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How Risky is ECF?

If you’re a young investor looking to start off your journey, it’s unlikely that fixed deposits or mutual funds will generate the same amount of excitement or interest compared to other forms of high-return investments. One of these is equity crowdfunding (ECF), a modern form of investing that can lead to a large return on investment down the road, but also comes with a large amount of risk. However, most individuals will put in small to medium sums of money which means they are more likely to be able to afford losses in the event that a company fails to deliver a return.

Companies Might Go Big or Go Home

Like any other form of investing such as playing the stock market, dabbling in commodities or purchasing property, ECF has its own set of risks. The companies raising funds through this model could go on to make a killing or simply fade into obscurity after a few years. No amount of research will be able to account for sudden market changes or demands, even if there is a very experienced team spearheading the company’s expansion.

The Challenge of Localisation

Similarly, if the company is expanding internationally, there’s the risk of not being able to localise the product or service to suit the market’s needs. You just have to look at the countless American companies that have tried to penetrate Asian markets like China and India, but failed because localisation wasn’t their strong point. Notable examples include Taco Bell and Groupon to name just two.

So How Viable is ECF?

However, there have been enough success stories in recent years that suggest ECF is a viable method of raising, especially in more mature markets. Two of the most well-known examples of ECF investors reaping the rewards are through ride-hailing app Uber and plant-based meat substitute firm Beyond Meat.

As part of a more developed ECF market in the United States, an equity crowdfunding platform by the name of OurCrowd held healthy positions in both companies. This led to investors getting sizeable returns on their money when both Uber and Beyond Meat had their initial public offerings (IPO) in the same week!

Shareholders in Beyond Meat would’ve been well-advised to hold their shares until today though – having listed at a price of $25 per share, it’s now hovering around the US$120 mark! For investors in Uber, it would’ve been best to cash out during the IPO itself, but retail investors in both are still in the green if they choose to cash out today. Although such wildly successful stories are rare, it does highlight the potential for retail investors to get in early on some truly revolutionary companies through equity crowdfunding.

The Numbers Don’t Lie

Another advanced ECF market to consider is the United Kingdom; according to Statista, the ECF market in the UK rose from just £28 million in 2013 to £333 million in 2017, with a total of 20 different ECF platforms serving this market alone!

This demonstrates huge and consistent growth and is indicative of the demand for such a progressive fundraising model among retail investors that want to put smaller sums towards riskier but more rewarding investments. Overall, the global ECF market accounts for US$2.5 billion annually, which may sound like a lot but is a drop in the ocean when you consider the amount of funds companies are raising through more conventional models like IPOs. 

If you’re considering investing some funds into a specific company via ECF, we hope this has given you a balanced view of the subject. Ultimately, it boils down to your risk appetite and how much you are willing to invest and potentially lose, for a chance to get a very large return on your investment depending on the success of your chosen company.

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Disclaimer: Our articles are not and should not be taken as financial advice. You should conduct your own research carefully and be fully aware of all implications prior to making any investments.

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