Crowdfunding: Worth the reward?

Companies/startups usually raise initial (seed) money from private/angel investors. From there on, companies raise more money from venture capitalists/private equity firms through investment rounds (Series A to C/D/E and beyond) before they issue an IPO. Accredited investors are also allowed to participate in these rounds usually with restrictions on the minimum amount of investment (typically between USD50,000 to USD250,000). Today, there are several websites out there for accredited investors, some examples being sharespost.com and equityzen.com. This limits pre-IPO investments only to a certain strata of society - rich becoming richer with blockbuster exits post-IPO.

However, in 2015 and 2016, two regulations were legalized in the US with respect to raising money:

Regulation A+ (Reg A+)

Regulation Crowdfunding (Reg CF)

These two modes allow startups to raise money from non-accredited investors that need not be US-residents. That's correct, the general public, you and I. Moreover, the minimum investment can range anywhere between USD100 to USD10,000 with majority being lesser than USD1000. Exciting?

Some companies crowdfund independently through their own websites. It is typically hard to learn about these companies as they do not spend much on marketing. So it is less likely to come across such companies, unless you bump into some information or hear about them through word of mouth. At the same time, there are several crowdfunding platforms that specialize in the process of raising money and majority of startups are crowdfunding through these platforms. Some examples are: Startengine.com Wefunder.com Republic.co Seedinvest.com Seedrs.com and many more. Check them out. You might just find your next investment opportunity.

In addition to non-accredit investors being able to invest in these companies, some platforms like Startengine.com have also recently launched a secondary market to trade shares of companies that have been purchased through their platform. Although trading is currently limited to US residents only, I believe it is only a matter of time for it to be available to everyone.

Beyond equity crowdfunding, there are other crowdfunding platforms for other investment purposes, like: Masterworks.io : Crowdfunding for artwork/paintings Farmtogether.com : Crowdfunding for farms and their output Fundrise.com : Crowdfunding for real-estate and the list goes on.

Crowdfunding has become an investment method and an industry of its own which has boomed over the past 5 years and I think is just beginning. Check out some stats here.

The great thing about crowdfunding is obvious, it gives the crowd the opportunity to seed into startups. This gives a massive opportunity to potential exuberant profits -100x, 1000x or possibly even 10,000x, subject to how well the company grows and exits, be it either by being acquired or via IPO. However, as we all know, with great reward comes even greater risk. There is no guarantee for any startup making it big. Investors will need to do their research and due diligence before investing, else can wave goodbye to their investment. Moreover, historically, we have seen exits happen between 5 and 15 years from seed investment, depending on the rounds of funding a company goes through. If you are looking for a quick buck, this is not for you. Some examples on the number of investment rounds and years that companies have taken to go public can be found here.

So what are your thoughts? Do you think you would be crowdfunding in the near future if not immediately? Are you patient enough and willing to take the risk? Leave your comments below.

As always, happy investing! Ali Godrej Patel

Disclaimer: I have invested in startengine.com and have also invested in several companies listed on startengine.com and other mentioned websites.