Crowdfunding is the process of raising money for a particular cause, event, or product to help fund its cost. Instead of applying for bank loans, people can post their projects on crowdfunding websites such as Kickstarter and Indigogo to sway people to donate money to them in an effort to reach their financial goal. The purpose of crowdfunding is to help those without proper funding to achieve a particular goal.
As crowdfunding is becoming more mainstream, investors want a more viable way to maximize returns for their investment. The Securities and Exchange Commission is currently in the process of approving formal methods to connect people with entrepreneurs to help legally and officially make investments into a company a viable option for anyone. The formal name for this type of investment is called equity crowdfunding. Investing this way means you could receive stock in the business.
With high risk comes high reward
If you are a founding stockholder of a company, you can increase your initial investment more than the typical stock or bond investment. The downside is that there is no predicting the future of a startup, especially via crowdfunding.
“There is no promise or guarantee. What we offer is high risk, high reward,” said Daryl Bryant, founder and CEO of StartupValley, which is a portal that aims to one day connect investors with entrepreneurs. He noted that people close to retirement should not rely on equity crowdfunding as an investment for retirement savings.
Your best bet at investing in a potentially successful company is to research.
Ask the following when making your decision about a particular company:
- What are their long- and short-term goals?
- Are these goals reasonable and obtainable?
- What kind of marketing strategies do they have?
- How high is the demand for the product or service?
- How are they going to differentiate themselves from the competition?
Trust what others have to say about the company. “With this platform, it’s the crowd that helps determine if this is a good idea or not. The crowd is passionate about due diligence. The crowd will sniff out whatever doesn’t smell right,” added Bryant.
Diversify your portfolio further with equity crowdfunding
After your thorough research, you may decide to put your money into equity crowdfunding. You could receive well over 100 times your initial investment.
While it’s great to be optimistic, it’s important to be realistic when investing through crowdfunding. Many companies will most likely not be able to provide a considerable return on investment. There will be many failures, resulting in a significant number of people losing their initial investments.
As always, diversifying your portfolio is in your best interest. Minimize your loss on investments and consider investing through stocks, bonds, CDs, real estate, and other types of investments.