Short description
Crowdfunding is fractional investments in everything, and it is so - crowdfunding is a tool that allows people to make joint investments in everything there is a platform that allows you to invest in solar and wind farms, you can invest in whisky art, and even there is a platform that allows you clown a race horses. Basically, everyone will be able to find a niche to invest in crowdfunding.
Hey, everybody!
Today we will talk about crowdfunding and what investment opportunities it offers.
The majority of people when they hear the word “crowdfunding” it does not ring a bell for them at all or they think about Kickstarter and IndieGoGo, where people raise money for their ideas or needs in the form of donations or rewards meaning in return for investor contribution it gets reward which usually is a product that he aims to produce.
But, crowdfunding is way more than this, with crowdfunding, you can try yourself in the role of Banker, start-up investor, real estate tycoon, and more.
The essence of crowdfunding is that it allows people to invest millions of euros worth of assets starting with a few hundred euros which is achieved by collecting small amounts from many people.
Important to mention that crowdfunding is regulated in all major markets, meaning there are clear rules on how this industry work which is important when you invest your hard-earned money.
Sound cool right?! And it getting even more interesting.
Let’s start with the basics - how crowdfunding works.
In the process of crowdfunding, there are three participants: Investor - a person who has money and wants to invest, Fundraiser - a person or business that have an idea or project and need money to make it live, and platform - a company that owns a digital solution where these participants meet and which is responsible for all operational staff - legal documents, transaction management and checking Fundraiser and making sure all is inline with regulation.
The process goes like this
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Fundraiser approaching Platform and providing project details.
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Platform evaluating project and
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if it is in line with the regulation and meets platform criteria, the project is posted on a platform describing project details - like a)Project itself 2) how much money it needs and for what, 3) what he offers in return, etc.
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If the idea is good and enough people believed and the required amount of funds are raised, the campaign is closed successfully and money goes to the Fundraiser and he starts to operate.
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If people did not believe and the required amount is not collected, funds are returned to investors who made a commitment, and the fundraising campaign is closed.
The investment is made only if a few hundred people evaluated the project and find it good enough to invest their money.
And of course, investors for their contribution receive benefits and the form of this benefit is defined by crowdfunding type.
Let’s have a look at a few most popular crowdfunding types
We will start with Equity crowdfunding.
In Equity crowdfunding in exchange for investor contribution, he receives company shares.
Process logic is very similar to IPO, but the essence is very different.
Companies go for IPO when they are already big and they grow slowly and steadily, therefore when investing in IPO in the best case scenario you could expect dubbing your investment in a few years, but in the case of Equity crowdfunding you investing in the next Amazon while Bezos is still sitting in his garage and this is next-level returns.
With equity crowdfunding, you invest in a company when it has just made its first steps and it costs e.g. million, but if the product is good and the team can deliver, its value can reach tens of millions in a few years' time, multiplying your investment x10 or more times.
Of course, at this stage ratio of failure is also high, but those are the rules of the game high returns = high risk.
If you want to learn more about how exciting and rewording it might be to invest in start-ups. - there are shows, in the USA called Shark Tank and in UK Dragons Den, basically, there is a version of this show in any country even in Afghanistan, I am not kidding - that is how cool this show is.
The idea of the show is - young entrepreneurs pitch their business ideas to big business guys and when investing via equity crowdfunding basically you gain a sit among those big guys.
Watch a few episodes to understand how cool it is and how to evaluate start-up projects and of course, google what returns they making - you will be surprised.
The next crowdfunding type that we going to review is so-called crowdlending.
It is not a secret Banks make a lot of money and crowdlending allows you to get a share of it.
You know how banks make money! The Funds that you keep in accounts or deposits, Banks lend to people and businesses, and then they pay interest for loan usage which is basically bank income.
Crowdlending allows you to cut off the bank as a middleman and provide a loan by yourself in such cases you get full interest which might be around 10% per annum, but it also means you are taking full risk, so you should choose the project wisely.
And it is not only about making money with crowdlending you decide to which business your money is lent and here is why it is important.
Getting funding for small-medium businesses from a bank is a huge challenge since for banks is better to issue a 100MEUR loan to one company than 1 MEUR loan to 100 companies, therefore your favorite family pizzeria might be soon replaced with some fast food chain since it does not be having access to capital to grow, but crowdlending can change it.
So if you think banks are not doing a good job, become a bank! Crowdlending gives you that possibility.
Now we know how equity crowdfunding and crowdlending work so it is time to jump to Real estate crowdfunding which is a bit different version of both of them.
If it is your not first-day investing, most likely at some point you considered real estate as an option.
I mean it is everywhere - narrative-like - real estate best investment, never loses its value, and so on, and 70% of it is true, real estate is truly a great investment.
But there is a problem, only a few of us have hundreds of thousands of EUR to buy an investment property.
As how you might guess crowdfunding offers a solution also here.
There are two main types of real estate crowdfunding - you with the crowd can buy the property or you can give a loan to a real estate developer.
Let me unpack it and let’s start with the “Loan” option.
It basically works in the same way as crowdlending - crowd gives a loan to a company, which builds/ renovates property, then sells it or rents it out and repays your loan plus interest.
The difference is that such a loan is secured with property, so if the business fails this property is sold and funds are used for loan repayment, which makes it a relatively safe investment, but of course, it does not guarantee 100% that you receive the full amount back.
The second option is when you and the crowd together buy the property. And there are also two options that are possible - buy-to-sell or buy-to-let.
In the case of buy-to-sell - the property is bought then developed and then sold and money is split proportionally, so if the sales price is bigger than the investments, congratulation you earned some money.
Next is Buy-to let this is an option where the property is bought/built or renovated and then it is rented out, in such case you receive part of the rent proportionally to your investment and if the property value grows your investment value also increases.
If we are comparing all mentioned scenarios' returns wise then I would say that in the case of lending, you might expect annual rates slightly below 10% mainly depending on location, so in old Europe, it will be 7-9% in eastern Europe rates can go 10+.
In the case of buy to let or buy to sell - you might expect to earn something between 12- 15% + on your investments.
Given that each investment is backed by the property it is a great risk-reward ratio.
Let’s sum up
We just reviewed a few crowdfunding types.
But as the video name says, Crowdfunding is fractional investments in everything, and it is so - crowdfunding is a tool that allows people to make joint investments in everything there is a platform that allows you to invest in solar and wind farms, you can invest in whisky art, and even there is a platform that allows you clown a race horses.
Basically, everyone will be able to find a niche to invest in crowdfunding.
And if you still have doubts is it a good idea to invest in crowdfunding? Think about that. Most of the successful entrepreneurs at some point start investing in startups, banks provide loans and make profits for thousands of years and they keep doing it, real estate is what everyone wants to have since private property was invented.
Yes, it is a great idea to invest in crowdfunding.
If you want to learn more about crowdfunding and how to invest go to crowdinform.com where we have posted more videos and articles.
It is for now!
Have a good day and we wish you successful investing.
