Crucial Crowdfunding Guide

Investor View

  • Investors should figure out what their expectations on risk and return are
  • Loan-based crowdfunding has usually the most predictable rate of return
  • It is easy to diversify investments in loan-based crowdfunding using automatic IT tools
  • Equity-crowdfunding gives a possibility to support a business You like
  • Donation-based crowdfunding helps You to support a good cause
  • Invoice trading has relatively high liquidity and short investment horizons

Different investors have different expectations regarding risk and return of their investments. When planning your crowdfunding project it is sensible to analyse, what kind of investor are you are targeting. What is their motivation and risk-tolerance? What profit or reward would they expect? How much are they willing invest. Based on answers to above questions you can select most suitable Crowdfunding projects and platforms for your needs…

It is important to note that investments on Crowdfunding are riskier than traditional bank deposits or any other government secured or backed investment vehicles (e.g. government bonds) or corporate bonds of large companies. However, usually returns from crowdfunding projects are also higher. In addition, there are other motivations for crowd investors e.g the opportunity to support people, causes or products which they care about. Different crowdfunding investment categories have different types of returns and they also attract different types of investors.

Loan crowdfunding:

If the investor prefers to know with a relatively high certainty what kind of return the investment is going to make, then loan-based crowdfunding might be more suitable than other crowdfunding types. In loan-based crowdfunding, interest rate is agreed in advance. Naturally some loans will default and there might be some delays in payments, but due to the relatively high quantity of loans financed in most crowdfunding portals, it is possible to estimate profitability of investment rather well. Returns of loan-based crowdfunding are most predictable, ranging from 2-3% to almost 20% depending on platform used and locations of lenders and borrowers. Returns from equity-based crowdfunding projects are difficult to estimate before companies have started producing profit or before they have been sold.

Loan-based crowdfunding can be fairly automated, so an investor uses his time efficiently. The platform usually takes care of loan collection activities on behalf of the investor.

Equity crowdfunding returns

If the investor is more interested in potential high-risk and high-gain investments, then equity-based crowdfunding might be the more suitable avenue. Probability of success varies from business to business, but in equity-based crowdfunding projects, investors are able to benefit if the recipient company is sold to a larger player or listed on stock-exchange.

Equity, donation and reward crowdfunding projects communicate about their activities and usually give an investor the possibility to communicate with them if needed.

Reward crowdfunding

In case the investor is interested in supporting cool ideas and receiving concrete perks, then reward-based crowdfunding might be more suitable as an investment option. Backers of reward-based crowdfunding projects are motivated by possibility to use an interesting product when it has been developed and by having something new and innovative earlier than the others. There is a chance of supporting interesting projects which are emotionally important for the backer. Rewards of crowdfunding projects can be emotional, physical or monetary. Different investors value these rewards differently.

Equity, donation and reward crowdfunding projects communicate about their activities and usually give an investor a possibility to communicate with them if needed.


Donation crowdfunding

In donation-based crowdfunding the gains are not monetary. Positive emotions come from the possibility of supporting an interesting cause emotionally relevant for the backer and from the possibility to contribute to the society or to life of a particular person by creating something positive.

Equity, donation and reward crowdfunding projects communicate about their activities and usually give an investor the possibility to communicate with them if needed.

Invoice trading

Invoice trading (and loan-portals) appeal to the risk averse as they provide a possibility for the investor to invest money for a short pre-determined period of time with a high probability of repayment.

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Invoice Trading (Prev Lesson)
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CRUCIAL is co-funded by the EU through ERASMUS+. Project: CRUCIAL (Crowdfunding Capital) 2015-1-IE01-KA202-00862The European Commission support for the production of this publication does not constitute an endorsement of the contents which reflects the views only of the authors, and the Commission cannot be held responsible for any use which may be made of the information contained therein