IPO vs Equity Crowdfunding
01 May 2018 @ 8:00am Equity Crowdfunding Investors
There is more to investing than simply the stock market, but most alternative investments have traditionally been unavailable to everyday investors. With rapid advances in technology and the rise of fintechs over the past two to three years, alternative investments have become more accessible to everyday investors. OnMarket’s IPO platform has been at the front of this evolution offering everyday investors access to over 100 IPOs, which have traditionally been offered to high net worth and institutional investors.
Equity crowdfunding gives retail investors access to an even wider range of investment opportunities. As the new way for everyday investors, mums and dads, and the millennial generation to invest in early-stage and growth-stage businesses, it is all about connecting innovative, young companies that need capital to fund growth, with retail investors who are looking for the opportunity to get in on early-stage investments.
With both IPOs and equity crowdfunding now available through OnMarket Crowd, understanding the difference between the two is critical to selecting the investment that is right for you.
Liquidity: How long will my money be tied up for?
With IPOs, you decide whether your investment is a marathon or a sprint. In general, IPOs have greater liquidity than equity crowdfunding investments, so if you are likely to want to exit your investment quickly, then equity crowdfunding may not be right for you. With equity crowdfunding you should be prepared for your money to be tied up for several years. Exit opportunities can present themselves via a trade sale, share buy-back or the company listing on the stock exchange. A look at exits on the UK equity crowdfunding platform Crowdcube, shows that the time horizon has ranged from 8 months (Camden Town Brewery) to 5 years (Mettrr Technologies). With equity crowdfunding, your money will be tied up for longer than most traditional investments and IPOs, so if you have a preference to get in and out quickly, IPOs may be more suitable for you.
What stage are these companies at?
As a rough guide, crowdfunding companies will be at the early and growth stage, and may be higher risk than those which are about to IPO. This is because they generally have smaller operations, less customer traction and are most likely not yet making either revenue or a profit. The trade-off is that despite their risks, these companies have greater potential upside for your investment. Through the OnMarket platform, you get the opportunity to review and invest in a range of companies that are from seed stage to IPO stage.
To illustrate, the UK-based BrewDog, managed to earn a $1.2b valuation when it sold a 23% stake to the private equity firm TSG Consumer Partners. For their earliest investors (who invested in 2010 when they were in an earlier stage) this meant a return of 2,800%, whilst their most recent investors in 2016, who invested when BrewDog was at a later stage, made a 177% return1
Investment size: What is the minimum investment amount?
The minimum investment threshold for equity crowdfunding is much lower than what is required to invest in an IPO. For IPOs the minimum subscription amount is $2,000. This contrasts with equity crowdfunding, where investors can invest in companies for as little as $50.
Like all investments, both are inherently risky. That said, the much lower investment threshold for equity crowdfunding allows investors to invest smaller amounts across a range of companies and build a portfolio of investments, enabling investors to diversify and mitigate some of the risk.
Am I in it for the social return or the financial return?
For some investors the rewards of equity crowdfunding may be just as much about the social rewards as it is about the financial rewards. Crowdfunding enables investors to support companies that are making an impact in the world – for example, investors help companies in their mission to address an environmental or social issue or use technology to develop sustainable processes. It could even be a local business that might not exist without your support.
But the cherry on top of the equity crowdfunding cake is the possibility to make a financial return at a future exit. As we highlighted in our previous blog about the different types of crowdfunding models, what makes equity crowdfunding different is the opportunity to invest in startups, secure a stake in the company, and be part of their success as they grow.
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With OnMarket’s online platform providing free access to both these types of investments, it’s important to remember that IPOs and equity crowdfunding are apples and oranges. Not all investors think the same when investing, so if you’re unsure of which is most appropriate for you, start off by asking yourself the above four questions.
OnMarket makes investing and capital raising an efficient, simple and transparent process that is accessible to everyday investors and businesses making a change in the world. OnMarket was one of the first in Australia to receive an equity crowdfunding licence, enabling us to offer equity crowdfunding to connect investors with businesses that are making a change for the better. By investing in companies offering equity via OnMarket, everyday investors can share in the upside in businesses that ultimately will make a better, smarter, more sustainable world.
To read our comprehensive guidebooks showing you how to raise capital for your business go to www.onmarket.com.au.
Ref: https://www.locavesting.com/crowdfunding/whats-a-successful-crowdfunding-exit-anyway/