11 Jul 5 reasons why investors are getting sucked into Crowdfunding
Traditional investment firms were taken by surprise when the most innovative projects ideas started popping up everywhere. The seed money for these projects was raised with the help of Crowdfunding platforms which also had crept up on them when they weren’t looking. All of a sudden, a lot of entrepreneurs were opting to raise money online as opposed to walking into VC firms only to get turned down. This marked the beginning of the war between traditional investment and Crowdfunding. A lot of projects that were turned down by venture capitalists and angel investors were readily accepted by online backers and seed money was raised even ten times fold the initial asking. When they realized they were missing out on awesome opportunities and they couldn’t beat the Crowdfunding culture, investors jumped into the crowd fundraising bandwagon and soon there were Crowdfunding platforms that had been designed for accredited venture capitalists. With the finalization of the JOBS Act regulations, even non-accredited venture capitalists will be allowed to invest as little as $100 in projects in exchange for equity. The rise of the Crowdfunding venture capitalist is as a result of the realization that Crowdfunding is highly beneficial to them in the following ways:
- Narrowed focus: A lot of the sites are niche based. Therefore, the venture capitalists are able to focus on only ideas they understand and can give more valuable output as they are aware on the challenges and potential breakthroughs and successes the businesses will face.
- Risk mitigation: Traditional investment might demand large amounts of money input in one business. Crowdfunding offers the opportunity to put in small amounts of money spread out among numerous projects. The spreading of capital causes mitigation of risk as only small amounts of money are involved for each project.
- Lower investment: The beauty of Crowdfunding is that there is no minimum investment required by law. Traditional investment or private investment firms require high amounts of money to take part in investment opportunities, $ 50,000 or more. Crowdfunding allows one to invest small amounts of money in any given project. Some even asking for a minimum of a $1. This opens up chances for them to invest in more projects.
- Networking prospects: Crowdfunding breakdown geographical barriers. Investors can therefore meet up online and have conversations about subjects they have in common or investment openings whilst sitting in different parts of the globe.
- Popularity: There is a growing popularity of using Crowdfunding websites as they give one insight on raw and unedited market research. It gives the investor a very good picture on what ideas are popular and which ones are not. They also have begun to look at it as a great way to jump in on fads from the onset when the online buzz on an item begins. It is always beneficial to jump into a great project at the beginning before it goes global.
With the increase in Crowdfunding platforms geared towards venture capitalists, there has been the carving out of these sites into functional stratification. Some platforms are equity based whilst others are loan based. Two major examples of Crowdfunding websites for investors are:
- WeFunder.com: it allows only for accredited investors but they are gearing up to allow non accredited investors to participate once the JOBS Act regulations are finalized
- Microventures.com: It mainly focuses on pre-vetted early state startups.
Resources:
- Best, Jason, Sherwood Neiss, Steven Stralser, and Lee Fleming. 2013. “How Big Will the Debt and Equity Crowdfunding Investment Market Be? Comparisons, Assumptions, and Estimates.” Fung Technical Report No. 2013.01.15, College of Engineering, University of California, Berkeley.www.funginstitute.berkeley.edu/sites/default/files/Crowdfund_Investment_Paper.pdf
- Steinberg, Scott. 2012. “The Crowdfunding Bible.”
- Ries, Eric. 2011. The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses. New York: Crown Publishing.
