17 March 2017
How to Incorporate Crowdfunding into Your Investment Plan
Wealthy Investors Look to Cash in On the Latest Trend in Venture Capital
Companies like Indiegogo and Kickstarter have changed the way that businesses and startups get their products from the testing stage through to large-scale production. Initially used as a simple way to reach out to friends and family, now billions of dollars are being exchanged on these crowdfunding sites. Huge success stories like Uber and Oculus Drift have only increased the number of investors looking to strike gold through these new platforms. As crowdsourcing lowers the cost of entry for capital investments, high-net-worth investors are wondering where they fit into this expanding landscape.
Why Get Involved in Crowdsourcing
One of the primary reasons crowdsourcing has become so popular is that it has a low point of entry, allowing people without substantial wealth to invest in new businesses. But there are other benefits of crowdsourcing that are available to investors in any income bracket. Not only do many startups offer a high return on investment, but crowdsourcing also provides an opportunity to be part of social movements and invest in products at the earliest stages of development.
How Much to Invest in Crowdsourced Projects
According to financial planner Allan Moskowitz, wealthy investors should cap this type of high-risk investment at 10 percent of their portfolio. Investors should also spread out their investments. Depending on the amount of money you’re putting into each project, you can likely make contributions to 20-30 companies and track their progress.
Finding the Ideal Crowdsourcing Platform
The first step in a successful crowdfunding investment strategy is using a reliable platform. Make sure it asks for third-party valuations, financial audits, and offer liability insurance if applicable. This is where being a high-net-worth investor can give you an upper hand. Instead of having to go through low-entry sites, some companies offer extensive vetting and only allow high-income individuals to get involved.
One example is Junction which lets users with a net worth of over $1 million or an annual salary of more than $200,000 invest in movie productions. Another example is Onevest which offers a “trusted venture community” where projects are highly vetted before being added to the platform. It typically only accepts 2-3 percent of the applications it receives. To get involved, investors must meet the $1 million net worth requirement and have an annual salary of $200,000 or a joint annual salary of $300,000.
What to Look for When Investing
As any investor knows, the bigger the return, the greater the risk. Ultimately most startups, even those with a healthy dose of crowdsourcing, are likely to go out of business. For this reason, you shouldn’t invest blindly on the next project that piques your interest. Finding the right platform is only the first step in ensuring success in your crowdfunding endeavors:
- Focus on the People: Don't invest in a company just because it's promoting a cool project. Look at the founders' background. Do they have experience in the industry they're in? Check out the staff to make sure it has a good balance of engineering, business, and marketing experts.
- Be Industry Specific: Find out which industries have a higher survival and return rate. This usually means looking for an industry that is actively growing. You also want to see if professional venture investors from that industry are getting involved in the company.
- Look Through the Numbers: Make sure the company offers thorough financial plans. Look them over to see if the projections and valuations make sense. By knowing the numbers, you can hold the company accountable if progress is not going as planned moving forward.
- Understand Your Investment: Know what type of stock you own and who will represent you moving forward. If valuation changes or returns become available, who is doing the evaluations? How will your shares be affected? Get answers to all these questions before investing.
Whether you want to support a product that you believe in or are looking for a unique way to diversify your investment portfolio, there are a lot of reasons to take part in crowdfunding. By following the tips outlined above, you can make sure any money you put into these projects is used wisely.