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Getting Started in Crowd Investing? A 5-point checklist

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Whether you’re a retail, angel or peer-to-peer investor, equity crowdfunding represents a new investing ecosystem, introducing a new sphere of investment and a new set of rules.

For the full gamut of investor types, some initial pointers are helpful to ensure you receive the the best start possible in the equity crowdfunding industry. Before you select your preferred investment, it’s important to establish your investor type, and the sort of platform that will align most closely with your needs and interests. The following five points will also remedy the most pressing concerns that newcomers to equity crowdfunding often have – those surrounding portfolio diversification, and crowdfunding returns. 

Follow the checklist below to ensure you’re getting the best start in the industry.

 

1. Platform 

Sizing up their homepage isn’t sufficient – conduct as extensive research on your platform just as you do upon your chosen investment.  Firstly, look to their investor audience. The breadth of their database, the average investment contribution to the platform, and any specific strand of investors that they typically target will allow you to size up whether you are a good fit. By examining their current investor base, you will be able to ascertain if they are more closely affiliated with the angel and established investment community. These kinds of experienced investors will be able to help leverage your capital with their experience, if you are a novice investor.

Moreover, examine the platform’s success rate as well as their case studies. While their portfolio is helpful in exhibiting the kinds of companies they typically raise for (not to mention their stage, size, sector and level of innovation), comparing the success rates of different platforms is key. Look at the number of companies that have reached their minimum target, and assess whether your ideal platform has learned from its failures and successes.

Finally, look to personality, and consider the human element always. This may be an ongoing relationship, so be sure to assess whether these are people you’d be happy to continue doing business with.

 

2. Investor status/eligibility

It’s essential to evaluate your own knowledge by reading the company’s prospectus as well as studying your chosen platform’s website. As a newcomer, if phrases such as pre-emption rights, nominee versus direct shareholding and valuation are Greek to you, then you’re perhaps more of a novice investor than you expect.  Consider too if you are a high-risk or a low-risk investor, before turning to the sorts of deals that equity crowdfunding platforms offer. Preferring more secure returns, that shield them from as much risk  as possible (but are still higher than cash deposits) are low-risk investors. This class of investors will shore up against fluctuations in the stock market by opting to invest in asset classes such as fixed interest and property, together with global funds that hold shares.  

On the other hand, high-risk investors are prepared to risk substantial sums of their capital in exchange for the possibility of much higher returns. High-risk investors are willing to make a more expansive time commitment– willing to wait beyond ten years or more to see returns. It’s important for investors to consider which bracket they fall into, and employ the same level of scrutiny and assessment on their own status as for their chosen investment vehicle.  

 

3. Choosing the right investment 

First and foremost ought to be the market need of the industry in which your chosen company will operate, and whether the product or service solves a problem. CB Insights and KPMG teamed up to research the reasons of failure, evaluating over one hundred startups in the process – the number one reason for their failure (42% of the companies surveyed) was lack of market need.  

Moreover, you must carefully assess the company’s strategy; they must be able to succinctly provide an exit plan, an approach to management, and its ownership structure. Of course, from the early stages, it can be near impossible to predict the state of the industry in the five to seven years’ time, whereupon your investment may be able to be liquid.

Ultimately, remember to always seek independent financial advice and always thoroughly read the materials provided to you by the company.

 

4. Diversification

Before the time of equity crowdfunding, diversification required extensive advisory services, time and money.  Experienced investors such as business angels found it more simple, as did wealthy individuals who would invest via EIS or SEIS funds. Nowadays, investors seeking long-term investments as a way of diversifying can adopt crowdfunded equities into their portfolio.  As a result, there is a typical waiting period of five years plus before seeing returns.  This attracts investors towards a broader array of sectors and industries than hitherto imagined, but can nonetheless be intimidating for retail investors. 

Allocating your divided investment amount towards an array of industries allows for true diversification. Additionally, this allows investors to further save on the traditionally costly due diligence and fund management fees.  This allows for larger sums of capital to be apportioned for investment purposes.  Additional capital such as this is essential for extra fundraising rounds that occur if your company decides to expand.

 

5. Return on equity and liquidity 

While it may have become conventional wisdom that 90% of startups fail, 50% of all businesses fail in the first five years, and 40% lack the market need for their product, there has only just emerged new research for the equity crowdfunding industry alone. Offering a report on companies who have financed through equity crowdfunding, the AltFi Report is expansive, providing a rebuttal to industry skepticism, and outlining that of those companies who funded since 2013, 80% were still trading. Likewise, last year saw the highest first quarter for dollars invested since 2000. 

Also, in 2015 we saw the very first successful crowdfunding exit, with E-Car Club’s acquisition by Europcar. As equity crowdfunding enters new territory in 2017 and beyond, where it has cemented its status as a viable alternative, it begins to offer tangible returns to steadfast investors.

 

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Tagged: Tips & Tricks

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Richard Andrée Wiltens

Written by Richard Andrée Wiltens

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.