Imagine if Amazon had raised funds by doing an equity crowdfunding campaign shortly after they launched back in 1998 when their valuation was about €1m. Anyone who had invested just €1 in Amazon back then would have an investment today worth about €871,000 today.
The average investment amount in an equity crowdfunding campaign is €1,500, so an average investment in Amazon back in 1998 would be worth about €1.3 billion today!
Unfortunately, the average investor, like you or I, couldn’t invest €1,500 in Amazon back in 1998 because crowdfunding platforms, like Spark Crowdfunding, did not exist. Hence, it was only the Venture Capitalists who earned these massive returns on investments in startups like Amazon.
Does that sound fair to you? Is that a level playing field when it comes to investing in startups?
Democratising Finance
Equity crowdfunding platforms provide small and medium sized investors with access to exciting early stage companies, like Amazon. Essentially, these platforms make it as easy for a small investor with €100 to invest in a startup as it is for a venture capitalist with €1m to invest. This is what is known as ‘democratising’ finance and it partly explains why equity crowdfunding has become so popular over the last 6 years.
Where Dragons’ Den enables just 5 investors to invest in a startup, equity crowdfunding opens it up to the wider investor community and allows thousands of investors to invest in an early stage business. Equity crowdfunding is simply an online version of Dragons’ Den.
The Importance of the Crowd
Assessing investment opportunities can be a challenge at the best of times. How realistic is the company valuation, how good is the management team and how big is the demand for the product are just some of the questions an investor will ask. It is very difficult for any one individual to take all of these factors into account and make an informed decision. This is where the crowd can help.
In his excellent book ‘The Wisdom of Crowds’, James Surowiecki provides may examples showing that “a diverse collection of independently deciding individuals is likely to make certain types of decisions and predictions better than individuals or even experts”. Equity crowdfunding platforms provide the ideal vehicle for this, in two ways.
Firstly, investors can engage directly with company promoters and ask questions about the history or plans of the company, with the answers to these questions on show for all members of the platform. Second, and more importantly, investors can see exactly how much money other investors have pledged to invest in the crowdfunding campaign and use this information as a ‘signalling’ mechanism. If no-one is investing in a campaign it is a good sign that you should ask more questions before making your own investment decision.
Building a Portfolio of Small Investments
For every €1.3 billion investment opportunity like Amazon, discussed above, there are thousands of startups that go bust or return very little to the investors. That’s the nature of startup investing. Even Venture Capital firms get it wrong more times than they get it right. But the reason many Venture Capitalists succeed is because they spread their investments across a wide portfolio of investments. In general, for every 10 startup investments they make, six of them will be a write-off, another two will return the original investment and the last two will achieve the high multiples which will generate the required returns for the portfolio. This is precisely the type of investment approach that small investors should adopt and equity crowdfunding platforms, like Spark Crowdfunding, now make this possible.
Generous tax breaks from the EIIS Scheme for Irish taxpayers also reduce the risk by giving investors a 40% tax rebate on investments in Irish startups. Please contact us for more information about this.
Test the Water First
As with all types on investment, it is advisable to fully understand the risks before taking any action. We would recommend that investors fully familiarise themselves with all of the features of equity crowdfunding and also investing in early stage business, and even then, test the water by starting with a very small amount of money.
With the minimum investment amount of just €100 per campaign on the Spark Crowdfunding platform, a small investor can now build a portfolio of startup investments with as little as €1,000, and there are no hidden costs or fees for investors.
You don’t want to miss out on the next Amazon!!
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