the increase in value on those shares.
Prior to the introduction of equity crowdfunding, startup investment has been mostly reserved to individuals with a high network value – be it venture capitalists, business angels or other wealthy individuals. Now, equity crowdfunding platforms make it possible even for people with smaller capital to make real gains from investing in early-stage businesses.
Who can become an investor?
As previously stated equity crowdfunding opened the doors for virtually anyone to become a startup investor. It all comes down to finding the right platform for your needs and financial resources. The investment criteria varies in case of different crowdfunding platforms, so make sure to do thorough research to find a site most suited to your investment needs.
Opportunities of equity crowdfunding
- A big variety of projects to choose from.
Platforms usually offer a listing of projects from many different fields and industries, allowing you to freely choose businesses that are particularly interesting to you. It’s the perfect way to diversify your investment portfolio. - Potentially large return on investment.
Startups that become successful can exponentially gain in value and bring a huge return on investment for people who backed that business in its early stages. - Affordability.
Equity crowdfunding significantly lowers the entry barrier. If you don’t have large resources at your disposal, crowdfunding allows you to enter investments even with a small capital. - Efficiency.
Investing in projects listed on equity crowdfunding platforms can help to promote businesses, help them grow, and build community around their products. That is also highly beneficial for investors who can then profit from the raised value of shares.
Risks of equity crowdfunding
As any type of investment, equity crowdfunding also comes with a set of risks that one should be aware of before starting their activity in this field.
- It takes time to see gains.
Startup investment is a long term investment and it often requires patience to see profit. One must remember it takes time for a startup to become a full-fledged business and bring real ROI to investors. - Risk of shares dilution.
The shares you receive from investing in an early-stage business will most likely get diluted once the company is looking to raise more capital in later stages. Introducing new investors means that your shareholding percentage will be reduced. - Risk of capital loss.
Risk of losing the capital is inherent to startup investment. The large competition on the market can also mean that many of the startups fail, so we advise you to make smart and informed decisions and diversify your investment portfolio. - Illiquidity.
Even in case the business succeeds, investors are not very likely to be able to sell their shares (or receive dividends) for a number of years after making the investment. It will only be possible if there is an opportunity for an exit, such as public listing of the company or a company takeover.
That is it for the brief introduction to basics of equity crowdfunding. We hope you found this short article informative and we encourage you to do further research about this subject if you see yourself investing on equity crowdfunding platforms in the future! Best of luck in your future investment endeavours.
