In 2015 and again in 2020, the SEC published new rulings that allow companies to offer and sell securities through online portals. This ruling gave birth to regulation crowdfunding. Investment opportunities, once restricted to banks and venture capital firms, opened to millions of individuals. Since then, dozens of crowdfunding platforms have registered with the SEC as brokers or funding portals. In doing so, they have set-up a two sided marketplace.
Start-up companies come to crowdfunding platforms eager for new financing streams and (more importantly) a way to build brand awareness. And, prospective investors flock to crowdfunding platforms eager to find new technologies to expand their businesses, leverage external innovation, and make financial returns.
The Risk and Reward of Start-Ups
Through regulation crowdfunding, an individual’s investment becomes company share, a piece of partial ownership. As the start-up grows, is valued, and possibly acquired, the investor sees their share value grow. And, if the company fails, the investor loses their investment, nothing more. Because start-ups are naturally risky, each investment opportunity is a balancing act between risk and reward. Data shows that only 50% of start-ups make it to their fifth year.
To instill confidence in the crowdfunding process, platforms have taken it upon themselves to heavily vet prospective business ventures and start-ups. Many platforms describe their vetting process and state the amount (often quite low at 5%) of possible ventures and start-ups that make it to a live offering. InfraShares only offers opportunities that pass our thorough screening process. Once we determine the Shared Value of a project (the offerings lasting economic, social and environmental benefits by supporting the delivery or operation of public infrastructure), it must pass our 15 Point Risk Evaluation test to be considered.
Building Confidence for Investors and Start-Ups
While this level of oversight is common among crowdfunding platforms, crowdfunding adds an additional layer of certainty for start-ups. Often, start-ups are looking to cross the valley of death by understanding and penetrating a market. For an industry- like construction- that has been slow to adopt technology, crowdfunding offers a unique opportunity for start-ups- especially ConTech– to build resources and reputations to make it across the valley of death.
As ConTech start-ups make their way to crowdfunding platforms, they are seeking crowd validation and interest in the market. Therefore, investors on crowdfunding platforms play a critical role. So, how do you make the most of your crowdfunded investment, for yourself and for the start-up?
Evaluating Investment Opportunities
First, decide why you want to invest. Crowdfunding offers a two-pronged financing approach for start-ups and investors. Savvy start-ups come to the crowdfunding market to interact with the market and understand demand. Therefore, ConTech, as an emerging industry, has found a home on crowdfunding platforms.
The technology adoption life cycle has five types of investors: innovators, early adopters, early majority, late majority, and the laggards. Crowdfunding, while it may seem daunting for novice investors, offers innovators, early adopters, and even the early majority a first look into novel technologies. Therefore, their investment decisions are motivated by instinct and deep market knowledge. In short, these investors invest in start-ups that are developing direct solutions to problems they face.
When we put this in relationship to ConTech, crowdfunding attracts industry practitioners looking for new ways to improve construction safety, reduce project uncertainty, better manage labor, money, and time, and provide a competitive edge. Making that connection between purpose, technology, and investment provides confidence to both investors and start-ups.
Second, research the start-up. Believing that the start-up provides a direct solution to known problems means there is a real market. While that might be the most important criteria, investors must consider several other criteria:
- Identify the Competitive Advantage: Investors should identify potential competitors and understand why the start-up/technology in question is unique in the marketplace. That leg-up could be a critical partnership with a supplier, a novel delivery method that increases efficiency, or a patent that ensures no one else can duplicate the technology.
- Know the Team: One of the biggest strengths of start-ups is their ability to move quickly when the market changes or an obstacle arises. That ability to move comes from the expertise and experience of the start-up’s leadership. This team will need to have diverse backgrounds, work ethic, and experience to swiftly navigate the challenges of bringing a technology to market.
- Understand the Business Model: Is this start-up selling a subscription service, a one-time product, or a customized solution? Knowing where the revenue for a start-up is coming from is key to understanding it’s viability.
- Expect a Timeline: Start-ups come to crowdfunding platforms at all different stages. As a start-up matures, they should be able to show their growth through prototypes and beta partnerships with industry practitioners. Understanding the start-up’s customers and partners can provide additional confidence for investors and a better understanding of when (and if) a return on investment will occur.
Investing on a Crowdfunding Platform
Crowdfunding is unique in that it makes the evaluation process more transparent to so many more potential investors. As start-ups cross the valley of death and attract early adopters, they need crowd validation. This makes it an exciting and also daunting option for novice and experienced investors.
Crowdfunding platforms, like InfraShares, are building a pipeline of ConTech start-ups and a pool of investors; many of whom are interested practitioners looking for novel ways to solve age-old problems. If this sounds like you, join the InfraShares community! What better way to revolutionize the industry than investing in new ideas that will improve your own business?
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