How to Diversify Using Crowdfunding: Utilising New Investment Opportunities

In today’s diverse, dynamic, and potentially volatile financial landscape, diversification has never been more crucial. I've spoken with many clients over the years and the topic on crowdfunding has come up quite a bit but only in the last few years have I given it due attention. Since the 1990's, crowdfunding has emerged as a powerful tool for investors looking to spread their risk and tap into innovative ventures. In this article, we will explore how to diversify your investment portfolio using crowdfunding, highlight standout success stories, and provide practical tips to peruse this dynamic space.

What is Crowdfunding?

Crowdfunding is a method of raising capital through the collective efforts of individuals, typically via online platforms. It allows startups, artists, and entrepreneurs to present their ideas and receive funding from a broad audience. This approach democratises investing, enabling everyday individuals to participate in funding opportunities that were once only available to wealthy investors.

The Importance of Diversification

Before diving into crowdfunding, it’s essential to understand why diversification matters. Diversification helps mitigate risks by spreading investments across various asset classes, industries, and geographic regions. By not putting all your eggs in one basket, you can protect your portfolio from the volatility of any single investment.

How Crowdfunding Facilitates Diversification

Crowdfunding platforms offer a wide array of investment opportunities across different sectors, making it easier than ever to diversify. Here are some key areas where crowdfunding can help:

1. Equity Crowdfunding

Equity crowdfunding allows investors to purchase shares in startups and small businesses. Platforms like Europe Republic (formerly Seedrs) and Crowdcube enable individuals to invest in various industries, from tech to food and beverage.

Success Story: Oculus Rift

Oculus Rift began as a crowdfunding project on Kickstarter, where it raised nearly $2.5 million. This success story illustrates how equity crowdfunding can lead to substantial returns, as Facebook later acquired Oculus for $2 billion. Early backers not only supported a revolutionary product but also benefited significantly from their investment.

2. Real Estate Crowdfunding

Real estate crowdfunding platforms like Fundrise and RealtyMogul allow investors to pool their resources to fund real estate projects. This model provides access to real estate investments without the need for significant capital.

Success Story: EquityMultiple

EquityMultiple has facilitated investments in various real estate projects, allowing everyday investors to participate in high-quality commercial real estate deals. With a minimum investment often as low as $1,000, individuals can diversify their portfolios by gaining exposure to the real estate market.

3. Reward-Based Crowdfunding

Platforms like Kickstarter and Indiegogo offer reward-based crowdfunding, where backers contribute to projects in exchange for perks or early access to products. This model not only supports innovative ideas but also provides opportunities for investors to engage with unique products.

Success Story: Pebble Smartwatch

The Pebble Smartwatch campaign on Kickstarter raised over $10 million, becoming one of the platform's biggest successes. Investors who backed this project received not only the product itself but also a stake in a burgeoning tech trend.

4. Peer-to-Peer Lending

Peer-to-peer (P2P) lending platforms, such as LendingClub and Prosper , connect borrowers with investors willing to lend money in exchange for interest payments. This method allows investors to diversify into fixed-income investments.

Success Story: Funding Circle

Funding Circle allows investors to lend directly to small businesses, facilitating loans that help companies grow. By diversifying across various borrowers, investors can manage risk while earning attractive returns.

Tips for Diversifying with Crowdfunding

1. Research and Due Diligence

Before investing, conduct thorough research on the crowdfunding platform, the specific project, and the team behind it. Look for transparency, track records, and realistic financial projections.

2. Start Small

If you’re new to crowdfunding, consider starting with a small investment in various projects. This approach allows you to test the waters and understand different sectors without risking significant capital.

3. Spread Your Investments

Diversify across different types of crowdfunding—equity, real estate, rewards, and P2P lending—to create a balanced portfolio that can weather market fluctuations.

4. Stay Updated

Crowdfunding trends can change rapidly. Follow industry news, join relevant forums, and engage with other investors to stay informed about new opportunities and emerging sectors.

5. Evaluate Risks

While crowdfunding offers exciting opportunities, it also comes with inherent risks. Assess the potential for loss and consider your risk tolerance before making investment decisions.

Conclusion

Crowdfunding presents a unique avenue for diversifying your investment portfolio, offering access to various sectors and innovative projects. By leveraging equity crowdfunding, real estate investments, reward-based funding, and P2P lending, you can create a well-rounded investment strategy that mitigates risks and opens doors to new opportunities.

The success stories of projects like Oculus Rift, Pebble, and EquityMultiple exemplify the potential rewards of crowdfunding. As you embark on your crowdfunding journey, remember to conduct thorough research, start small, and diversify across different types of investments.

Share your thoughts and experiences with crowdfunding in the comments section!

I'm a Consultant and Coach helping clients across a broad spectrum of projects. Reach out to see if I can help you in your endeavour.