You’ve decided that you want to diversify your investment portfolio by investing in some equity crowdfunding deals. That might be the easiest decision you’ll make when it comes to private capital investments.
It’s not enough to go to a few equity crowdfunding platforms, take a look at some of the deals, find the investment opportunities that provide the best income and put your money to work on autopilot.
Much like stocks, it pays to do your due diligence. It’s not enough to like the product or service behind the company looking to raise capital. You’ve got to understand how the business makes money, why it will continue to grow, and how much opportunity exists for its product or service.
In some ways, analyzing an equity crowdfunding deal isn’t much different than assessing a stock you might be interested in buying. The most significant difference you will find is that the financial information available to do your analysis isn’t nearly as thorough. I’m talking about financial statements, market projections, competitive analysis, etc.
That’s because many of the opportunities you’ll consider are relatively new businesses. They won’t have 10 years of income statements, balance sheets, and cash flow statements. And that’s okay.
However, if you want to compound your investments in equity crowdfunding, it’s important to remember that you do have options. You don’t have to jump at the first deal that you look at, no matter how exciting you consider their pitch deck.
The name of the game is to identify companies that have the management team, business model, and sustainable growth strategy to move from newbie to big business successfully.
That’s not nearly as easy as it sounds. Here are three things to look for.
Find a Reputable Equity Crowdfunding Platform
Before you can start investing in equity crowdfunding, you have to get deal flow. You do that by finding a reputable platform that’s been in business for several years (at least three) and provides a reasonable number of opportunities each month or year, whether on a deal-by-deal basis or through a diversified portfolio.
My InvestorPlace colleague, Luke Lango, recently discussed the five best real estate crowdfunding platforms. One of them, Fundrise, is perfect for the rookie real estate investor, because it allows you to invest as little as $500, charges an industry-low management fee of 1% of net asset value, and provides a diversified portfolio of Fundrise REITs that are selected for you. No muss, no fuss.
More importantly, Fundrise has a solid reputation in real estate investing. But don’t take my word for it. Go to their site and check out their management team. They’re building a talented bench.
Decide What Type of Investments to Make
Not only is it important to consider what type of industries you want to bet on with your private capital investments, but it’s also vital to consider what types of securities you wish to own.
Although equity crowdfunding is one of the major focuses here at InvestorPlace, there are other ways to invest. Indianapolis-based Localstake offers four distinct options: Revenue Share Loans, Preferred Equity, Convertible Debt, and Traditional Loans.
Some investors might be more comfortable investing in debt investments that generate a specified rate of return for the loan over the unknown potential of growth equity. It depends on what you’re most comfortable with.
I recommend you have a look at their website. Localstake’s focus, as the name suggests, is on local businesses.
Diversify your bets: There’s that word “diversification” again. Whether you’re investing in stocks or private investments, not putting all your eggs in one basket is a good thing. That’s especially true if you’ve never invested in private capital before.
Perhaps that’s why San Francisco-based equity crowdfunding site, WeFunder, says on the Getting Started page of its website to start slow, expect to lose it all, only invest in what you understand, do your research, look at the types of investors involved in a deal, and diversify.
In the past few years, as I’ve gotten more familiar with equity crowdfunding, I’ve become more interested in companies that were raising small amounts from large numbers of non-accredited investors. However, that doesn’t mean an accredited investor shouldn’t invest in an equity crowdfunding deal that’s attracted a large amount of investment capital from non-accredited investors.
As you become more familiar with the equity crowdfunding platforms that are out there, you’ll find the one that’s right for you. If you become comfortable with more than one, feel free to diversify your bets across different platforms and different opportunities.
Developing a system will take time. Just remember, you’ve got options.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.