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Equity Crowdfunding– 6 Things Investors Should Pay Attention To

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Checklist for new equity crowdfunding investors

By André Jasch
5 minute read

Digitalization has long reached the world of finance. Startups in the sector of finance technology (short: FinTech) such as N26, Savedo or OptioPay are mixing up the industry with innovative ideas. This development has also reached the branch of venture capital: the opportunity for anyone to invest in startups and growth companies through online platforms has already existed in Germany for a few years.

This is called equity-based crowdfunding. Financing via the crowd is becoming increasingly popular. The market for equity crowdfunding currently comprises more than 144 million euro. Alone on Companisto, capital of more than 43 million euro has been invested in startups and growth companies by more than 74,000 investors.

The concept of equity crowdfunding is that investors can participate in young enterprises with great potential for growth through a sum of their choice. The companies can thus develop new, innovative ideas while the investors have the chance to make an economic profit.

Through equity crowdfunding, private investors can participate in the early phases of a company. In the past, they could only invest in unlisted companies indirectly through funds or venture capital companies. Equity crowdfunding thus creates new investment opportunities. Furthermore, this increases the investors’ freedom to make decisions about which companies to invest their money in.

Since equity crowdfunding is venture capital, investors always take a business risk – on the other hand, however, the profit chances are high, for example when a startup is acquired by a larger company or if it goes public.

How does the process of equity crowdfunding run? And what should private investors pay attention to? The following six points should serve as a point of orientation for investors.


1. General framework – How does the investment process run?

In equity crowdfunding, the investment process occurs entirely digitally. The transactions are encoded and comply with the rules of the most important IT security standards. Certification marks (e.g. TÜV) document data protection. The opening of a portfolio on platforms like Companisto is free of charge. There are also no transaction or administrative fees for the subscription of company shares. Only in the case of distributed profits will the platform operators receive a percentage share.


2. Business idea – How does the startup plan to grow?

An important aspect: the business idea. Before every investment, investors should make themselves familiar with the business concept of the startup. In equity crowdfunding, investors can exchange thoughts concerning the company’s concept amongst each other. That way they can also benefit from the exchange of knowledge with other crowd investors. Thus, investors are never alone in equity crowdfunding, even though the invested sum is naturally individual. Furthermore, questions that come up can be discussed directly with the founders. This opportunity does not exist in the purchase of shares or funds. Therefore, should investors be uncertain and have open questions about the business idea, allocation of resources, or growth potential, they should make use of this opportunity.


3. Portfolio – Why does it make sense to spread the investments?

When talking about equity crowdfunding, it is important to understand that it is a form of venture capital that is tied to chances and risks. Therefore, private investors considering startups and growth companies should only invest an amount of capital that they are able to do without, just in case the business idea does not break through in the marketplace. Furthermore, they should not place their capital all in one single startup but rather spread the risk in their portfolio as broadly as possible. That way, successful startups can balance out potential losses of failed companies. Private investors can draw from professional venture capitalists’ strategies of distributing risk.


4. Participation model – How will profits be generated?

An investment in startups and growth companies occurs in the form of a profit participating loan. The investor provides the startup with a temporary loan so that it can implement its business idea. Investors have two ways to make a profit in equity crowdfunding: through an annual fixed interest rate (for growth companies) or a profit and exit participation (for startups). Accordingly, you profit when the startup generates profit or you participate pro rata in the proceeds of a possible sale - called an exit.


5. The form of participation – How long does the participation last?

The question of the form of participation in investments in startups is also crucial. How long is one involved as an investor in the companies? How long can one gain from profits and sales revenue? Most participation forms ended after seven to eight years. Through its lifetime participation, however, Companisto offers a life-long participation for investors. That way, they can benefit from future profits or a sale of the startup for a lifetime if they wish.


6. Conditions for startups - Is follow-up financing possible?

Equity crowdfunding provides initial financing for innovative business ideas. In order to achieve continuous growth, startups also seek follow-up financing from business angels or venture capitalists. In order to facilitate easy follow-up financing, Companisto's investment model was developed by specialized lawyers in close cooperation with the venture capital industry. As a result, 87% of all financing rounds on Companisto were co- or follow-up financing with venture capital firms and business angels. A small excerpt from a long list: e. g. Christoph Maire, Martin Sinner, Frank Thelen, Jan Henric Buettner, Earlybird, HTGF, IBB Bet. and many more). This gives startups the chance to grow further.


Have we sparked your interest in investing in startups? Then register on Companisto now!

Status as of 06.10.2017 16:06


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André Jasch

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