Equity crowdfunding is an evolving investment method that allows all types of investors to invest in private companies. It helps businesses to access a larger pool of investors, build brand communities, and create a sense of ownership and community.
Raising capital through equity crowdfunding also provides an opportunity to invest in early-stage businesses that may not have been accessible through traditional channels, allowing for smaller individual investments.
It contrasts with the more traditional way of raising capital. This has tended to be the domain of institutional investors, which make decisions on behalf of the likes of mutual funds, pension or insurance companies, or accredited investors, a definition normally determined by their own net worth.
Equity crowdfunding opens the door to everyone – with investment opportunities requiring the need only to meet the relatively low minimum buy-in requirements. Thus non-accredited, or as they are also known, retail investors can now take a stake in private companies.
By providing a small stake in emerging companies, it creates a loyal community with a vested interest in the firm’s growth and success. This, in turn, increases customer loyalty and advocacy. In addition, investors who feel a personal connection to the brand are more likely to share the company’s products or services with their own networks, helping to drive organic growth and brand awareness.
Utilising this investor community can also provide a platform for businesses to showcase their products and solutions to an audience of future customers and investors to accelerate their growth within their chosen market.. By soliciting feedback and input from their community of investors, businesses can refine their products or services and ensure they meet their target audience’s needs.
It also allows smaller investors to start developing a portfolio which was previously closed to them. For private company owners, it allows them to secure funding without the need of handing over a significant slice of their company in exchange, thus allowing them to continue to steer in the direction they planned.
In contrast, venture capital investors may not enjoy the same levels of engagement as its model is focused on financial returns rather than building community advocacy, although obviously, it can provide a ‘one-stop shop’ for significant funding arrangements.
Equity crowdfunding is shown to be on the rise as a method of investment. According to a recent report by research firm Pitchbook, the total amount of capital raised through equity crowdfunding in the US was $1.3 billion in 2021, up from $827 million in 2020. This represents a year-over-year increase of nearly 60%.
Meanwhile, funding raised through venture capital has remained relatively flat. According to the same Pitchbook report, the total venture capital investment in the US in 2021 was $158 billion, only a slight increase from the $156 billion invested in 2020. This data suggests that while venture capital has plateaued, equity crowdfunding is burgeoning.
While still in its relative infancy, equity crowdfunding is becoming an increasingly popular investment method, particularly for early-stage businesses that may not have access to traditional funding sources. As more investors become familiar with the equity crowdfunding model and the benefits it can offer, it is likely that we will continue to see growth in this area.
Investors should recognize and accept the risks associated with investing.
Certain investments may require you to keep your holding for periods of many years with limited or no ability to resell unless there is a strongly regulated secondary market.
You may also have limited access to periodic reporting, see your holdings decrease and increase in value, or even lose your entire investment.
Investors should decide for themselves whether to make any investment, basing this on their own independent evaluation after consulting with financial, tax and investment advisors.