Crowdfunded investing is on the rise, but its success rate should make you think twice

Crowdfunding has come a long way in the past decade. It’s no longer just a way to help pay an unlucky stranger’s medical bills or get your hands on the first version of a cool new gadget.

Crowdfunding is changing the way companies grow—and how investors can get in on the action.

Not all businesses have the resources to file an IPO, nor do they all possess the size, scalability or savvy required to attract deep-pocketed angel investors. With alternatives like crowdfunding and special purpose acquisition companies (SPACs) providing new paths to the marketplace, an IPO is no longer the only way for a business to get capitalized.

The year 2021 broke records for the number of IPOs in the U.S., with over 1,000 new listings and $286 billion raised. Notably, 59% of those listings were SPACs.

Crowdfunding promises a greater number of those opportunities, but whether it improves their quality is up for debate.

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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. IndieGoGo generally has more than 1,200 projects open to funding at any given time. GoFundMe has raised more than $9 billion to date.

There are a number of less publicized platforms you can also explore. The U.S. had more than 1,600 active crowdfunding and P2P platforms as of 2019, according to an estimate from JustCoded, a crowdfunding software and consulting firm.

TechNavio projects the global crowdfunding market to grow from about $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 RealtyMogul and Equity Multiple, for example, have already attracted millions of dollars in capital from would-be real estate investors.

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 found that 85% of crowdfunding initiatives fail.

Take Kickstarter, for example. The platform has seen over $6 billion pledged to the projects offered on its site. Yet only 39% of the total campaigns on the platform have been successfully funded. More than 330,000 Kickstarter projects have failed to meet their funding goals.

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. The FTC recommends that consumers 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.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

— With files from Samantha Emann

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.