Crowdfunding Risks: 5 Tips crowd investors should know
Startups, real estate, film projects – crowdfunding exists for a variety of investments. However, the risks may differ significantly. In this article we describe how crowd investors can better assess the risks involved.
Tip 1: High returns = high risks
If an investment product offers significantly higher returns than other products available on the market, caution is advised. Because what use is a higher return if the investment risk is disproportionately large. After all, a hiker would not choose the path through the gorge filled with hungry lions just to reach his destination one hour earlier. The risk would be disproportionate to the profit.
In the case of Crowdinvesting, there are different investment classes, where different rates of return are possible. However, investors must be aware that the risks are also different.
Start-ups offer high returns to investors. According to the Crowdinvest success monitor, the average return was 27.4% per year. A tempting number, in which many investors forget the associated risk through all the euphoria. The default rate is often very high with start-ups. In Germany, 14% of all start-ups fail.
Much more conservative are real estate investments, in which the crowds receive approximately 4% to 8% fixed interest rates. