The nascent rise of equity crowdfunding has lead investors of all types to register interest on how crowdfunded equities could impact their investment portfolio. The industry has reached a point where investors have seen the tangible benefits resulting from their crowdfunding investments. There may be a more personal justification for making these investments – wanting to support entrepreneurs or admiring a particular product for example. But for the more experienced investor there is an array of excellent perks to the diversified portfolio. Today, Invesdor examines how exactly these equities can benefit your investment portfolio, and explore the array of investor types beginning to uncover the positive impacts of equity crowdfunding.
Invesdor has previously assessed the issue of liquidity in equity crowdfunding investments. Retail investors new to the industry will become aware that unlisted business offer a high risk/high reward dynamic. They are a healthy part of a diversified investment portfolio, but represent an odd choice for a first-time investor. Prior to equity crowdfunding, portfolio diversification was a more difficult and nuanced task. Only business angels were able to easily diversify, or wealthy retail investors could invest in EIS or SEIS funds in the UK.
Now, investors willing to plan longer-term investments can benefit from crowdfunded equities in their investment portfolio. Playing the long game is a necessary aspect of this approach, as you must be prepared to wait at least five years until returns. Similarly, crowdfunded equities may pull an investor’s portfolio towards sectors and industries with which they are wholly unfamiliar – this is far from a disadvantage, but it does stall some retail investors who are unwilling to maintain investments in unknown or unfamiliar sectors. This approach, however, of allocating your divided investment amount towards an array of industries, allows for real diversification.
Similarly, investors who favour crowdfunded equities are able to eschew the standard due diligence costs and fund management fees. This allows for greater sums of capital to be freed up for investment purposes. This is sometimes an essential aspect of having crowdfunded equities in your portfolio, as, if your chosen company continues to go through fundraising rounds, you may want additional capital to be able to maximize returns.
Moreover, equity crowdfunding raises attract the full gamut of investor types – from VCs to Angels – legitimizing the deal in the truly ‘democratic’ manner for which the industry was initially triumphed. Without the indicators of future performance, it’s difficult within the industry for prospective investors to know how to manage their investments. With the reduced capital requirements offered by equity crowdfunding raises, it’s easier than ever for retail investors to diversify, as they can spread small investments across an array of different businesses, at different stages of maturity.
Diversification is the essence of responsible investment, and with equity crowdfunding, it’s easier than ever to achieve.
Find more diversification opportunities on our investments page.
Richard Andrée Wiltens is a commentator within the fintech sector, who has written for an array of international investment platforms. His career has spanned from investment banking to financial technology firms, backed by an education in economics and finance.