5 Factors to Consider Before You Invest in Crowdfunding

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Investment opportunities for the individual have grown substantially over the past several decades. While real estate investing and buying precious metals, such as gold and silver, are popular, there are a number of newer investment opportunities as well, and one that is growing in popularity is crowdfunding. This type of investment opportunity, where a large group of people fund a project, product, or business, has the potential to yield impressive returns. If you want to include crowdfunding as a part of your investment portfolio, there are five factors you may want to consider before you begin.

The Transparency of the Investment Opportunity

Before you invest in a crowdfunding opportunity, you may want to take the time to investigate how transparent its documentation is. The project’s initiators should be able to provide you and other investors with a variety of available information such as financial statements, a detailed business model, and full disclosure pertaining to the risks of investing in a particular venture. If the project or business manager cannot provide you with such details, you may want to think twice about investing your money with him or her.

The Project Manager’s Experience

Crowdfunding a business venture requires the project manager to abide by certain rules that were recently set by The U.S. Securities and Exchange Commission. In February of this year, the SEC approved new guidelines for those who wish to register their projects as a funding portal. As a result, new forms must be filled out before registration can be approved.

Before you invest in a crowdfunding opportunity, you should consider how much experience the project managers have with creating crowdfunding investment opportunities and whether they are aware of the new rules and guidelines. Failure to understand these changes might cause a delay in the registration process and the loss of your investment.

Feedback from Other Investors

Not all crowdfunding investment platforms are created equal, so gathering feedback from other investors who have already put their money into a company’s investment opportunity can go a long way in helping you decide whether it is worth the risk. Take the time to ask former investors a variety of questions that may reveal what kind of experience you might have:

  • Were all transactions performed in a professional manner?
  • Were all questions about investments answered completely and promptly?
  • Were the project managers available and accessible?

On average, the more positive feedback a crowdfunding entity has, the more likely you are to have a positive experience, even if returns cannot be guaranteed.

The Amount of Money Required to Invest

Investing in crowdfunding offers you some flexibility when it comes to how much you invest and with whom. Some portals require only a few investors who are willing to put up anywhere from $5,000-$10,000, and others include a wide variety of investors who can invest any amount they choose (although this type of crowdfunding is typically used for reward-based fundraising, where investors receive prizes and personalized gifts when they put up money.)

If you choose a crowdfunding investment opportunity that requires you to invest a set amount in excess of $10,000, you may want to contact an investment bank before doing so. Consider working with a bank that has a history of stability yet continuously offers new services to its clients. For example, Warren Stephens of Stephens Inc has held the position of CEO at the company for thirty years while working to create new services that help its clients feel more confident about the investments they make. Receiving professional advice about crowdfunding investments may ultimately improve your chances of receiving a profitable return.

Overall Risk

While any investment opportunity comes with a certain amount of risk, carefully considering how much you stand to lose and whether the future of a company, product, or project is viable can prevent investor’s remorse later on. No one can see the future, but there are several factors you can consider when it comes to calculating the amount of risk involved with an individual investment. For example, you might factor in any past success the project manager has had, to what extent the service or product might fulfill a current demand, and how market changes might affect your investment.

If you want to reduce the amount of risk involved, think big for the future but start small when it comes to crowdfund investing. Do not filter all your funds into one project, especially if this is your first time investing in such a venture. Invest in smaller projects at the outset, and if you experience success, consider larger investments as time goes on. As a newcomer, you might also profit from investing in projects that feature a high transparency so you know exactly what you are risking. This may allow you to weather setbacks, if they should occur, without bankrupting you.

Crowdfund investing can be an exciting and profitable way to grow your investment portfolio if you take the time to carefully consider what is involved. Involving yourself in projects step by step, being conservative at the outset, and seeking advice from investment professionals before you decide to invest may help you choose projects with more confidence and increase your chances of receiving larger returns.


Disclosure:  This post was sponsored by Barrons.com