Crowdfunded Investing Is On The Rise, But Its Success Rate Should Make You Think Twice

What is crowdfunded investing?

There are generally three types of crowdfunded investing you can take part in. Each one involves investors contributing capital to help fund a company or one of its projects, but they differ in how investors are rewarded:

• Reward-based crowdfunding is common among companies looking to launch a new product. Investing this way may get you early access to the product or a special limited edition version of it.
• Debt-based crowdfunding pays investors interest on the funding they provide.
• Equity-based crowdfunding exchanges investor capital for equity in the company.

To get involved with crowdfunded investing, you’ll need to find a platform.

You can always turn to the biggest names in the space and search for an investment that speaks to you. Kickstarter has successfully funded more than 185,000 projects. IndieGoGo generally has more than 1,200 projects open to funding at any given time. GoFundMe has raised more than US$9 billion to date.

There are a number of less publicized platforms you can also explore. The Canada Media Fund has put together a handy list of almost a dozen crowdfunding groups that operate in Canada.

U.K.-based market research firm TechNavio projects the global crowdfunding market to grow from about US$120 billion in 2020 to $196 billion by 2025. It’s safe to assume there will be a steady stream of crowdfunding firms jumping into the fray in the coming years.

“This is already starting to have an economic impact on how companies find additional financing and how retail investors can participate in high-growth investing,” says Len Zapalowski of Vancouver-based investment bank Strategic Exits.

“It's like the frog in the boiling water. Things are happening all around us that we're not necessarily aware of yet.”

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Pros and (some major) cons of crowdfunded investing

Crowdfunded investing offers some real perks to the average investor.

Most start-ups get their funding from institutional investors, which themselves are funded by the ultra-wealthy. Crowdfunded investments, because they are not limited to accredited investors, can be a way for everyday investors to put their capital behind a company or product they believe in.

Crowdfunding platforms can make certain assets more affordable, too. Crowdfunded real estate investment platforms like addy and Nexus Crowd, for example, have already attracted millions of dollars in capital from would-be real estate investors who can’t afford properties of their own.

But here’s the rub: Crowdfunding is neither tightly regulated nor a very successful means to get a company funded. In 2019, the [U.S. Securities and Exchange Council}(https://www.sec.gov/files/regulation-crowdfunding-2019_0.pdf) found that 85 per cent of crowdfunding initiatives fail.

That’s one of the main reasons why Hai Tran, co-founder and chief marketing officer of art investment platform Masterworks, which sells shares in famous works of art, says the company rejected the crowdfunding model.

“My view is that very few crowdfunded products ever live up to their full potential, so I don’t think it’s a strategic position for us,” Tran says, adding that crowdfunding investors, not unlike venture capitalists, “have little protection from losing 100 per cent of their capital potentially.”

A lot can go wrong with a crowdfunding campaign. The marketing can fail to find an audience. The managers could be out of their depth or working in an industry they don’t understand. And if the product being made isn’t properly patented, it could be copied — and even improved upon — before getting to market.

It’s also fair to wonder, as Zapalowski puts it, “Why does a good company need 1,000 retail investors that each put in $5,000 when they can get $250,000 or $500,000 out of angel investors?”

As crowdfunded investing becomes more common, it’s sure to intrigue some people. But keep in mind that just because an investment is accessible or affordable, it doesn’t automatically qualify as a smart play. Carefully research any company, its management team and the quality of the investment being offered before handing over any of your capital.

Don’t just follow the crowd.