What should you know about equity crowdfunding and how it can be beneficial for your investment portfolio? You see, those who are interested in real estate investment have various options to ‘save up’ her money. Within the last years, crowdfunding platforms have emerged to connect project owners and investors.
It’s expected to deliver win-win solution for everyone. Project owners can get the capital they need, while the investors have the appropriate place to keep their money. So, what should you know about equity crowdfunding and how it works?
Equity Crowdfunding: What to Know about It?
Also known as investment crowdfunding or crowd investing, equity crowdfunding refers to a way that startups (and also early stage companies) use to raise capital. This way offers the securities (of the company) to several investors in the exchange of their finance. Each investor will have the right to a stake within the company’s proportion.
Different Types of Crowdfunding
Not many people know this, but crowdfunding comes in different types and purposes.
- Donation crowdfunding. It’s a campaign type in which contributors, donators, or investors won’t get any financial return. Basically, people give out donations to finance (or fund) a specific cause or idea. It’s usually done to raise money for disaster relief efforts, non-profits, or charities.
- Reward crowdfunding. Investors contribute to business for the exchange of incentive or reward. The reward relates to the business’ service or product. This kind of crowdfunding type is ideal for companies having goods (and other products). It’s also quite good for startups that want to test the market.
- Debt crowdfunding. In debt crowdfunding type, the project owner (the one who runs the campaign) would borrow money from investors to run the project. Investors are willing to lend money and the business will then repay the lenders. The owners would set a specific time frame to pay their contributors back, including the interest rate.
- Equity crowdfunding. Investors who are willing to buy the shares will get financial return. This is especially popular (and common) among startups and entrepreneurs.
More about Equity Crowdfunding
The equity crowdfunding is unique. It’s different from the others because it offers a more conventional method in raising capital through financial securities offer for the investors. Moreover, the process is utilized on (specialized) online platforms.
Because of the digital trait (and nature) of the crowdfunding platform, it somewhat offers a more open and liberal way of financing.
How is the equity crowdfunding different from the conventional capital raising method? The latter mostly focuses on investments from professional investors, usually a small group of them. The first one targets a broader and bigger group.
The main idea (and purpose) of this kind of crowdfunding is to raise the needed capital through getting small contributions but from bigger groups of investors. So, if you don’t have a lot to spend, but you want to start off your investment portfolio, this kind of investment can be a good option.
The Benefits and Downsides
This type of crowdfunding has its own benefits, naturally. So, what are they?
- Accessing capital is easier. Companies and entrepreneurs are able to showcase their projects and expose them to bigger coverage of potential investors.
- Management has less pressure. This crowdfunding is different from other financing options, such as venture capital. It doesn’t end with ‘power dilution’ in the company. Power won’t be concentrated within a certain shareholders’ group.
- Lucrative and promising returns. Startups are always viewed as risky ventures. But it’s always possible that the company may be the next unicorn, delivering promising return (for the investors).
Although the crowdfunding system is profitable and promising, it’s not 100% perfect or ideal. There are some possible downsides that you need to consider, such as:
- Equity dilution. Equity crowdfunding is somewhat related to new shares’ issuance, which means that current shareholders’ stake would be diluted
- Higher risk of failure. Not only startups themselves are ALWAYS risky, but the crowdfunding system and scheme is also risky. There is always a possibility that some projects are basically fake.
- Fraud risk. As it was mentioned before, scammers or fraudsters may find loopholes within the regulations or the systems, allowing them to gain access to the financial pool without actually having the projects.
- Low liquidity. When you buy the securities on equity crowdfunding platforms, you should know that they are highly not liquid. It means that you have limited exit option or there is no exit option altogether. In most cases, the (crowdfunding) investors typically need to wait for at least several years until their investments pay off.
You have various types of investment and you are free to pick one that meets your requirements. This equity saving can be ideal for some people, but not so much for the others. Be sure to decide whether equity crowdfunding is the right one for you and also your financial condition.