By now, you’re probably familiar with how crowdfunding sites like Kickstarter and GoFundMe work to support cool ideas and projects you want to see come to fruition or to raise money for worthy causes. But did you know you can also invest in budding businesses via crowdfunding?
“Equity crowdfunding” allows a lot of investors to contribute small sums to a company in its nascency and, in return, become part owners (“equity” in this case just means ownership). It’s a lot like owning stock in a company, but these are businesses that aren’t publicly traded on a stock exchange—yet, anyway.
Until this month, only wealthy, “accredited investors”—those with a net worth of more than $1 million, excluding their primary home, or who’ve earned more than $200,000 annually over the last two years (or $300,000 combined with a spouse)—could participate.
So should you jump in?
Maybe. But consider this before you do: While this type of investing offers the potential for big gains, it also carries big risks.
Spot the next SnapChat, and it’s possible your small investment could one day fund a down payment on your dream home. But keep in mind that for every Twitter, Uber and Airbnb, there are a lot of startups that don’t make it big—or even past their 10th anniversary. About 71 percent of startups fail by the 10-year mark, according to data compiled by Statistic Brain Research Institute.
“If the only reward you are looking for is monetary gain, crowdfunding probably isn’t the place for you,” says Danny Kelman, CEO of tech equity-crowdfunding site CrowdBoarders. Instead, Kelman says investors should evaluate companies according to whether they believe in their mission—or want to see their product come to fruition. (If you’re passionate about video games, for example, you could invest in GameTree, a social network for gamers that’s raising money on StartEngine.)
Even if a business you invest in takes off, you probably won’t get any money back for a long time. Investors typically can’t cash out of a crowdfunded company until either the business is acquired or has an initial public offering. Reaching one of those milestones could take years.
So if you do invest, you shouldn’t use money you’ll need anytime soon—or can’t afford to lose.
Fortunately, you don’t have to spend a lot to take part. Several crowdfunding sites have been approved by FINRA to accept investments from the general public, including Wefunder, where you can invest as little as $100 in a wide range of companies, including Beta Bionics, which is developing a bionic pancreas system to help people with Type 1 diabetes, and Bogobrush, a startup that makes biodegradable toothbrushes.
Fees vary among equity-crowdfunding websites. SeedInvest, for example, charges entrepreneurs to access the platform, but not investors. NextSeed takes a 1 percent cut out of any payments made to investors. So be sure to factor that into any anticipated returns.