The rise of equity crowdfunding has been mirrored by increased understanding of the alternative finance market and positive impacts of a startup economy. So too have pundits from the financial sphere begun to consider the new avenues of investment opened up to an array of different investor types. Representing a new era for growth investment, companies and investors alike now must reassess their investment priorities and new avenues. Invesdor today assess the fundamentals of growth investment, compared with value investment, and how equity crowdfunding heralds a paradigm shift for traditional business investment.
Growth Investing v Value Investing
In order to understand the progression of growth investing, it’s first necessary to have a definition. Growth investing reflects an investment strategy which is capital appreciation-focused, opting for companies with signs of above average growth. Regardless of a high share price, growth investors make decisions based on these criteria rather than price to earnings or price to book ratios. While growth investment targets stock with auspicious signs, value investment is based on targeting stocks deemed to be undervalued – stocks trading at a rate less than their intrinsic values.
Growth investing represents a higher risk than traditional investment, however it can offer potential higher returns. Similarly, when investors use equity crowdfunding platforms to invest in an array of companies, they are able to spread risk by having a diversified portfolio and alleviate traditional administrative costs. It must nonetheless be acknowledged that the exits of crowdfunded companies can take time, estimated at anywhere from three to ten years for a successful exit.
The Bigger Picture
As crowdfunding legislation is increasingly liberalized and enacted around the world, the healthier this marketplace will become. Already, equity crowdfunding has attracted angel investors and a syndicated investment approach. Still, there is a lack of data necessary to assess the exits of startup companies through equity crowdfunding. Last year, Europcar acquired E-Car Club, representing the first successful crowdfunding exit. If you’re an investor demanding quick returns it pays to be conscious of the typical trajectory of crowdfunded companies. Marcus Stuttard, Head of Aim and UK Primary Markets at London Stock Exchange Group stated in reference to growth investing, that “it’s massively helpful that companies now have better access to equity finance from an earlier stage”.
Startup companies and established businesses alike have benefited from new capital avenues thanks to equity crowdfunding, just as savvy investors have from their diversified and healthy portfolios. Financing startup companies has and will remain an unpredictable business, but growth investment is worth assessing as a new avenue, thanks to crowdfunding platforms which allow you to spread your risk, diversify and tap into a new network of entrepreneurial and ambitious companies.
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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.