Should you forget the stock market and focus on crowdfunding?


In recent years, the popularity of crowdfunding has soared. For example, in 2016 the amount raised through crowdfunding surpassed venture capital funding for the first time in its history. By 2025, it is estimated by the World Bank that capital raised through crowdfunding will exceed $93bn.

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Clearly, it is becoming a more mainstream means for start-ups and smaller companies to raise the capital they need to grow. It is also becoming more common for investors to invest a small part of their portfolios in crowdfunded ventures. Is now the time to increase this amount and ditch shares altogether?

The appeal of crowdfunding?

Put simply, crowdfunding is a means for a business to access capital without going through traditional channels such as banks or other lenders. It allows them to raise cash directly from investors, which can be a much faster process than through banks. It can also provide a degree of marketing for the business in question, which can help to get its name into the public domain at a time when it is probably not well-known.

The appeal of crowdfunding for a business, therefore, is relatively straightforward to grasp. However, the attraction of the platform for investors is somewhat more difficult to ascertain. Generally, the companies are either pre-revenue or have only a short track record of sales. They are therefore extremely high risk, and it appears as though the vast majority of crowdfunding investments end with a loss of some degree to the investor.

Furthermore, crowdfunding lacks the transparency of the stock market. In other words, while listed companies are required to provide a minimum amount of information as well as regular updates to investors in order to allow them to conduct due diligence, doing so with a crowdfunded venture is much more difficult. Although some information is required to be provided to investors, a company with no track record may be little more than an idea.

The appeal of shares

In contrast to crowdfunding, the stock market has an excellent track record of creating wealth for investors. Not all investors end up in the black, but history shows that buying a diverse range of shares within a portfolio and holding them for the long run generally leads to a high-single digit annualised return. In addition, dividends are often paid, and it is possible to buy shares in a company for a much smaller multiple of sales or profit than is the case with many crowdfunded ventures.

In addition, shares are highly liquid and can generally be sold easily. Crowdfunded ventures are among the most illiquid of mainstream investments, which adds an extra degree of risk for investors. And with multiple funding rounds likely due to the young age of many of the companies on crowdfunding platforms, dilution of shareholdings is a major issue for investors.

Therefore, while the idea of crowdfunding may sound appealing and the chance to buy into a stock in its early days may be enticing, the reality is that the risk/reward ratios available in the stock market are likely to be far superior in the long run.

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The world's most successful investors
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The world's most successful investors

Soros is one of the world’s most famous speculators - who sees the market as something to place highly leveraged bets on rather than invest in.

He cemented his reputation by shorting the pound on Black Wednesday in 1992, and making $1 billion from the collapse of the British currency and the near-collapse of the Bank of England.

He is another noted philanthropist, giving primarily to human rights, public health and education charities.

Slater was another highly controversial investor, known for corporate raids on public companies, and subsequent asset stripping to realise quick value for shareholders.

He also invented the phrase ‘The Zulu Principle’ to describe the importance of being a specialist when you are investing, so you can concentrate your research efforts and know more than the rest of the market about something specific.

Woodford (CBE) gained his reputation at the helm of the Invesco Perpetual Income and High Income funds, by offering relative stability and reliability in even the toughest markets.

His trademark was to make bold decisions about the companies he wanted to be invested in, and then stick with them - no matter how unfashionable his decisions were.

It led him to buy tobacco stocks in the 1990s (because he felt that concerns about the legal threats to the firms were overplayed) and avoid technology in the dotcom bubble.

Woodford currently runs Woodford Investment Management.


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