Crowdfunding exploded in 2014, with $16B in funds raised across hundreds of platforms. But according to Richard Swart,one of the top thought leaders in crowdfunding and alternative finance, 2014 was merely the tip of a massive crowdfunding iceberg that’s forecasted to swell to $300B in funds raised by 2020.
While crowdfunding picks up momentum in general, equity crowdfunding, which allows private companies to raise funds online in exchange for equity, is the fastest growing category in particular. Until recently, only public companies with extensive operating histories and millions of dollars in revenue could raise capital from the public. Private investing was an opaque, exclusive club that included only institutional investors or ultra-high net-worth individuals.
Today, equity crowdfunding is redefining the possibilities of investing and fundraising worldwide, as it opens up private markets to an ocean of new investors for the first time. In light of this trend, hundreds of equity crowdfunding platforms are popping up left, right and center, vying for a piece of the $300B pie. But how does an investor determine which platform is best?
Like many things in life, the devil is in the details. Platforms may appear similar at first glance - using sleek graphic design, up-to-date UX and an inviting user-friendly interface. Yet, true differentiation must consider deal flow quality and variety, due diligence, quality of the entrepreneurs, transparency, co-investing, and a number of other key dimensions. To assist you in selecting the optimal platform, Part 1 discusses the several of these dimensions below.
Crowdfunding platforms supply you with deal flow that you would otherwise be unable to access. The deal flow on each platform varies in type, variety, sectors and stages of the company, as well as different parameters that are important to different types of investors. Some people prefer only to invest in companies where they have expertise or can add value. Overall, deal flow can be divided into two aspects – variety and quality. In terms of variety, some platforms feature a high number of deals, while some offer only a select few. This leads you to consider the quality of these deals – arguably the most important factor to consider. Below are some guidelines to help you assess the quality of the deal flow.
Before investing in a startup, it’s wise to conduct due diligence: analyzing the market, product, team, traction, and so on. Most platforms leave it up to the investor to carry out the due diligence. However, this can be extremely difficult and time-consuming to carry out: imagine investing $5k in a startup that represents a tiny fraction of your entire portfolio, and then making the effort to conduct due diligence from the other side of the world without direct access to the company. For investors who are new to early stage investing, it can be hugely valuable to use a platform that assists in the analysis and due diligence process.
- Entrepreneurs - Product and market are constantly changing in early stage startups, so one of the most important factors in an investment decision is a solid team. Yet, being able to meet entrepreneurs face-to-face and form a bond is almost impossible in equity crowdfunding. Luckily, platforms exist that specifically facilitate virtual communication between entrepreneurs and investors. Look for platforms that encourage you to ‘meet’ entrepreneurs via webinars, interviews, forums and other methods- it will significantly add to your startup investing experience.
- Transparency – This is paramount with crowdfunding. A truly transparent platform will guide you through its screening and investment process, make all necessary disclosures, put everything on the table and help you make insightful, well thought-out decisions. Expect any questions you have to be answered promptly and openly.
- Co-investors – There are a small number of crowdfunding platforms that offer new investors the chance to collaborate alongside traditional investors. This clearly offers some very significant advantages, as it provides new investors with an excellent starting point to gain mastery in the field and benefit from those in the know.
Stay tuned for Part 2, where I discuss the importance of potential returns, deal terms, incentive structure, investor rights, tax considerations, user experience, investor education, and management of the platform.
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