Step 71: Investing through Crowdfunding

Step 71 of the 100 steps mission to financial independence: Investing through Crowdfunding
Step 71: Investing through Crowdfunding

Once you’ve got a taste for investing, you’ll likely want to investigate other options that allow you to invest some money, either to diversify your portfolio, support a small start-up, increase returns or simply for fun to see what happens.

A hugely popular new way of investing (or indeed raising money if you are on the other side of it) is crowdfunding. Crowdfunding is a way for companies, entrepreneurs and start-ups to get together a sum of money to set up a business, launch a new product or expand and open a new project or department.

Types of crowdfunding

There are different types of crowdfunding:

  • In P2P (peer-to-peer) lending, capital is raised by getting many different loans of small amounts together. Instead of getting one loan of $30.000 from the bank, entrepreneur(s) might get as many as 200 different people lending them amounts between $50 and $1000 for example. Like with a bank loan, the entrepreneurs are then paying the loans back over time with interest to their investors.
  • Pre-sales in which people can pre-order even before a product has been produced. Those initial investors will get a first release or even a small present several times a year (for example a new exclusive wine or another small new release).
  • Selling shares and having people invest in your company in return for a small ownership in your company.

Why raise capital through crowdfunding

If you’re looking to grow your money, then the first option of P2P lending is the most common type of crowdfunding to pursue. But why would start-ups want to raise money through PsP lending? There are several advantages for raising capital through crowdfunding over getting a loan at the bank:

  • It can be very difficult to get a loan from a bank these days. Banks are more cautious when it comes to providing a loan and it is often easier to get the money together through crowdfunding.
  • Interest fees charged by banks are high and can be kept lower through crowdfunding.
  • A start-up will automatically create a network of people who don’t just support them financially but will also support them in making the start-up a success in many different ways: it builds a small platform to launch, promote and make the enterprise a success.
  • There is no limit on the amount that can be lent whereas banks often have a max they are willing to lend.
  • To secure a bank loan, you often need a good amount of start-up capital already or backing up by investors. Start ups and product launches will find this difficult which is why crowdfunding might work better for them.

Advantages of investing through crowdfunding:

As an investor you can invest your money in the stock market, but investing through crowdfunding can be interesting for the following reasons:

  • Returns can be higher than returns on the stock market.
  • You can decide how much to invest. With crowdfunding there often isn’t a minimum compulsory contribution of $100 per month. Many sites let you invest from $100 or even $50 onwards, and you could just invest once that year if you don’t have any more to invest or don’t want to.
  • You can be very specific in what you want to invest in: you choose your own projects. This means you can support start-ups that you identify with: whether they are new gadgets, a humanitarian initiative or a new restaurant – you only invest in those projects that you want.
  • It can be more fun and rewarding knowing your money is invested in a new project and that you help create or support a new product or start-up. It’s not the same as buying stocks or shares from big companies that already have a revenue of many billions of dollars per year.

Disadvantages of investing through crowdfunding:

Of course there are also possible risks or disadvantages of investing through crowdfunding:

  • You need to inform yourself very well and investigate more: is there a decent business plan, what is the project like, when do they expect to make a profit etc.
  • There is a higher risk of companies not surviving. Start ups have a bigger chance of failure and if they go bust before paying back the loans, the company will be gone and so will your money be. So you run a bigger risk of not getting (some of) your money back. This of course is offset by the bigger return on investment though.
  • Projects can fill up quickly, sometimes in just a day, so it can be difficult to actually invest in a project that you’re looking for.

Step 71 – Investing through Crowdfunding – in detail:

  • There are different websites and platforms on which projects can be found. Start investigating some of these platforms in your country and read their specifics. Like with investing accounts, make sure you check the details and small print and of course things like:
    • minimum amount to invest
    • costs
    • success rates and how many projects default on payments
    • clients’ feedback: how content are people with the services, success rates etc.
  • Check out some of the projects. Often the websites will divide projects based on risk, return, length of loan etc. Read some of the projects, and see which types of projects you might consider sponsoring.
  • Determine whether you want to start investing through crowdfunding. You probably don’t want to put all of your money in this, but you could of course allocate a small portion of your investment money to crowdfunding or even just try one and see how it goes.
  • If you decide to sponsor one or a few projects, make sure to keep track of the project by having an excel sheet or a page in your notebook indicating how much you’ve invested and per project how much you have received, whether any projects are defaulting (i.e. not able to pay back) and the interest you are receiving.

Investing through crowdfunding can have many advantages and can be fun to do, but make sure to familiarize yourself well with the possible risks however as you’ve got a bigger chance of losing some of your money.

Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.

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