Equity Crowdfunding (ECF) has provided access to the private market, enabling ordinary people to invest in startups and small to medium-sized enterprises (SME’s) and thus democratising and diversifying investments for startups. However, though investing in startups and SMEs can reap high rewards, investing into these securities can also be incredibly risky and illiquid. Therefore, there are several things to bear in mind when investing through Equity Crowdfunding (ECF) in order to minimise these risks.
Read Also: What is Equity Crowdfunding (ECF) and how it works.
Reason for investing
The first thing that needs to be established when investing through Equity Crowdfunding (ECF) is your reason for investing. Are you investing for the financial returns or for the social aspects? This is worth considering at the very start to help create the basis of your investment strategy plan as it makes it easier to determine where to invest, how much to invest and where the source of these investments is coming from.
Adjusting your expectations
It should be acknowledged that when investing into the private market, the securities are more illiquid than those on the public market, therefore the investments bear higher risks. The startups and SMEs being listed through ECF have much less experience in the industry than publicly listed companies, therefore they may not exist long enough for you to reap the rewards of investing into them. With that being said, the higher the risks, the higher the rewards. Therefore, it is worth adjusting your expectations accordingly from the start and acknowledging that though investing in Equity Crowdfunding (ECF) can come with high rewards, it requires a great deal of risks to be taken.
Due diligence
When considering investments, you should spend some time analysing what the funds raised would be used for and how the budget has been allocated. This is typically a good indication of how well their management is which can testify to their ability to overcome any potential future challenges. In addition, as these startups are in the early stages and may not have much experience, it is also worth doing a lot of your own research on the market as well as the industry before deciding to invest.
Diversifying your portfolio
For those looking to invest for financial returns, it is worth ensuring that your portfolio is diverse. Since private market securities are incredibly risky as mentioned earlier, diversifying your portfolio can help spread out this risk. Generally, the safest way to diversify your portfolio is through spreading the investment across different industries as if an industry were to struggle, you would have the investments in other industries to fall back onto. Moreover, it is also worth having a mixture of safer investments, such as high market capitalization stocks on the public markets, bundled with the riskier ECF investments to provide a safety net in the event that the private investment were to result in losses.
Product Market Fit
One of the key things to consider when investing through ECF is whether there is a good product-market fit, meaning that the product can satisfy a strong market demand and whether this will hold in the long term. As well as being profitable, the product will also need to be scalable because if it cannot be scaled, there is no long term vision for it and is not worth the investment. As startups are in the early stages, it needs to be clear that it can survive long enough for you to see the product in use or for there to be financial returns, and a good product-market fit is a good indication of this.
Always use a licensed platform
When investing, it is key to ensure that you do not transfer funds directly or through an unauthorised ECF platform to a startup or SME as you cannot be protected from the risk of scam. It is always worth going through a reputable and licensed platform, such as Leet Capital, when transferring funds as these platforms have been licensed by the Securities Commission Malaysia, therefore they have an obligation to regulate fraudulent activities. Investing through ECF is already highly risky, therefore it is always worth going through a licensed platform to prevent any other risks from occurring.
Get to know the team
One of the best indications of a good investment will come down to the team. It is always worthwhile to take the time to get to know the founders and the team behind the scenes. What are some of their previous achievements? What experiences have they had with the industry prior? How well do they know their target market and audience? These are some things to consider when deciding whether the team is capable of turning an idea into a reality. The team is undoubtedly one of the most important things to assess when considering an investment, because despite how compelled you may be by their backstory or their business plan, if they are unable to pull it off, their idea is ultimately not feasible and therefore not worth the investment.
Overall, there are many things to consider when investing through ECF, however these remain some of the key things every investor should bear in mind. These aspects will not guarantee risk-free investment, but can certainly help provide a better understanding on how to invest as well as steps you can take to minimise some of the risks. It should be noted that investment strategies are not the same for everyone due to the differing reasons for investing and financial circumstances. Therefore, more research should be done to craft a strategic investment plan that better caters to each individual.
Investing through Equity Crowdfunding (ECF) is fairly straightforward at Leet Capital as we want to ensure that every retail investor, angel and sophisticated investor gets the opportunity to do so. Our team also thoroughly reviews applications and conducts extensive due diligence with our startups and SMEs to ensure that our investors are investing into campaigns with potential growth. To start investing with us, create an account at Leet Capital and if you’d like to find out more, contact us through whatsapp at +60 11-5628 0817 or by email at info@leet.capital.
