Bitpanda

Equity crowdfunding

Equity crowdfunding is a type of investment crowdfunding, just like peer-to-peer lending and business loans. With equity crowdfunding, you invest in (future) company shares. This type of investment has its risks, but can be hugely profitable for investors.

How does equity crowdfunding work?

equity crowdfundingWith equity crowdfunding you are not investing in a loan, but in company shares. Unlike crowdfunding a business or consumer loan, there is no debt to be paid back. Instead, the returns are based on future company results.

If the company you invest in makes a profit, you will get your part just like all the other shareholders. Your company share is proportional to the investment that you make at the start. Investing in equity crowdfunding makes you a shareholder and therefore partial owner of the company.

With equity crowdfunding many people can invest in a company, and so there are a lot of smaller co-owners. This means startups do not overly depend on a handful of big investors. Usually, it is also less expensive than entering the stock market.

Equity crowdfunding in Europe

Crowdfunding in general is on the rise in Europe: between 2015 and 2018 the European alternative finance market tripled. In 2020 the European crowdfunding market amounted to a total volume of 19 million euros. The most popular forms of crowdfunding are peer-to-peer lending, real estate crowdfunding and business loans. Equity crowdfunding is a small but growing part of the European market, with Finland, France and Sweden as its frontrunners.

Equity crowdfunding is a small but growing part of the European market.

According to the Cambridge Center for Alternative Finance, companies that most often use equity crowdfunding are service providers, software developers, bio and medical tech companies and entrepreneurs in renewable energy.

Benefits of equity crowdfunding

investing in equity crowdfunding

An important upside of equity crowdfunding for the lending party, is that there is no debt on the company’s balance sheet. The investment is part of their own equity. Because there is no debt, the company you invest in has a higher solvency.

And since their equity increases, this type of crowdfunding can be used as collateral for a loan at the bank. In this way, equity crowdfunding can be leveraged to raise more capital for starting and growing companies.

Because equity crowdfunding does not create debt, the company has more funds to invest in growth scenarios. For this reason equity crowdfunding is typically used for companies that are expected to grow fast, such as promising tech startups.

Equity crowdfunding is mainly used for companies that are expected to grow fast.

This benefits you as an investor because your share can be worth a lot in the future. First of all,  this is good news for your payout. And besides that, your shares can be sold at a much higher price than the amount you bought them for. This is an important source of profit for investors in equity crowdfunding.

Risks of equity crowdfunding

risks and rewards of dividendsWhen you invest in crowdfunding for a business loan, you can be fairly certain what you will get in return. There are detailed estimates of your monthly payback and interest rate. With equity crowdfunding, there is more uncertainty. It can be difficult to predict the company’s profits.

For this reason, first time investors will usually not choose this type of crowdfunding. Equity crowdfunding is instead much more popular with experienced investors with quite a lot to spend, such as private equity investors or venture capitalists.

Although much is uncertain, there are a few things you can control beforehand. You can make arrangements on when and how shares will be bought back and at what price, for example. Additionally, you can agree upon a minimal payout for your stocks. By doing this, you reduce the risks. Your investment becomes more like a hybrid between a business loan and equity crowdfunding, if you prefer.

Another way to minimize risk, is to first invest in a convertible business loan. Since future profits can be very difficult to predict beforehand, the loan can be converted into shares at a later time. When the company turns out to be profitable, for example, or once you can make a more detailed estimate of your stock payout.

Returns

Your main source of returns from equity crowdfunding will usually not be dividends. This is because startups often don’t make a profit for a while. And so, it is rare that a starting company will hand out profit shares. Instead, your return on investment will mainly come from capital gains. In other words, from the increased value of your share.

In equity crowdfunding, your main source of return won’t be dividends.

Keep in mind that it will take some time before the value of your share increases. Although equity crowdfunding is usually meant for startups that are expected to grow fast, the investment horizon is at least three to five years. And sometimes it can take longer. This is in part because you want to sell the shares. Therefore you will have to keep them until the company is sold or enters the stock exchange. Alternatively, you can resell them on the crowdfunding platform, but this is not always possible or even profitable.

Crowdfunding platforms

There are a lot of popular crowdfunding platforms. Below are some of the biggest platforms that offer equity crowdfunding in Europe.

Crowdcube

Crowdcube is a crowdfunding platform from the United Kingdom and was founded in 2011. It is one of the first big crowdfunding platforms in Europe. Small to medium businesses can raise funds on the platform through debt, investment or equity. You can also sell your shares on Crowdcube after you bought them. More than 1 billion euros was already invested on the platform.

FundedByMe

FundedByMe was founded in Sweden in 2011. On the platform you can invest in reward-based as well as equity crowdfunding. FundedByMe is known for offering crossborder investments. The crowdfunding website has over 250 thousand members that invested more than 75 million euros.

Seedrs

Seedr is from the United Kingdom and was founded in 2009. On Seedr, over 1,5 billion euros has already been invested, which makes it the biggest European crowdfunding platform. The crowdfunding website is known for offering a secondary market where you can sell your shares when the value has increased.

Companisto

Companisto is a German crowdfunding platform founded in 2012. It is known for offering a network of experienced investors such as business angels and VC companies. Since 2019 the platform also offers equity crowdfunding. On Companisto, investors funded more than 190 startups with a total amount of over 125 million euros.

Invesdor

Invesdor is an equity crowdfunding platform from Finland and was founded in 2012. The website offers cross-border investing, mainly operating in six countries: Finland, Sweden, Denmark, Norway, Austria and Germany. More than 160 million euros has been invested in over 200 projects.