The pandemic has changed the way we work, learn, and how we spend our leisure time, but it has also influenced our spending and investment patterns. The data regarding online fundraising shows this to be true. The value of both charitable internet giving and crowdfunding in commercial ventures has risen sharply.
Last year, 70 companies obtained investment from the public through crowdfunding in return for shares. That represents more companies than those that tried to enter Warsaw’s alternative stock market which is designed for new startups. Some have argued that crowdfunding could damage the stock market as a result, but often the companies that choose crowdfunding later enter the Warsaw Stock Exchange NewConnect index anyway.
Companies are sourcing funding and investors are getting the opportunity to participate in innovative ventures. So, where is the catch?
First of all, a company that pursues crowdfunding risks its business idea will be replicated very quickly by companies who already have the necessary capital. From the point of view of investors, it is worth remembering that crowdfunding is often chosen by fresh and inexperienced entrepreneurs.
Most start-ups also fail, so the risk in investing is great, but interest in crowdfunding will grow as regulations change.
From autumn of this year, the limit on fundraising in this manner will be increased from €250,000 to €1.25 million. This will be a big step up for crowdfunding platforms as long as transparency about company plans and financial performance can be assured. However, no one can reduce the risk for investors. It is up to them to assess the situation and act accordingly.
Investors would still be wise to adopt a strategy of diversification. Putting all the eggs in one basket is rarely a good business strategy. As Warren Buffet says, diversification is a shield against ignorance.