Equity crowdfunding is growing in popularity for startup founders to raise capital, and amateur investors are taking notice. But equity crowdfunding can be intimidating to those who aren’t familiar with its quirks. In this week’s edition of the Arora Blog, we’re giving you a comprehensive look at the 5 W’s so you can make better-informed investing decisions.
Equity Crowdfunding has taken the finance world by storm in recent years, giving startups with successful campaigns the capital they need to launch into hyperdrive. And with the SEC’s recent decision to allow startups to raise up to $5,000,000 per year (up from $1.7M), launching a campaign has never been more attractive.
But with new campaigns going live each day, amateur investors are flocking to ECF platforms with cash on hand to make investments—often with little to no guidance to the risks and potential pitfalls inherent to this industry.
To those beginners, we say: never fear. Arora Project is here with insights.
First Things First: What Is Equity Crowdfunding?
Historically, startup founders had very specific paths to gain funding from traditional methods, such as VCs or angels. Unfortunately, the path to traditional funding is often difficult to navigate, especially those outside of major metropolitan areas like Los Angeles, New York, and Boston.
At a basic level, crowdfunding is a not-so-new way to fundraise that allows many people (i.e. “the crowd”) to donate to or invest in ideas they believe in. Equity crowdfunding takes this concept a step further by allowing retail investors to invest small amounts of money in exchange for equity in a company—an option previously unavailable to anyone outside of the elite.
Why Should You Invest?
…Other than the possibility of massive returns, of course.
Until equity crowdfunding was legalized, only a select few were able to invest their money in startups. These select few knew the way to make real money via startup investing was to invest before the startup took off—and exit with full pockets after an acquisition or IPO launch.
We wouldn’t be doing our jobs if we didn’t make a caveat here: it’s statistically improbable that a retail investor would ever see returns from a startup investment in the 7 digits. After all, you have to invest big to exit big, and nonaccredited investors can only invest up to $2,200 per year—well below the amount necessary to see a million-dollar+ return.
But just because investing via equity crowdfunding is unlikely to make you a millionaire, that doesn’t mean there aren’t other compelling reasons to invest:
- You believe in the startup’s mission, and want to give them an opportunity to execute their vision.
- You see the opportunity for return on investment (ROI), even if that return likely won’t be massive.
- You’re just starting an investing portfolio, and equity crowdfunding is providing an affordable way to get your feet wet.
- Your portfolio could use a little diversification.
- Investing in smaller private companies provides you with greater satisfaction than purchasing stocks.
Who is Equity Crowdfunding Good For?
At the risk of sounding biased, we think the answer to this question is everyone. Literally!
With platforms allowing investments as low as $10, equity crowdfunding is great for those who want to get started investing but perhaps don’t have large amounts of liquid cash to execute an aggressive investment strategy.
It’s good for the planet; American impact investing ventures (ventures that benefit to society as a whole) have been found to outperform the market time and again.
It has also taken the most definitive steps to democratize the finance industry, bringing us ever closer to true financial democracy. This elevates people of color, ethnic and racial minorities, and women, to give a level playing field for all.
When Should You Start Investing?
There’s no easy way to answer this question, because every person’s financial situation is different. But if you think now is the time to start investing, ask yourself some questions:
- How much can you realistically afford to lose?
Equity crowdfunding poses a significant risk due to the volatility of the business environment. No one can predict the future, and it’s possible that even the most promising startups will fold.
- Can you afford to go years without seeing a return on your investment?
Unlike public stock exchanges, there is no secondary market for equity crowdfunding. That means once you invest and purchase your shares, there is no way to sell them. Until the company is acquired or goes public, you likely won’t see any return—though there are some startups that are able to eventually pay investor dividends.
- Is there a startup that fits your personal ethos?
The best way to find satisfaction in your investment is to invest your money in a startup you believe in. Are you someone who loves groundbreaking medical technologies? There are multiple startups for that. Reversing climate change and saving the planet? Equity crowdfunding has got you covered.
Knowing your money is being put to good use while you wait patiently for a potential return can help you feel as though you’ve invested wisely.
Where You Can Invest:
There are several equity crowdfunding platforms available where amateur investors can browse campaigns and make their investment decisions, each with its own style, specialty, and approach.
- Republic: A champion for diversity and inclusion, Republic has emerged a leader in the industry’s fight toward equality.
- Wefunder: Instrumental in the passing of the JOBS Act, which made it legal for nonaccredited investors to invest in startups.
- StartEngine: Entrepreneur- and startup-centric; StartEngine believes in helping entrepreneurs achieve their dreams.
- NetCapital: Specializing in funding innovative startups.
- Fundable: Hosts the largest amount of equity crowdfunding campaigns.
- SeedInvest: Hosted the first unicorn exit for retail investors.
Still Need a Little Guidance?
At Arora Republic, we’re passionate about spreading the word about our industry and bringing new investors into the fold.
Are you a founder with a passion project you’d like to bring in front of the crowd? Let’s have a conversation.