Risks and Rewards of Equity Crowdfunding That You Should Know
A financing strategy that allows companies to raise capital, equity crowdfunding is the favorite of entrepreneurs and startups.
While other financing options such as bank loans, venture capital and other institutional investors are also used, equity crowdfunding is big in the news. It allows startups to raise capital without the need of going through the long and complicated alternative options.
Equity crowdfunding technology has also improved and from paper and pen, almost all of it is done online.
With the improvements, the equity crowdfunding tech news is full of new successes and bigger failures – and this can be pretty scary for small non-accredited investors.
So, before you decide to become a part of any equity crowdfunding, consider looking at the rewards and risks associated with it
Risks: The Downside of Equity Crowdfunding
High Failure Chances
Small and individual backers may not have the resources or experience to analyze a business venture and correctly score its risks. This means that many startups that have a higher than normal risk of failure may still be able to gather funds through equity crowdfunding.
Consequently, equity crowdfunding backers run a higher chance of losing their investment if the firm collapses.
Equity crowdfunding can sometimes lead to higher profits, especially in the tech sector. The equity crowdfunding technology side is full of news where a small startup made millions, even more. News like these have equity funding potential parties emotional and longing to make huge profits by backing startups.
This has led to rampant frauds in the market, where a fake startup using all the right buzzwords and extensive social media marketing can rope in unsuspecting backers, only to run away with the funds collected, leaving investors with nothing.
Weaknesses of Intermediaries
Since startups using equity funding don’t have professional and institutional investors who can do in-depth due diligence, they have to rely on crowdfunding startups. These platforms act as the middlemen, ensuring all the financial security precautions have been taken so small investors can safely back their favorite startup.
However, with many startups raising hundreds of thousands, maybe even millions in capital, these platforms are the favorite places to be hit by hackers.
Rewards: The Upside Potential of Equity Crowdfunding
Higher than Normal Profits
The saying higher the risks, greater the rewards, holds true for equity. Unlike donations or loans startups may opt for, equity crowdfunding gives investor profits to backers. With successful startups making super growth in the first few years of their existence, equity backers can enjoy higher returns.
This gives equity funding parties the chance to earn more than they normally would in traditional or institutional investments.
VC Like Environment
Venture capital and seed firms are famous all over the world for finding future blue chip firms well before they see the light of day. This allows them to invest at extremely low entry points.
This is not possible for individual or small investors as firms seeking institutional investments often have a high barrier of entry requiring a significant investment per backer.
Equity crowdfunding relies on hundreds, if not thousands, of investors who can contribute smaller and manageable amounts that can collect into a huge fund. Thus, with equity crowdfunding, small time investors have exposure to the same early investment options like their larger counterparts, but with smaller invested amounts.
Large Pool of Startups to Select From
Equity crowdfunding is a huge market and platforms like Indiegogo and Kickstarter can have several hundred startups listed from all walks of industries.
This gives equity funding parties the opportunity to select their preferred startup. The selection can be based on a number of reasons such as an expanding industry (with high growth potential), an industry disrupting concept (becoming the sole market leader) and even on a personal level where they feel that the startup resonates with their beliefs and ideas.
Professional Due Diligence By Crowdfunding Platforms
One of the cons of equity crowdfunding stated earlier is the possible lack of knowledge and expertise to gauge a startup financially and technically. This has led to a lot of failed kick offs and even scams.
On the other hand, crowdfunding platforms offer an excellent opportunity to small investors in this regard. With strict controls on what projects can be listed on their platform, these crowdfunding websites have their own due diligence process, which gives investors a greater confidence on the project they want to back
How Do I Get Into Equity Crowdfunding?
There are several equity crowdfunding platforms available today. With the host of benefits these platforms bring, you can easily find a project to your liking and invest in it.
You can check out our list of the 10 biggest crowdfunding platforms of all time.