Crowdfunding Business Startups – Support the new businesses

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The world of crowdfunding is being opened up over the last few years as the government is easing the restrictions to allow non-accredited investors. What was once available to only the rich few is now opened up to the masses. There are now crowdfunding investments and businesses that were not available until recently.

And though there are still certain contribution limits, now determined by each state, most of the states only limit the amount you can invest to a small percentage typically 5-15% of your income. However, most middle-classed investors have a hard enough time putting away 10% of their income for the limits to be too much of a concern.

Crowdfunding basics – Pooling Funds

The idea of a crowdfunding investment is a way to pool funds. People get together and bring in a portion of the funds, then with the funds, they split the profits and receive shares of the company or get a return on their money.

For example, if a company is currently worth $1,000,000 and they decide to sell half of the shares then he can gather 500 people to bring $1000 and each person would own $1000 worth of the $1,000,000 company. Now if they continue to grow the business and it gets bought out by someone for $10,000,000 then your $1000 share now became $10,000.

The idea mirrors traditional investments where you provide money in exchange for stock or provide money in exchange for a debt note or bond. The biggest difference is that the market is private and there are limited options to liquidate your share.

 

Become a Venture Capitalist – Invest at the beginning

By allowing you to invest at the beginning you can become a Venture Capitalist and share similarly in the large risk as well as large reward. There was a reason that accredited investors were the ones who were allowed to become Venture Capitalists, it’s because they could afford to lose. Any amount they invested was at high risk of the company just closing up shop and leaving them with nothing of value.

That may be one of the reasons why non-accredited investors are only limited to invest a small amount each year, for if they lose that money they should still be able to provide everyday essentials.

To help the process of finding legitimate investments, brokers are set up and go through underwriting and auditing of the companies to help provide the most accurate information. It’s not like you’re just going to be investing in someone’s grand idea. Most of these companies already have sales and are in the growth phase as well as they have been in business for a few years to show they are fairly stable.

 

Invest in Startups – Help Grow the Business

Though non-accredited investors are now allowed to invest there are still a number of places that require accredited investor status. The biggest name that focuses on crowdfunding business startups is Republic. Republic is formed by alumni of AngelList. AngelList is one of the world’s largest investment platforms to help accredited investors find investments for them. They are already in the habit of finding these venture capital companies ready to be grown.

Most companies are between $1,000,000 and $15,000,000 have working products, big-name investors, and a track record of increasing revenue. With the initial slow years of starting a new company behind them, they are in the accelerated growth phase where they can make the most impact.

Republic is unique in that is allows investors from all over the world to invest, not just US-based investors. Investment minimums are determined by the company but typically range between $50-$250 and come with no fees. Companies come looking to receive between $25,000 and $1,000,000 which they sell as potential shares of their stock. Some companies have specific time frames while others have not current time frame of when they’ll sell off or prepare to go public. But most of them provide incentives (similar to Kickstarter) for higher investment tiers.

Here’s how it works

There are typically 2 ways that an investor can make money during a triggering event-when your money converts into stock- either when the company take their stock public – an IPO – or being acquired by another company. If the company can allow a discount or a max valuation or both. If they offer a discount then when the company goes public they will take the amount and buy your shares at the discounted rate. If they offer a max valuation, your shares are pegged at that valuation and if the company continues to grow you are acquired then they are still valued at the max valuation. Or if the companies offer both then you get the better of the 2 options.

Let’s see how this works in action. If you invested $500 into company XYZ and they offered both a discount of 20% and a max valuation of $10,000,000. If they go public then with the discount you would earn $500 worth of stock 20% cheaper than face value (1/(1-.2) * $500) for a $625 total. With the max valuation once the company hits $10,000,000 then your $500 is pegged to that $10,000,000 value. If the company is acquired for $50,000,000 or hits an IPO at $50,000,000 then your $500 investment converts into $2500. And if the company offers both then you get the better of the two, $625 or $2500.

Now how long it takes to reach that valuation is anyone’s guess so consider these long-term investments and diversify accordingly so you can see your profits spread across a handful of companies and not waiting for that one to go public decades later.

Why invest

Do you wish you could have invested just a few hundred dollars in Microsoft, Apple, Google, Amazon, Facebook, while they were small? Think about this, if you had invested $1000 in Amazon at their IPO you would have over a $1 million and at the time of their IPO, Amazon was valued at almost $500 million. What if you could have invested when the valuation was $50 million or $5 million? You would have $10 or $100 million respectively based on that small $1000 investment.

We’re not saying to invest because the next company will become as big as Amazon more likely is that they’ll be bought out by these larger companies. The best part of Republic is that you are in control, you can evaluate the companies you like and which ones you choose to back and invest in and spread out your investments across a diversified basket of companies.

Crowdfunding investments are becoming more and more common, think of the possibilities. You could crowdfund a real estate project, or fund a business, or pool together an assortment of investments. We’re glad that these options are not becoming mainstream and available to the everyday investor to allow them to diversify their alternative investments and get in early on the success of startup companies.

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13 Comments

  1. I stopped being a fan of crowd funding after a company who claimed they were into it ran away with my money. Reading this has made me interested in it once more. I am just skeptical about finding the right company to go with and also to trust them because I don’t want the repeat of my past experience.

