There are a lot of options for companies who want to raise capital. However, no option comes easy. It requires much concerted work.
Let’s say that you’ve got a fantastic idea – one that you believe will revolutionise a sector – or even people’s lives across the globe. Pitching this idea to investors is a difficult process, let alone getting them to buy-into who you are and your idea.
Yet despite this, no-one can start a business without capital investment. Well, if we’re splitting hairs, it is possible to start an eBay shop, selling baby clothes, for instance and grow this small venture into a nationwide or better still global brand.
But the odd business idea aside, how can you secure the investment you need to make sure that your idea flourishes into a strong business? Well, one way is through crowdfunding.
What Is Equity Investment Crowdfunding?
In a nutshell, crowdfunding is when entrepreneurs raise money from members of the public (a crowd) using online platforms. Think GoFundMe, Crowdfunder or even JustGiving.
Equity crowdfunding takes this one step further. In exchange for a small donation, members of the public can invest in your business and get their own proportionate slice of the pie (equity.) In short, they ‘own’ a nominal amount of your business.
In time’s past, the only way for entrepreneurs to raise the funds they needed to kickstart their business venture was to get a loan from the bank or borrow from family and friends. Ambitious entrepreneurs could borrow money from a private equity or venture capital firm, and if they believed in you and your idea would be willing to lend you capital to fund the business venture.
Today, everything has changed. According to statistics online, investment crowdfunding is set to reach as much as $30 billion globally by 2025.
Sound appealing? Well, before you go online and click link after link to find the right crowdfunding option for you, let’s look at the risks and rewards of investing through equity.
As with any commercial venture partnership there are always risks. For some, the greater the risk, the greater the reward philosophy might be part of their DNA. Others might take a more cautious approach.
So, what are the risks of equity investment crowdfunding?
Returns Could Take Years
If you invest in a business venture, you’ll expect some type of return on your investment, right? It’s not uncommon (though, if we’re honest a little unusual), for investors to see returns in a matter of months on ‘traditional’ investments. However, equity investment crowdfunding generally takes longer for investors to get a return.
There are several reasons for this. Business plans can change, scalability can prove difficult in a competitive market or during challenging economic times. This can result in capital erosion and a distinct lack of wealth creation.
Moreover, unforeseen costs attached to an investment can weigh down a business. Then there’s disruptions and a lack of business agility. There are lots of variables – and crowdfunding often isn’t at the apex of commitments for businesses.
The Security of a Crowdfunding Platform or Portal
Our digital ecosystem is great for businesses. But it’s not without its drawbacks. For instance, over the last few years, online hackers are becoming more and more sophisticated – and determined – to get access to corporate data. We’ve seen business accounts hacked and credit card details stolen. And that’s just the tip of the iceberg.
Crowdfunding platforms and portals face a similar threat. Some lesser-known platforms are particularly vulnerable to cyber-attacks. Before choosing a platform for your investment crowdfunding, make sure that you research the platform thoroughly to make sure that they – and consequently you – are protected.
A Greater Risk of Failure
We can’t talk about the risks of equity crowdfunding without mentioning failure. No investor wants to consider the chance of losing their investment, but shrewd investors do – after all, do you think that Warren Buffet just got lucky?! No. He weighed the risk and rewards of each investment carefully.
A business that has been capitalised through equity FCA crowdfunding arguably runs a greater risk of failure. Why? It doesn’t have the financial might of being backed by a venture capital or investment firm.
To get the backing of a venture capitalist or investment firm, you need to have a plan, the right infrastructure, and advice from experienced decision-makers. Remember, even the most promising of ventures can fail and without knowledgeable and experienced heads driving the business, it can be like feeling your way around in the dark.
Now that we’ve got the risks out of the way, it’s onto the exciting stuff! There are significant rewards that businesses can reap when choosing FCA crowdfunding.
Huge Chance of Rewards
Have you ever heard the story of Facebook’s 2 billion acquisition of the Oculus Rift in 2014? It’s, perhaps, the most significant success story of crowdfunding. Why? The VR headset initially raised $2.4 million worth of donations on Kickstarter to start the business.
There is one caveat to the story, however. As the firm was started on the back of Kickstarter donations, those who gave their money to help bring the Oculus Rift to market did not receive any kickback.
Now, if the business had raised its initial capital through equity crowdfunding, the Facebook buyout who have resulted in an estimated return of up to 200 times that of the initial investment.
So, anyone who invested $250 could have received a $50,000 windfall. Not bad, right?
Opportunity to Act Like an Accredited Investor
Before FCA crowdfunding there was simply no way for the average person to invest in early-stage, speculative ventures that held the promise of a high risk-reward opportunity. Why? The minimum threshold for investments was too high.
Nowadays all that has changed. Equity crowdfunding gives anyone the opportunity to stake their claim in a product or innovation that they believe in. Better still, investors can donate as much or as little as they’d like.
The result of this? It has levelled the playing field and given the average person a place at the table, without being an ‘accredited investor’.
Risk vs. Reward
It’s clear that equity FCA crowdfunding has given everyone the opportunity to invest in something that they believe in and be rewarded for their faith.
Now, like anything else, no investment is immune from risk, but the chance to put your money where your mouth is, even support a friend or loved one in their ambitions however you can, has proven to be popular with consumers.
The only question to ask is: after the Oculus Rift, what do you think the next big opportunity is?
Interested in learning how you can utilise equity crowdfunding to bring a product to market? Get in touch with Northern Provident today on 02896 001616.