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Crowdfunding has become so popular, that the total crowdfunded investment volume worldwide rose to 34 billion dollars in 2015. As of today, Crowdestate has helped to raise over 50.4 mil euro. Due to the increasing demand for projects, new crowdfunding platforms are being established regularly and an investor might have difficulties in finding the most suitable platforms. In this blog, we have written a short overview of the differences between crowdfunding platforms and what an investor should consider before making an investment.
The types of crowdfunding platforms
In general, two types of platforms exist – for charity and for investment purposes. But a more precise way would be to differentiate them by their objective:
- Many platforms have projects that offer a „reward“ for your investment, i.e a product in development that you can receive before it hits the market. The most famous platform of this group is Kickstarter;
- Equity crowdfunding is the collective effort of individuals to support efforts initiated by other people or organizations through the provision of finance in the form of equity. Investors shall take part in the development of the company and its potential future profits. However, the investment term and yield can be rather unpredictable. Crowdcube and Seedrs are platforms that facilitate equity crowdfunding.
- Debt-based crowdfunding (also known as “peer to peer”, “P2P”, “marketplace lending”, or “crowdlending”) enable investors to invest into short- or long-term loans to private persons or companies. In this case, it is important to emphasize that an investor should find out what/who it is they are investing in and assess the potential risk level of the investment. Person to person loans are offered by Zopa or Lending club while companies can find funding through Investly or Crowdestate crowdfunding platforms.
- People with good intentions have a chance to donate their money via a charity platform. There are many of these platforms and one can donate to help cover the costs of health care, legal fees or education. But there are many fun examples as well, like the project where a person asked for donations to make potato salad.
Check out Lending Times, which is an info portal that publishes crowdfunding news and monthly crowdfunding volumes.
What to consider when selecting a crowdfunding platform?
With so many different platforms and the increasing digitalization of the world, anyone from anywhere can invest via a crowdfunding platform. So the question becomes: „how to select the ones where you actually dare to make an investment without being afraid to lose the funds?“ Below you will find some suggestions on what to consider and check before making your first investment on any platform:
- A thorough background check – find out how long the platform has been active, what kind of information they ask from you and what kind of data they publish about their project. Work through the informative materials listed with the investment opportunity and check who the people are behind this platform. The ratio between total projects vs exited projects can also help with determining the credibility of the platform.
- What type of background checks the crowdfunding platforms perform and how are they liable in case something goes wrong?
- Get acquainted with the market – how are other platforms on the same market performing?
- Assess the balance between the risks and rewards. Projects with a high-risk level should offer a higher interest rate while secured projects will probably offer a lower interest rate.
- Assess the financial model – does the business plan and financial calculations seem realistic?
- Who is the sponsor of the project – who are you investing your money into, what is their background and experiences?
- Is this platform regulated by law, and if yes, then how? In some countries, crowdfunding is strictly regulated, while in others there are no regulations yet. In Estonia, some crowdfunding services are regulated by the law (loans to private persons) while a large portion of the platforms operate in an unregulated environment. Leading platforms in Estonia joined the crowdfunding Code of Conduct in 2016, which is a kind of a trust marker assuring investors that certain conditions have been met to establish the trustworthiness of these platforms.
Moderation and diversification are the keywords words any investor should have in their vocabulary
It’s understandable, that once a project offers a very high yield, the euro bills flying in front of your eyes might cloud your judgment. This is why it is extremely important to never invest based on just your emotions. To create a high-quality investment portfolio, diversify your portfolio by selecting projects with different focuses, yields, and investment terms. And always analyze each project thoroughly, before investing.
You can join Crowdestate HERE and start your journey in crowdfunding.