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Equity Crowdfunding is the essence of raising funds from members of the public (or the ‘crowd’), predominantly through crowdfunding platforms, in order to finance a new project or business venture. In exchange for what can be potentially small sums of money, investors receive a portion of the equity in the project or business venture, which can potentially lead to diversifying their portfolio. In this article, we shall assess some of the risks and rewards that accompany equity crowdfunding.
What Are the Rewards of Equity Crowdfunding?
Equity crowdfunding can be potentially advantageous for both investors and fundraisers when executed successfully. Outlined below are some of the rewards and benefits of investing through equity crowdfunding platforms.
Potentially Lucrative Returns
The main benefit of equity crowdfunding is the potentially high returns. Equity crowdfunding provides the opportunity to increase your funds. The crowdfunding project you invest in could do very well and could potentially even double, sometimes even quadruple in value over time, possibly bringing you great returns as a result.
Equity crowdfunding also allows individuals to invest small amounts of funds across multiple projects and potentially enjoy the returns these provide. As a result, this could help to diversify your portfolio, which is ultimately the general long-term goal for many investors. Unlike conventional investment strategies, equity crowdfunding allows you to own shares in a project or property without being required to maintain a high net worth prior to investing.
Diversify Risk Through Multiple, Smaller Investments
Equity crowdfunding offers a more affordable entry into investing in property. Investments can start from £100, with crowdfunding platforms offering a wide selection of investment opportunities on their website, including commercial real estate projects (such as hotels, apartment complexes, medical complexes, self-storage and retail), as well as real estate investment trusts and institutional commercial real estate, all depending on the crowdfunding platform. The various forms of property investment opportunities can vary in size and type, so investors can decide which projects are right for them. A choice of projects provides the potential to diversify the risk through the investment of smaller amounts across several projects at once, as opposed to investing all of your available capital into one project.
No Fees for Investors
In most cases with equity crowdfunding, investors will not be required to pay any fees or commissions. The costs associated with financing a project are paid by the fundraiser and included within their finance costs. There are no management fees or exit costs, and investors have full autonomy over their own investments, allowing them the flexibility to choose which projects they wish to invest in, whilst of course, considering the timescale, opportunity type and risk associated with the project.
Learn From the Developer
With crowdfunding projects that offer an element of ‘learning while you invest’, the developer will share their (often valuable) knowledge as the project advances, whilst factoring in the current market circumstances. Generally, developers will organise webinars to present the progress of the project and discuss any recent challenges faced and how these have been resolved before answering any questions from investors. The developer may also arrange site visits at key stages of the project, which allows investors to see the project for themselves. Some developers may also create learning programs, which can be a good way to meet the developer and sometimes even socialise together afterwards.
Learn From the Crowd
Upon signing up to a crowdfunding platform, investors become part of a community of like-minded individuals, creating the opportunity to learn from their peers. As a new project is established, potential investors are able to ask questions to the developer through the crowdfunding platform. As an investor, you are able to see questions being asked by other investors as well as the developer’s responses. Investors can join conversations via project forums, and some members can often be very experienced and can even have been involved in property development projects themselves. This is the best way to increase your knowledge about investing and the property marketplace in general whilst doing so in a space that protects investors.
What Are the Risks of Equity Crowdfunding?
When making any form of investment, there are always associated risks to be expected, but understanding these risks and educating yourself on them can definitely put you in good stead. When considering the risks associated with equity crowdfunding, there are a few things you should familiarise yourself with prior to investing, which are outlined below.
Risk of Failure
A project that has been funded through equity crowdfunding strategies can run a risk of failure as the success of a business can not be assured solely by funding. Without a sufficient business plan and support structure, even the most promising ventures can potentially fail. That’s why undergoing due diligence into the project and fundraiser in question can prove to be most beneficial. There are also crowdfunding platforms that educate its investors, allowing you the opportunity to learn from experts with proven experience within the industry.
Risk of Fraud
Equity Dilution
It is likely that the project you invest in will require further funds as the project progresses, in which instance can reduce, or ‘dilute’ the percentage worth of your shares within that project. It is advised that you ensure that the business or project has established investor protections in place. The dilution of shares, however, generally won’t have the same effect as it is found with more traditional financing strategies. Nobody should consider investing unless they are comfortable with their ‘risk appetite’, ensuring they are only investing what they can afford to lose, and it is essential to understand both your own risk appetite and financial situation. Understanding your risk appetite, how much capital you realistically have to invest and how long your money could be tied up in a project are all crucial elements to be aware of prior to making investments.
Low Liquidity
Equity investments can often be accompanied by a high risk of illiquidity, due to the lack of options to sell your shares to a secondary market, as exit options may be limited or could potentially not even exist. It is important for investors to be cautious that shares obtained through equity crowdfunding can be highly illiquid. Similar to traditional venture capital processes, investors in crowdfunding could potentially wait for some time before their investments pay off.
Years to Materialise
Naturally, each investor will expect a future return. When it comes to equity crowdfunded projects, these can often have a waiting period before they materialise. There can sometimes be delays with the project moving along, perhaps due to those in charge deviating from the original project plan, or they may face difficulty scaling the project in question. This could lead to capital erosion instead of wealth creation. In some instances, there can be an opportunity cost associated with your investment which should be considered prior to making investments.
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