While you once needed a lot of capital to gain equity in private companies, new laws have made possible for small investors to invest using limited capital through equity crowdfunding. In this article, we’re going to give you a small introduction to equity crowdfunding and a few tips to help you get started.
What is Equity Crowdfunding?
Simply put, equity crowdfunding is similar to regular crowdfunding with the exception that you get an actual share of the company you’re investing in. It allows everyday investors to invest in early-stage companies that aren’t listed on the stock exchange.
There was a time when only accredited investors were allowed to invest through equity crowdfunding. To be an accredited investor, you needed to either have at least a $1,000,000 net worth or earn $200,000 annually. But since the Jobs Act was passed, equity crowdfunding has become much more accessible. As an investor, you stand to gain if the company profits, but you also share the risk if the company fails. Equity crowdfunding is usually done online through equity crowdfunding sites.
Now that you know a little bit more about how equity crowdfunding works, here some tips that will help you find winners and minimize your risk.
While the whole concept may seem simple, you should make sure that you educate yourself before you unleash your inner shark tank. Before you put your chips down, you should learn as much as you can about the companies you’re investing in and the specific online platform you’re going to invest through.
A good online platform should vet listings correctly, make sure that the companies are properly incorporating and weed out bad actors. Some sites will even perform due diligence for you. Try to look at crowdfunding sites that accept shares as a form a payment for listings; this shows that their interests and yours are aligned.
Know how to Pick Winners
This one is a little bit trickier. One way that you can spot a winner is if it has already received backing from a reputable venture capital firm. While it’s not a guarantee that the business will be profitable, this can greatly boost your confidence in the investment.
A quick tip you can use to identify legitimate investment opportunities is by looking at the founder(s) and check if they went to college or not. And try to pick companies with at least two founders or more since they usually grow quicker.
You could also talk with a private equity investment analyst if you aren’t sure about a particular company. Analysts like Chris Pivik, for instance, specialize in the healthcare sector, so they could help you tell if a certain healthcare-related startup would be worth investing in.
Diversify your Assets
Like with any investments, diversifying will increase your chances of success. It’s always better to invest a small amount of capital in various companies instead of putting all your money on black. Casting a wider net will increase your chances of finding a successful venture and will also allow you to minimize your risk.
Now that you know a bit more about equity crowdfunding, you can start looking at investment opportunities and benefit from the great potential gains this option has to offer. Whatever you do, make sure that you do your homework before you invest in any company and don’t be afraid to seek help from a professional if needed.