In 2017, crowd-sourced funding went mainstream in Australia. Otherwise referred to as equity-based crowdfunding, the investment model previously only accessible to sophisticated investors became available to the masses.
This means anyone can invest in startups (or established businesses looking to scale) and their great ideas. And as long as you’re over 18, so can you. You might be a professional or 'sophisticated' investor looking to diversify. Or you might be an individual or ‘retail investor’ (likely investing hundreds or thousands rather than millions). You’ll also be protected by what’s known as ‘cooling off periods’ - but more on that below.
Crowdfunding campaigns provide tons of benefits for retail investors. They’re much more personable (and much less stuffy) than more traditional investing avenues like stocks and shares. We’ll explore some of the benefits below, but first, let’s take a look at what crowd-sourced funding (CSF) actually is.
What is crowd-sourced funding?
You might have heard of Brewdog or Car Next Door. Two different brands from very different sectors, but both got their break by raising funds across a “crowd” of different types of investors, as opposed to just one or two very wealthy ones.
The simple premise is this:
There’s a brand or business model you like. They’re making sales, but they need more money to break into the wider market. They need big-budget marketing, scaled-up operations, and a bigger team to take on the big leagues. Investing in their crowd-sourced funding campaign is a proactive and rewarding way to help them go from startup to international brand name.
It’s an online process where companies seeking to raise funds will conduct an extensive marketing campaign. This will be followed by a launch date. They’ll usually secure ‘lead’ investors first - experienced professionals who will contribute the lion’s share of the cash.
Following this private round, the offer will go public. There is where you can invest via an online portal. You’ll be kept up to date throughout the live campaign. You’ll be informed when the company hits milestones, and (hopefully) achieves their raise target. It couldn’t really be simpler - and because all CSF must go through an accredited platform like STAX, it’s all regulated.
Benefits of investing in crowdfunding campaigns
Accessibility: naturally, one of the biggest benefits is that anyone over 18 and with a few hundred dollars spare can do it. You don’t need to spend hours on YouTube learning how to trade, or reading manuals on investing psychology. You should research the company and understand the risks, but you don’t need to be the next Warren Buffet to get involved.
Low entry cost: as an extension of the above, you don’t need to actually be Warren Buffet to afford this type of investment. Most CSF campaigns will have a buy-in of less than $500.
Balance your portfolio: if you live in Australia, it might be that you already have some money in superannuation, or you casually trade on the ASX. Maybe you have rental investments. CSF is a great way to diversify your portfolio. It’s a smart way to help mitigate inevitable impacts of the volatile stock market. And it takes up a lot less time than tenant management!
Well-regulated: as we touched upon above, all companies taking the CSF route must use an ‘accredited intermediary’ or platform like STAX. A lot of administration and compliance is happening behind the scenes, and if you’re a retail investor, you’re also entitled to a cooling off period - a 5-business-day period after investing where you can change your mind if you wish.
Last but not least, crowdfunding campaigns are fun, engaging, and meaningful. Investing in a start-up company you believe in comes from a more personal place than mainstream investing, and it is an awesome way to show up for a brand you support while reaping potential rewards in the long run.
Finishing on a note of caution - investing in CSF campaigns can be exciting, but it’s easy to forget about the risks involved. One of the biggest pulls of crowdfunding is the buzz, and the FOMO that comes with it. Trends can skyrocket in value, but they don’t always last.
Picking a startup isn’t like picking a horse at the races - you’ll need to remove emotion and bias as much as possible, and seriously consider your investment goals.
Every opportunity listed on STAX has gone through a careful screening process. We only back businesses we believe in. See our current live offers here.