Innovative business ideas, new products or exciting projects require seed money. Crowdfunding or investing is one of many options for acquiring seed money and getting your project on the market. But what is crowdfunding? And what is the difference between crowdfunding and crowdinvesting? What are the risks? And what do you need to consider if you want to take part in a crowdfunding project?
Crowdfunding vs. crowdinvesting
Crowdfunding is a blanket term used to describe two different types of financing, crowdfunding and crowdinvesting. Both involve three groups of participants: the investors, the platform and the business that intends to enter the market or grow.
In the case of crowdfunding, many investors invest relatively small sums towards the realisation of an innovative, creative or cultural project. These multiple small investments are added together and used as seed money. In point of fact, the ‘investments’ are much closer to donations, although investors often receive a service or reward in return, usually one related to the project in question. This might be anything from payment in kind to having your name appear in the credits for the project.
In the case of crowdinvesting, on the other hand, just like traditional investing, the aim is to turn a profit. The investor provides capital to a business (generally a start-up in the early phases) and receives either a share of the profits or interest based on the project’s risk-factor in return.
High risk investment
Anyone participating in crowdinvesting should be aware that it is a very high-risk form of investment. You might lose everything you invest. This is because very few ideas lead to long-term economic success. Plenty of crowdfunding projects fail during implementation. There are many different reasons for this, and they are not necessarily the fault of those running the project. External circumstances can make it impossible to realise the project. Potential reasons for failure could include things such as incorrectly calculating the amount of money required, the timing of the release of the product, diminishing interest within the target audience or any number of other issues.
What to consider when participating in crowdinvesting
Projects looking for investors are presented on special crowdfunding platforms. It’s important to note that if you invest via this platform, you are giving your money to a third party, not the platform itself. The businesses trying to attract investors do not just pay interest to their investors, they also pay a fee to the platform.
That means that the platform profits from attracting investors for as many projects as possible. It’s therefore very important to gather as much information as you can before making an investment. Do not simply rely on the information provided on the platform itself.
Remember to look at the terms and conditions, and that the capital investment information sheet provides an exact description of what will happen with the money. The following questions are particularly important: what is the duration of the project? Can investors cancel their investment and under what terms? What happens to the money if the project fails to get off the ground? Investors can only make the decision that is right for them based on comprehensive and precise information. Unclear or contradicting wording is not helpful.
If you are unable to write off the investment amount completely in the event the project fails, it’s probably best to simply not invest. And if you do decide to invest, the amount you pay should only come to a small portion of your available assets.
Important: there are income and investment limits to take into account. Anyone investing up to 1,000 euros in a project can do so without declaring anything. However, if the investment exceeds 1,000 euros, a self-declaration is required. The investor uses the declaration to declare that they have a disposable income of at least 100,000 euro or, alternatively, that they are investing at most twice their average monthly income. There is also a maximum limit: you are not allowed to invest more than 10,000 euros.
