Crowdfunding

UNDERSTAND THE ESSENTIALS FOR INVESTMENT

What is Crowdfunding?

Crowdfunding involves raising many small amounts of money from a large number of people, typically via an online platform.

The crowdfunding phenomenon has only gone truly mainstream in the last few of years. But the concept itself is certainly not new. One of the first crowdfunds actually dates back to the late 19th century – for the base of the Statue of Liberty (the statue itself was a gift from the French). To fund the $300,000 needed for the pedestal, citizens were invited to donate – even small amounts – enticed by miniature replicas of the statue given in return!

While the concept is simple, there are in fact different designs:

  • Reward-based: usually list products, services, projects or simply an idea, allowing the backer to pledge an amount of money for a ‘reward’ – and structured such that the largest backers receive the highest value or most unique reward. Some of the first and most well-known reward-based platforms are Kickstarter and Crowdfunder.
  • Equity-funding: enables startups, early and growth-stage businesses to raise finance from a ‘crowd’ of everyday investors, professionals, angels and venture capital firms, in return for an equity stake in the business. Investments can be small, starting from double digit $-amounts. In return for their investments the investors get a pro-rata equity stake in the business. Some of the major platforms include Indiegogo and CircleUp.
  • Peer-to-peer lending: often seen as a direct alternative to a bank loan, the difference being that, instead of borrowing from a single source, companies and private individuals can borrow directly from 10s or 100s of individuals who are ready to lend. The idea is to cut out the middle man so that both parties get a better deal. Some well-known peer to peer lending platforms include Zopa and Funding Societies.
  • Donation-based: backers donating varying sums of money to support a specific cause or project. Sometimes they will receive a simple “thank you” or a special mention – or even a physical item such as a postcard. The pledge is pretty much a donation, platforms include Causes, Chuffed and Classy.

Why do investors like crowdfunding?

There are a whole host of reasons why investors like crowdfunding:

  • Accessible and democratic: crowdfunding is a really innovative way to provide all investors, large and small, with opportunities to invest their money in companies that appeal to them. This makes crowdfunding a pretty democratic way to bring investing to the masses! Platforms are online and easy to access – to create an account and start investing can take a matter of minutes. And you don’t need a fat wallet to get started – investments can start from small amounts, making it a very inclusive asset class.
  • Supports innovation: as a crowdfunding investor it’s possible to discover exciting innovations in tech and design before they go mainstream. Many companies on crowdfunding platforms are in the early product development phase with products that have not yet been officially launched.
  • Potentially higher returns: with equity crowdfunding, one of the big attractions for many investors is the opportunity to make higher returns than those offered by other assets such as bonds or publicly listed equities. The risks are often higher as you will likely be investing in startups, but few other investment opportunities offer the potential to increase wealth as much as equity in an early stage business.
  • Diversification: since initial investments can be quite small it is possible to get a well-diversified portfolio without a huge investment. Given that the risk profile of many firms seeking crowdfunding differs from the traditional equity market, it can allow investors to spread their risk and make sure portfolios are diversified, through investing in a number of companies.
  • Rewards: many companies offer ‘rewards’ as part of their pitch. Investors can be one of the first to try new products, or get other benefits such as discounts or vouchers.

 

What are the main risks with a crowdfunding?

As with any investment, there are risks associated with crowdfunding investments, particularly when investing in startups.

  • Business fail: as many of the companies listed on the crowdfunding platforms are at the early stage there is a high risk that the business will not take off as planned. This might lead to lower expected returns or even a total loss of the investment if a company goes bust. This is why diversification is important, spreading risk across many small investments instead of a few big bets.
  • Illiquid: even if the business is doing well it might take a long time for you to get your money back. It’s still fairly difficult to trade these type of investments so options are limited if you want to get your money out – investors should expect money to be invested for the long term.
  • Dilution risk: if the business raises more funds at a later date (which most startups do) the percentage of equity you hold in it may decrease relative to what you originally bought.

 

How do I get into crowdfunding?

The good news is that it is fairly easy to get started with crowdfund investing, the market is really about getting private individuals on board. As an investor you have to decide what kind of crowdfunding platform or approach you are interested in. And then simply get started!

 

CROWDFUNDING FOR RESPONSIBLE INVESTORS?

Crowdfunding has grown rapidly from a Silicon Valley social experiment to a multi-billion dollar industry – from US$1 billion in 2011 to US$34 billion in 2015! And this astounding growth is set to continue – annual volume is expected to reach US$100 billion by 2025, becoming the leading funding channel for SMEs. Of particular note, crowdfunding in developing countries raised US$430 million in 2015, with India, the Philippines and Nepal in the top three.

All of these factors say a lot to us as responsible investors. Crowdfunding – with its ability to bring in smaller investors and act as a much more inclusive and democratic asset class – is ripe for investors who are also driven by social and environmental priorities. So how do you find interesting and sustainable projects in this fast growing market?

Most of the major crowdfunding platforms have an environmental section where you can find different types of green projects. Start by taking a look at the main crowdfunding platforms to see what their offerings for green finance are. Take a look at Kickstarter which has a category called Go Green where ‘sustainable campaigns’ are listed. Indiegogo has a similar category called Environment. Examples of companies and projects you could invest in through these platforms include a solar driven cell phone charger, eco friendly sandals, turning poo into power in Pakistan and much more.

Crowdfunding platforms with a specific focus on sustainability are still early stage – but momentum is growing. These platforms allow investors to seek out sustainable projects and drive change through investing directly. Couple of examples include EcoCrowd, GreenCrowd, and Kiva. Many of these platforms are still quite small and more locally focused, but over time have great potential to develop and play a much more transformative role. If you are interested to read more about how crowdfunding can be used to protect the environment where regulations fall short – read our article on crowdfunding for the environment.

A final thought – we also like CrowdsUnite – a website that gives investors reviews of different crowdfunding platforms. It’s good to see what other investors say about sites, and we love the filter function allowing users to filter by platform type, categories, and region. There is also a lot of useful information about the platforms that can help you decide where to look for interesting campaigns.

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