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Crowdfunding - my view

posted Jun 26, 2014, 11:34 PM by Siamak Ebarhimi
There has been considerable comment on crowd funding. Enterprises advertise their capital needs and the public are invited to subscribe amounts of money to finance them.

In my opinion this is one of the riskiest homes for an investor's capital.crowdfunding marketing

The chance of success of most of these enterprises is, at best, minimal. Even the ones that don't fail are unlikely to create much reward for the investor, unless the business can be sold on or the original proprietors can buy them out. Invariably the stake you buy is too small to compensate for the risk - many enterprises only make 5% of equity available in return for substantially funding the operation.crowdfunding advertising

Businesses usually only use crowdfunding when all other avenues have been exhausted. Many companies seeking crowdfunding are start-ups - the least likely ventures to succeed. If you are going to invest in a company via a crowdfunding arrangement you need to ask the following questions:indiegogo marketing

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

  • Does the venture actually exist and is it sensible?
  • Do the people running it have any expertise?
  • How much salary will the managers take?
  • Have they put their own money up, and would they be hurt if the venture failed?
  • Is there proper reporting and accounting?
  • Is there an independent director to look after the interests of the investors?
  • Who vetted the company (are they capable of it)?kickstarter marketing

My conclusion is that investors should only indulge in crowdfunding if they are certain they can afford to lose the entire amount invested, as the risks are extreme.kickstarter project

What are the alternatives?

In my view there are better options for investors who want to gain exposure to smaller companies.

Sophisticated investors could consider Venture Capital Trusts (VCTs). VCT managers look at thousands of businesses but select only a few, after extensive research. These are highly qualified teams who vet the business completely and will drive a far harder bargain than crowdfunding arrangements. They can also draft in expertise if a company starts to flounder.CrowdFunding advertizing

Like crowdfunding arrangements, VCTs invest in some of the most dynamic, entrepreneurial, high growth companies, and therefore both are high risk investments - some of the companies will inevitably fail. To encourage and support investment in such companies, the government currently offers generous tax reliefs to VCT investors who are prepared to accept the risks.CrowdFunding marketing

However, the speculative nature of VCTs means they are unlikely to be suitable for investors who may need access to their money in the short term or for whom loss of the investment may cause financial hardship.Kickstarter Marketing

Investors seeking a more mainstream option could consider UK Smaller Companies funds. They offer the benefits of diversification and professional management but with a simpler structure than Venture Capital Trusts. As with all stock market investments, their value will fall as well as rise.

Selecting the winners from the UK's large pool of smaller companies is no easy task and in our view few fund managers make the grade. However, a handful have demonstrated superb stock picking ability over the course of their careers, and it is these managers whose funds feature on our Wealth 150 list of favourite funds in each sector.Indiegogo Marketing

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By David Khorram