Generally, crowdfunding refers to an investment system where people place their money in an organization or business. The types of crowdfunding include donation, debt, reward, and equity crowdfunding.
For this article, we’ll be going through equity crowdfunding.
What is Equity Crowdfunding?
Equity crowdfunding can also be called investment financing, crowd investing, or crowd equity. It is basically a type of financing where a company receives funds from the public in exchange for its securities.
The major difference between equity crowdfunding and the other types of crowdfunding is that in the former, the investors own a part of the business they invest in. This is not the case for the latter.
In crowdfunding, the investors become shareholders who have a stake in the business, and they can enjoy profits (if the business succeeds) and suffer losses if the business fails.
More often than not, these companies are startups and as such, yet to establish a foothold in the market.
Benefits of Equity Crowd funding
Crowdfunding poses great benefits for both businesses and investors alike. These benefits include:
1. Huge Profits
A startup company could grow, and do so well, resulting in a huge return on investments.
How does this work?
Say you invested in a startup called MyCompany. You would have some of MyCompany’s shares. If MyCompany values their shares at $10 per share and you invested $100 (worth 10 shares), if the firm grows and succeeds, its shares could then be valued at $100 per share. You could sell them, resulting in a profit of $900 (i.e. $1000 return – $100 initial investment).
2. Become a True Investor
Earlier, only accredited investors (individuals with a high net-worth) could invest in startups with potential for success but with crowdfunding, almost anyone can invest (like an accredited investor) and also stand a chance to get benefits. See this link for more information on accredited investors: https://en.m.wikipedia.org/wiki/Accredited_investor
3. True Satisfaction
The advent of equity financing means that startups now have access to a larger source of funding and as a result, more startups are likely to key into it. This gives investors a lot of options, and they can invest in areas they believe in and have a passion for, and this gives a huge sense of personal satisfaction.
This is the single most important benefit businesses get from crowdfunding. It is an avenue for them to acquire funds necessary for them to succeed, in a short amount of time. Since there are investors willing to invest in these businesses, startups simply tap into this already large pool of people with similar ideas.
It’s easy to see funding as a major benefit for startups in equity crowd-funding, but looking past that, there’s more to be gained. There’s a high chance of success because of the large number of investors that can be reached. Each investor wants the business to succeed and becomes a promoter as a result.
Risks of Equity Crowdfunding
1. Huge Losses
Just like there’s a potential to make huge profits, there’s also the potential for losses. In fact, in the eventuality that a startup fails, you will not get any money back, and if it performs poorly, you might incur some losses. Crowdability compares various ways to minimize losses as an investor. Check out Crowdability review to learn more about minimizing losses as an investor.
The nature of crowdfunding is such that it is well suited to social media, as it is much easier and far more convenient to reach a large audience. Although this has great potential, this very reason makes equity crowdfunding prone to fraud. Dubious persons could take advantage of these social platforms to set up a fundraiser for a non-existent startup. Beginners and newcomers are prone to falling for these fraudulent campaigns.
3. Time to Materialize
When investing, one expects some return in profits at some point. However, with crowdfunding, there’s the problem of overly delayed returns, as the business’ managers may not have the tenacity to scale up the business.
In addition, there’s a high risk of failure, unlike startups funded by other means like venture capital. This is due to the fact that in the latter, these investors are more well off and far more experienced. As a result, these startups get more backing in terms of ideas, expertise and experience that businesses need to succeed (not just finance).
Indeed, it is not sufficient to have a good product; you must also have the required business knowledge to succeed in selling that product.
There are a lot of crowdfunding platforms. These platforms, however, are not always 100% secure, as hackers have shown they can break into some of them. If you are thinking to invest in a crowdfunding deal, then don’t miss out on reading read this helpful post.
Investing in equity crowdfunding has risks, but it also has benefits. Conduct thorough research about any startup or crowdfunding platform before investing to reduce risks.