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By Michael Sterling
The rules of investing are changing. As the concept of crowdfunding evolves, many investors are beginning to second question its proficiency. Some strongly oppose it, while others think it will change the market as we know it.
For a country that is “by the people, for the people,” crowdfunding shows to be a true American invention. But how will it reroute your investing strategy?
Trading Dollars For Shares
Since the JOBS Act was signed into law in 2012, it has offered opportunities for new entrepreneurs and innovative products to go mainstream, something that might not have been possible otherwise. Businesses can skip loan application, grant funding processes, and all the other paperwork that comes with a start-up. This means they depend on you, the investor.
You have a bigger chance at becoming a loud voice within the company. From the day the business starts, you are given a backdoor entry into the company from the get-go. But that’s not to say there isn’t risk, in fact, there’s probably more risk than investing any other way. According to statistics, over half of all companies never last longer than 5 years. Investigating is more crucial than ever.
The idea of owning a piece of a company by donating a few hundred dollars is a cool idea, but the best way to enter a crowdfunding investment is to start small. After a few months, the growth of the business can be an incentive to invest further. As time goes on, and your investment becomes more heavy, you may own a good chunk of the company.
*Tip: If you’re new to crowdfunding, start off by focusing on local businesses near your home. Most small companies who crowdfund through websites target their local audience. Most of the time, they will offer hefty incentives for local investors. In many cases, they are willing to give partial ownership. You can then use this money as a springboard for further investments.
Angel Investors Will End On Top
If you are an experienced angel investor or are a part of an angel group, you will have a major leadership role within crowdfunding, but it will be strictly strategic. Websites like Crowdfunder and AngelList are beginning to allow entrepreneurs to connect with such accredited investors who will help them towards a positive direction and get them to close deals with other investors.
According to Chance Barnett of Forbes, in the near future, many of the best crowdfunding rounds of investments will be “led” by angel investors or angel groups. This will yield strategic benefits for angels who decide to enter the crowdfunding game, including easier syndication deals.
Keep in mind that most beginners – investors and entrepreneurs alike – will always seek advice from experienced investors. This can be a very smart tactic to have if you play your cards right. By paying attention to where the angels are flocking, you have a better chance at following the yellow brick road to a sizable return.
The Power Of The People
In the last few weeks, Facebook has shown interest in allowing their users to raise money for companies by using their personal accounts. If this happens, it will lead to a massive outpouring of cash centering around all types of markets. Not only can this be a great way for you to truly see what the people want, but it’s a great tool to spot which company has less risk to invest in.
The consumers are always going to lift a company from the grave. With $5 or $10 “donation” from everyday people who believe in the product, the company will stay afloat, making your investment worth something, which gives you more potential at snagging shares.
Back to the Roots (BTTR) is a great example of this idea. They had an idea to create a self-cleaning fish tank that grew beans, basil, thyme, baby greens, oregano, mint, parsley, spinach, and more in one’s home, but they couldn’t afford to manufacture it. Within 10 days of crowdfunding, they had 16,000 Facebook fans that helped them reach their goal of $100,000.
Currently BTTR’s products are sold in every Whole Foods Store in America, and their company is worth millions. In the near future, crowdfunding through social media is going to be the biggest and most effective tool you can have as in investor. Start paying attention now.