Crowdinvesting 101: Equity Crowdfunding Facts
While everyone has likely heard of crowdfunding at this point, equity crowdfunding differs from more traditional models. So, what is equity crowdfunding? And how does it work in comparison to other crowdfunding methods?
In this post, we’ll define equity crowdfunding and explore some essential facts you need to know about this innovative way to finance new businesses.
What is Equity Crowdfunding?
While popular crowdfunding platforms like Kickstarter allow the public to invest in apps and products, equity crowdfunding allows the crowd to invest in companies. Let’s say you’re investing in a crowdfunding campaign for the iPhone (before it became the iPhone, of course). Once a campaign has been funded, instead of receiving an iPhone–you’d share ownership in the iPhone company–Apple.
Essentially, equity crowdfunding is a type of online offering which allows members of the crowd to own a piece–or two–of a startup or private company. With any luck, that company will turn out to be as successful as Apple. Understanding the definition of equity crowdfunding, let’s explore this topic a little deeper.
Here are a few crucial equity crowdfunding facts every investor and entrepreneur should know:
Equity crowdfunding is not new
Equity crowdfunding is relatively new to the United States. However, in other areas of the world, this model of financing is not new.
In Europe, an Esports job platform was recently reported to have raised 250% of its target amount in just under one week through equity crowdfunding.1 The company launched its campaign on Crowdcube, which is amongst the most popular crowdfunding platforms in Europe.
The equity crowdfunding market is evolving
In other words, this market is not just limited to tech and millennials. In learning to understand equity crowdfunding, an important fact to keep in mind: it spans multiple sectors across the globe. Equity crowdfunding campaigns exist in areas of healthcare, real estate, travel and tourism, and beyond.
At the same time, crowdfunding ordinarily is associated with more youthful generations of entrepreneurs. Don’t allow this limiting belief about equity crowdfunding to become too ingrained just yet. A 2019 study determined that recent campaigns tend to be launched by older, more established companies who can more easily access outside funding.2
Young higher-ups = higher chances of success
Although the experienced, veteran companies are getting skin in the equity crowdfunding game, age matters when it comes to predicting the success of a campaign. Data suggests that companies with younger high-ranking members are more likely to launch and complete successful equity crowdfunding offerings.3 If you do your research to evaluate an equity crowdfunding investment opportunity, do not underestimate the value of a few young members in top management.
Regulations help mitigate some potential risk
Equity crowdfunding still requires entrepreneurs to put in all the effort of a traditionally-financed company. These businesses are responsible for launching their own marketing campaigns to educate the public about their idea and attempt to obtain financing for it. Launching full-scale marketing and advertising campaigns demands hard work.
At the same time, government regulations have been put in place to protect investors, particularly those “non-accredited” individuals from the crowd. Businesses seeking capital through equity crowdfunding have to be extra careful about misleading the public or making claims about potential earnings or returns. The best startups are willing to put in the extra energy.
Investors still need to do their due diligence
Regulations can protect crowdinvestors, making it more difficult for them to be deceived. While these are in place to protect investors, they do not relieve them of responsibilities to execute due diligence. Before investing in an equity crowdfunding campaign, be sure to get the facts about the humans behind the business plan.
What are their credentials to set the company up for success? Find out if they have a history of success in their field. You can use a website like Crunchbase to learn more about private companies and the people behind them.
Equity crowdfunding campaigns have high ROI potential
As is often the case, the higher the potential reward, the greater the risk. An important fact to know about equity crowdfunding is that the potential for return is often long-term. If you’re looking for a way to pay next month’s rent, investing in an equity crowdfunding campaign will disappoint you.
Understanding the possibility a campaign may fail to acquire the target funding, investors should assess personal risk tolerance along with policies of potential investments. Many equity crowdfunding campaigns will protect initial investments, holding them in escrow until the funding goal has been reached. Become familiar with these policies before handing over your hard-earned cash.
Equity crowdfunding may have the potential to evoke change
While anyone can start a business, not everyone has access to the money they need to launch one successfully. In the past, new companies had to depend on financial intermediaries to acquire startup funding.
Today, online crowdfunding platforms allow new companies to open up financing to the public. This digital form of investing provides large amounts of individuals an opprtunity to invest in businesses at a much lower price. At the same time, equity crowdfunding gives potential customers control whether or not a given venture will blossom into an actual business.
If everyone from the crowd can participate, research suggests equity crowdfunding could efficiently distribute capital to new companies and improve welfare.4
Ready to learn more? Click here to explore the benefits of equity crowdfunding for real estate investors.
1. Cotton, B. (2019, November 12). Esports jobs platform Hitmarker smashes equity crowdfunding target: Business Leader News. Retrieved from https://www.businessleader.co.uk/esports-jobs-platform-hitmarker-smashes-equity-crowdfunding-target/75524/
2. Ralcheva, A., & Roosenboom, P. (2019, February 26). Forecasting success in equity crowdfunding. Retrieved November 15, 2019, from https://link.springer.com/article/10.1007/s11187-019-00144-x
3. Cumming, D. J., Meoli, M., & Vismara, S. (2018, September 24). Does Equity Crowdfunding Democratize Entrepreneurial Finance? Retrieved November 15, 2019, from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3247120
4. Grüner, H. P., & Siemroth, C. (2018, June 27). Crowdfunding, Efficiency, and Inequality. Retrieved from https://academic.oup.com/jeea/article-abstract/17/5/1393/5045846