The insider's top tips for how to invest via a crowdfunding platform – and avoid the traps
Crowdfunding is getting bigger and more established with every week, but this alternative ‘High Street’ for raising cash for businesses and finding opportunities for investors needs careful consideration before you leap in.
With some platforms and schemes covered by official financial regulation and others not, investors need to do plenty of due diligence and be absolutely clear on why they are investing and what they can afford to lose.
They also need to remember that start-ups, new projects and early-stage or growth businesses are at the riskier end of the investing scale.
Bruce Davis, director of Abundance Generation, outlines the simple steps you can follow to try to make sure your crowdfunding experience is a good one.
1. Decide what you want to invest for
Are you investing for high returns? To invest in something you believe in? To support the business of a family member or friend? Are your goals short or long term?
If you are interested mainly in higher returns, you will have to take on more risk. Start-ups tend to be higher risk than more mature businesses with trading histories.
2. Decide how much you can invest
What can you afford to lose?
As with any kind of investing, there are risks involved and if the business fails, your money could go with it.
3. Choose a platform
These can be generalist (businesses in different sectors at different stages of growth) or specialist. i.e. there are some platforms that specialise in renewable energy, some in gaming, some in theatre.
If you are risk averse, go for one that is regulated by the Financial Conduct Authority, such as Abundance Generation, Crowdcube, Fundingplanet and Seedrs.
4. Pick a business
If you can’t decide, go with a business you understand. And don’t be afraid to ask questions of the owner – they should be more than happy to answer to get your money.
But if you still aren’t sure, contact an enlightened IFA. Some are still wary of crowdfunding (they can’t earn fees from it in the same way they can from funds) but they should be able to help you work out whether the amount and type of investment are right for your circumstances.
Strategies for investment
Recent research carried out with our investors at Abundance Generation showed that people had a wide variety of motivations for investing.
We also found that investors are beginning to look at investing their money across a number of different platforms and products with the aim of both diversifying their risk and reflecting different strategies they have for different pots of money they have to invest.
Here are a few of the more popular reasons:
A bit of fun
Because of the low minimum investment requirements, it is possible to just ‘invest’ small amounts, for the excitement and feelgood factor associated with making a difference to a company. If you view crowdfunding as fun rather than serious investment, then your strategy should be to just invest in the projects or businesses you like the sound of or who reflect your personal values and ethics.
How you choose to do this depends on your appetite for risk and investment goals. Crowdfunding offers a number of ways to make money including investing for income (such as with Abundance Generation) or capital growth (such as Seedrs or Crowdcube).
High risk, high return: Do you like the idea of big wins but can afford to lose your stake if it goes the other way?
Equity stakes in start-ups offer the chance for significant capital growth if the business is successful, at the same time if a business fails then any equity held in it is effectively worthless. While there’s more chance of losing your money but if the company is a success, you win bigger too.
Some regulated crowdfunding sites offer tax incentives which are designed to encourage investors into higher risk, potentially high growth businesses to support the recovery in the real economy.
Medium risk, medium return: More established companies seeking funding to grow may be your best option.
Companies with trading histories and assets that have raised finance before are usually lower risk because they a) have a proven business model and b) have some value to fall back on to meet debts.
Unlike start-ups, these companies are often in a position to offer debt investments to crowdfunders – meaning the crowdfunders effectively lend money to the business for an agreed return.
Low risk, low return: There are few very low risk crowdfunding opportunities. However you can reduce your own risk profile by investing in several companies across different industries, or crowdfunding as part of a portfolio of investments that also includes other investments such as Isas, instant access savings accounts and traditional, diversified funds.
SOURCE: This is Money