Is Crowdfunding a Good Investment Idea?
Fundraising is an integral business activity. There is a novel way to raise funds called crowdfunding. Let us move further and know if it is a wise option or simply a poor investment choice as an investor.
What Is Crowdfunding?
Let us break this term for a simple explanation. It is visible from the formation itself that we can divide crowdfunding into two different syllables:
Crowd
Funding
What is Crowdfunding?
- Crowdfunding refers to raising money from the general members of society and anonymous investors.
- Most business organizations, especially startups and new entrepreneurs, prefer the technique of crowdfunding to fund their business projects and ventures.
- They usually prefer the social media route, such as Facebook, Instagram, Twitter, etc. to reach out to potential public investors.
- Nowadays, many have developed dedicated crowdfunding websites that help connect entrepreneurs and such investors.
Using crowdfunding, business organizations can tap money from an extensive network of investors instead of restricting themselves to the circle of relatives, friends, colleagues, and even venture capitalists.
We also know this type of investment as equity crowdfunding, where people invest directly in businesses.
How does Crowdfunding Work?
Crowdfunding allows businesses to raise funds from anyone with money. Project your business idea on crowdfunding platforms or social media sites to attract a wide variety of small or marginal investors, usually looking to invest their money in budding business concepts.
Let us understand this concept through a practical example.
Alex and Gina started a low-fat burger chain. Their business model is to make economical burgers in-house and sell them through their online website.
They raised funds using the crowdfunding platform and have set a target of initial funding of $150,000.
They registered themselves on a popular crowdfunding platform and appropriately pitched their modus operandi and a business model.
The registered investors in that platform browsed the business project Alex has and got interested in the same.
Starting from as little as $10, several investors lined up to invest in Alex and Gina’s launched burger chain. Although the initial target was only $150,000, their business could scoop up $242,000 through the crowdfunding platform.
What are the Advantages of Crowdfunding for investors?
Owning a startup is complex. Not everybody has this, barring a few. Crowdfunding allows small investors to invest in some of the business concepts which have the potential to become unicorns in the future.
- As a crowdfunding investor, you enjoy the best business returns you might not even get after investing in blue-chip companies or large-cap stocks.
- It offers you an alternate investment opportunity other than the traditional investment avenues, such as Mutual Funds, GICs (Guaranteed Investment Certificates), ETFs (Exchange Traded Funds), Stocks, etc.
- It allows you to own an equity stake in a budding startup. As the company grows, your investment has the chance of being multiplied.
What are the Disadvantages of crowdfunding?
It is not all rosy–Crowdfunding is a risky investment option, as your returns and the safety of your principal amount entirely depend upon the startup’s success.
- Get your firm registered, or somebody can steal the business idea from the crowdfunding platform. It increases the chances of business failure.
- Starting a new business with all the existing competition is always risky. Certain one-off situations, like the Covid-19 pandemic, further dent the chances of success.
- It is also a possibility that crowdfunding investors earn stellar business returns in the initial years and invest more money into it. Usually, there are chances of suffering heavy losses during the middle years.
What Are Popular Canadian Crowdfunding Platforms?
In 2022, the transactional value of all the crowdfunding platforms was USD 23.11 million. As per an estimate based on the current growth rate, this transactional value is going to become USD 25.04 million by 2026.
The data mentioned above shows crowdfunding in Canada is a success. Investors, and startups, prefer this route. Below is a list of some popular crowdfunding platforms operating in Canada:
| Name of the Crowdfunding Platform | Area(s) of Operation |
| Alberta Boost R | Alberta |
| FrontFundr | British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia |
| SeedUps | British Columbia, Alberta, Ontario, Quebec |
| Cuban Hat | Quebec |
| Haricot | Quebec |
| Donorhut | Manitoba |
Is Crowdfunding a Good Investment?
Well, it depends. Ask yourself, – How comfortable are you investing in equity? Or how much have you invested in equity mutual funds?
Crowdfunding does not differ from buying the equity of a company. The only difference here is that you are getting shares in a business that is unlisted, not profitable, and is yet to begin its operations sometimes.
It makes crowdfunding a risky investment option, even trickier than buying speculative stocks. There is no guarantee of success, and we must well understand that not every business becomes a unicorn. The statistic states that venture capitalists back only 0.004% of organizations that become unicorns.
However, if you are an investor in a startup that has achieved this distinction, there is no looking back, and you will not be required to do anything else.
Hence, if you are a risk lover and prefer investing in startups, you can certainly try your luck.
