The investing in startups has in the past been limited to the venture capitalist and other accredited investors. Nonetheless, with the help of the crowdfunding, people can also invest in the high-risk high-return asset class of start-ups.
This has provided for people the ability to invest in various instruments which has created new avenues for growth and development. In this article, the author will explain how the crowdfunding platforms work in the USA and how to invest in the startup of your choice.
Understanding crowdfunding platforms
The use of crowdfunding sites has brought a new meaning to how business owners especially startups are able to obtain capital. These platforms serve as link between the startup companies in search of capital and the investors in search of good projects to invest in.
The concept is simple: A start-up company pitches for a campaign on a crowdfunding site through describing their company, its financial position and its future strategy.
Thus, investors can then visit these campaigns and decide on which of them they want to support. There are several categories of crowdfunding and as for the startup investments, equity-based crowdfunding is most common.
While reward-based crowdfunding is where backers get a product or service from the startup and donation-based crowdfunding where people donate money with no expectation of getting anything in return, equity crowdfunding involves the investment of money where the investors get shares in the startup company.
The investment process
In order to invest in startups through the use of crowdfunding platforms, the following steps are followed. First of all, an investor needs to open an account on the selected exchange. This often requires the provision of some details about the person and going through an identification procedure.
Once the account has been opened, the investor is then in a position to search for the startup campaigns that are available. Every campaign usually has a pitch video, a well developed business proposal, the expected financial performance and information about the people behind the idea.
These are documents that should help investors to determine the opportunities and the threats that the startup present. The same way, many platforms provide the investors with an opportunity to post questions in forums or comment sections and communicate with the startup’s founders.
This is followed by the investor choosing an amount of money to put into the selected startup. Crowdfunding sites also have certain minimums that investors need to meet, the minimum can be as low as $100 or it can be a few thousand dollars. The investment process is quite simple and mainly consist of an online transaction.
Benefits and risks
Crowdfunding platforms are one of the most effective ways of investing in startups due to the following reasons. The first of the advantages is availability. In the current world, crowdfunding platforms have paved a way for non-accredited persons to be part of the startup funding.
This has opened up the avenue for more people to invest in other securities and possibly get high yields. Also, crowdfunding enable investors to invest in new ideas and new businesses that are yet to come into the market.
Startups can be a way for people to help new technologies, products, and services develop. It can be very fulfilling and quite lucrative at the same time since one feels that they are an active participant in the change.
Although, there are numerous advantages that come with investing in start-up companies, there are equal and opposite risks. Starting a business is a high-stake affair and many businesses do not survive the first year let alone the first three.
This in turn implies that investors can lose their entire investment. Unlike the publicly traded companies, the startups are illiquid in nature and selling shares and getting back the invested capital becomes a difficult task.
Legal and regulatory considerations
American legal basis for the regulation of crowdfunding has changed during the last ten years. The JOBS Act signed into law in 2012 paved way for equity crowdfunding. Section 3 of the JOBS Act also known as Regulation Crowdfunding permits startups to raise up to $5 million from the accredited as well as non-accredited individuals through the registered platform of the SEC.
Regulation Crowdfunding has certain rules for the investors’ protection. The companies must give disclosures such as financial statements, business plans, and risks. There are also limitations on the amount of capital that non-accredited investors can invest in a given year depending on their income and net worth.
Strategies for successful investing
This paper has outlined the factors that are described to make successful investments in startups via crowdfunding platforms. Here are some strategies to consider:Here are some strategies to consider:
Diversification
Like any other investment, diversification is always recommended in the management of risks. It is advisable that the investors should not put all their money in one basket but distribute their money in many startups. This strategy enhances the probability of achieving positive results from some of the investments.
Thorough research
Potential investors need to take time and research all the startups that they wish to invest in. This entails assessing the business proposition, market opportunities, competition, and the entrepreneurs’ background and previous accomplishments. It is crucial to comprehend the threats and opportunities in the startup to make smart investment decisions.
Long-term perspective
The investments made in a startup company take several years to yield fruits. Investors should have a long-term view and be ready to wait for their returns for a long time without necessarily getting them. It is therefore important that one exercises a lot of patience in this business since the returns are not immediate but usually in the long run.
Conclusion
Equity crowdfunding in the USA is a promising concept that allows anyone to become involved in the development of new business projects as an investor. Thus, knowing the mechanism, advantages, and disadvantages, investors can get high profits.
But, one should be very cautious while investing in startup companies, do proper background check and never put all eggs in one basket. Here are some tips that may help you in approaching the world of startups via crowdfunding and getting the best out of it.