Investing in Startups for beginners via Equity Crowdfunding
With Equity crowdfunding, you can invest in European startups like Revolut, Nutmeg, Paysend, and more with a few clicks and start with as little as 100 EUR and potentially multiply your investment 50 times in a few years time.
But big potential returns come with big risks!
Therefore let’s discuss things you need to know before investing in Equity Crowdfunding.
9 out of 10 startups fail.
Investment in startups could bring you great returns, some investments on the Equity crowdfunding platform have provided investors with 5000 percent returns, which are remarkable results, but the risk is also high.
On Equity crowdfunding you invest money in young companies in different development stages, there might be companies that have not yet fully developed products or have not made their first sales, and so on. Thus there is no guarantee that the product can be developed, that customers will like the product and will buy it, that there is a big enough market for the product, and that the team can manage everything.
Therefore statistically 9 of 10 startups fail, but if they succeed their value could go from a million to a billion in a few years time!
Know the product you are investing in.
When investing in Equity crowdfunding you should aim for companies that solve the problems of millions of people and thus can become a hundred million euro company.
To understand does a company’s product can solve people's problems and whether people will be ready to pay for it you need to very well know the issue they trying to solve!
Therefore it is better to invest in a product that solves your problem and you would buy it personally. Many ideas might sound good but in practice, people are not ready to pay for solutions, for example, the problem is not that big, there are different but more convenient solutions, the product does not really solve the problem or does not bring that much value, and so on.
Explore the team of the company
How many venture capital investors say it is better to invest in a bad product with a good team than in a good product with a bad team?
As mentioned earlier company is in an early stage and it will face many problems and challenges thus team needs to have the competencies and experience to overcome them.
Therefore before investing explore team experience to see if they have the required competencies. Do they have a person who knows how to sell, a person who knows how to build products, and a person who will manage everything and so on?
Before investing you have to be sure that they can not only solve all the problems but build a hundred-million-dollar company
Understand company growth potential
When investing in startups you should aim to win big, potential risks are high thus rewards also should be big.
To understand a company's growth potential you need to understand the market that the company can reach thus you need to learn what is TAM, SAM, and SOM.
TAM is an acronym for the total addressable market - meaning it is the amount of money that a company could make if it sells to all potential buyers. For example, the company sells T-shirts “I am 30 years old”, the total amount of people in the world is 8,000,000,000, let’s say 2% are 30 years old, so there 160,000,000 people who would buy it, and Tshirt cost 10 EUR, thus the total addressable market is 1.6 billion euro.
SAM is a serviceable available market that is a fraction of TAM that the company can actually service. If we continue our example, let’s say the company can deliver its product only to the European Union due to x and y reasons, the European population is 1/16 of the total population thus SAM is 1.6 billion divided by 16 which equals 100,000,000 EUR.
SOM is a serviceable obtainable market that is a fraction of SAM and is a market share that the company could obtain given a number of factors. Let’s say only each second 30 old people buy such T-shirts thus SOM is decreasing by 50% and now is 50 million let’s say another company owns 50% of the market therefore SOM is decreasing even more and becomes 25 million.
When you know this you can assume company value. e.g. Total annual sales of the company will be 25 million if the target is reached, let’s say the EBITDA (earnings before interest, taxes, depreciation, and amortization) margin is 50% (those numbers are usually provided in the financial forecast so you will not have to calculate them) and let’s say potential company buyer will be ready to pay 10 EBITDAs for it thus potential company value is 25 million multiplied by 50% and multiplied by 10 thus we get potential company value 175 000 000 euro. If the pre-money valuation was 10 million your investment will grow 17.5 times!
Should be mentioned that many factors could impact a company's value and there are many ways how it could be calculated, we used a simple classical approach when company value is defined by a potential buyer's desired returns on investment (ROI), in our case buyer aim for 10% p.a ROI.
Equity crowdfunding platforms to invest
In Europe operates around 100 great Equity crowdfunding platforms, a full list of platforms you may find on Crowdinform.com with platform details and reviews. Let’s review some of them.
The biggest Equity crowdfunding platforms are in the UK Seedrs and Crowdcube. Via Seedrs more than 2000 companies like Revolut, Paysend, TransferGo, and many more have raised more than 2.7 billion GBP and should be mentioned TOP investments on Seeders ensured their investors x50 returns.Crowdcube has also reached astonishing results more than 1.2 billion raised from 1.2 million investors.
Wefunder is a USA-based Equity crowdfunding platform that acquired a European Crowdfunding Service Provider license and opened operations in the Netherlands to provide funding and investment opportunities for European startups and investors.
Companisto is the largest German Equity Crowdfunidng platform with 230 million EUR raised for 328 start-ups.
Mamacrowd is the largest Italian Equity crowdfunding platform licensed under European Crowdfunding Service Provider regulation with more than 200,000 investors and 280 million Euro raised for startups.
NPEX is the stock exchange where you as an investor can buy and/or trade shares and bonds of Dutch SMEs
SeedBlink is an Equity crowdfunding platform from Romania that has raised more than 140 million EUR and has a great platform and wide offering.
Those are just a few great Equity crowdfunding platforms as mentioned you can find more on crowdinfrom.
Follow us on LinkedIn or Facebook and learn more about investing with crowdfunding on Crowdinform.com
We wish you a good day and successful investing!
CrowdInform