As the crowdfunding industry is looking forward to welcome equity-crowdfunding as a legislated form of startup funding, the impatience about the slow rate of its introduction is growing. There are some serious issues however that makes it worth considering whether or not every potential investor should be exposed to the possible dangers.
After 10 years, about 80% of the companies have went bankrupt. A big number has big consequences that most equity-crowdfunders might not always realize, especially when the entrepreneur is somebody you know. It’s hard to keep in mind the numbers and not be swept away by their persuading manners, well-developed business plan, and enthusiasm. Crowd-investors aren’t familiar with developing portfolios or spreading risk. Think, would you let your 10-year-old drive a car even though he knows where the steering wheel is?
Scams are rising
Companies might fail due to external developments (bankrupt customers, imploding industries, etc.) despite all the talent an entrepreneur has and the effort, time, and money invested. There are people out in the field however, who are actually looking to harm investors via scams, like the infamous Kobe Beef Jerky. The list with scams is growing and though the awareness is growing, there is no standard policy that protects crowdfunders.
The crowd is uneducated
Though some claim that “the wisdom of the crowd” will filter out faulty projects, the “crowd” exists from uneducated individuals that simply aren’t as educated as most professional investors. The private investors are accredited for a reason. Crowd-investors don’t have a background in startup development, company organization, revenue models, or finance.
Many of them might expect a quick win, while investing in companies usually locks you in for 3-7 years. There is also no way to get rid of SME shares as a standards way that is implemented in every campaign. So how are you going to get your ROI? Dividends are easier to grasp, but most startups won’t make profits within the first few years, and when they do it might be better to reinvest instead of paying dividends.
Let’s work towards safer funding!
Let’s get real: equity-funding is not going to be forbidden. Though there are still some growing pains in the equity-crowdfunding industry, the potential is enormous. In order to create a healthy funding sector, policies and accreditation should protect the crowd-investors. The opportunities are to promising, and it’s unlikely anyone would want to stop a way to further develop our economy by democratizing capital streams and empowering the crowd.