    • Right on.  Was it a product you crowdfunded in or an investment/company?  

      I think it’s starting to become a newer and more popular thing in the next few years, I’ve been told to look into reviewing StartEngine as well (review coming soon), looks like they have good offerings but do a little less due diligence so far.  

      There are a few companies that offer pooled funds to help diversify over multiple offerings, but their returns are less than stellar compared to typical index investing.  I think if someone finds a company they are interested it’d be good to put up a small amount as investment trials.  

      The real question is which of these companies is going to be around the longest and provide the best exits to investors.  After a few years, some companies will come out better than others and become the next big IPO, I’m glad this is the first step to allowing everyday investors into the world of venture capital.    

  2. I understand the importance of investing into a business. Out of all the options you mentioned, i took part in crowdfunding 4 years ago with a company which I won’t mention the name. I lost a huge amount of money which I haven’t fully recovered from. I knew investing in business is a risk both online and offline but I learnt from that experience. So I am being careful before I venture into another. But reading your reviews today, I may want to consider but with a trial because only risk takers are successful in life. I like the part that you asked if one had invested in  Apple, Amazon, Facebook etc in the past, when their values were still not big as it is currently, those that invested in them back then are now enjoying. Yes I agree with you. 

  3. Tons of value to be found on this post.This is a great and simple to follow guide on crowdfunding.You laid it all out clearly and showed series of examples that helped emphasize your various points. This article has changed my negative orientation on my views about crowdfunding.

    I will surely invest and wait for the results.

  4. This is an insightful article that motivates someone about investing for the future. Crowdfunding business is good but my fear is how some company liquidate unexpectedlly.Investing has been part of me from the onset. With this article information have read, How do I figure out a crowdfunding company to invest into?. 

    best regards

  5. The idea of crowd funding is of good intention but I for one have decided to verify any form of crowd funding company either real estate or online investments. Loosing only a paltry sum few years ago has taught me a little lesson. With my uncle as a stock broker I have learn the methods of identifying crow funding company that are at least of lesser risk. Also with this article , I think am now gathering confidence to try it once more.

    • Yes it’s interesting to see how many of these were started years ago but due to lack of regulation and oversight they could promise the world without doing due diligence.  Most now have to register, provide their balance sheet and if they are serious they’ll allow a 3rd party to audit their business and profit/loss/inventory records.  It’s starting to become a more stable investment.  

      I too had been part of a few venture capital businesses that went under because they changed directions completely and lost traction or failed due to embezzlement from the Executives.  

      I recommend becoming familiar with the management and what previous projects they’ve been involved with.  If they are a serial entrepreneur and have built and sold multiple companies that is a stronger buy than a guy working by himself and has never done this or knows how to build and sell a company.  

      I’d love to see an analysis done and scoring provided on which investments may be better than others.  Now that I think about it, we may provide that with a team of analyzers and take on every quarter the available investments and which ones are better than others.  Thanks for the comment.

  6. Of course I have heard of crowd funding before, but I never really knew how it worked in relation to businesses.

    Now I do know, thanks to your clear explanation. It does seem as though crowd funding could be a good idea for smaller investments, even though they do carry a risk. But of course, every investment carries risks.

    I would be interested to know if you have any personal experience in investing in crowd funding projects?

    Very many thanks for your interesting article.

    Chrissie 🙂

    • Yes. We currently are invested in certain projects that have funded and a few that are still open to new investors.  Look forward to upcoming posts which will analyze the current offerings and help teach how to vet some of the better ones out.  Hopefully, we’ll keep it ongoing and provide updates as new projects come on-line.  

  7. This is an informative and eye- opening article. Though Crowd funding sounds to be a good business but the disturbing issue here is how some fold up so unexpectedly. One just has to verify and investigate on which type of crowd funding you would like to engage yourself with. But in  this article I have found great guides with instances that has really changed my negative view about crowdfunding. Thanks for sharing this rich piece

    • Glad we could help.  Look forward to our upcoming posts as we dive into current offerings and help evaluate the ones with the best potential.

  8. Crowdfunding is certainly one of the best ways to fund a new business or idea. It is a win-win situation for both the business owner and the investor. I have tried raising funds from some of the popular crowdfunding platforms in the past but never really got to complete the process because of not having a complete hang of how the process works.

    It is interesting to know that I can benefit from a crowdfunding platform not by raising funds alone but also by becoming an investor. I would like to research more on Republic because I love that they allow investors from all parts of the world.

    I also love that I can start with a small investment of between $50-$250. I have lost countless amounts of money in so many Ponzi get rich quick scheme. If I had gotten this education much earlier I wouldn’t have made such unwise decisions. I have always wanted to invest in real estate and since Republic has that as one of its portfolio then I think it is the perfect business opportunity for me.

    I appreciate reading your article.

    • Yeah you need to get the concept of crowdfunding and most of these are not what we would perceive as ‘startups’ in someone’s garage.  They’ve past that stage and looking at finalizing their product and expanding.  There are some nice new listings, but you just need to invest what you can or start small and wait it out for them to finish growing and be acquired or go public and repeat the process.  It’s a long-term plan but those that work out will work out big time. 

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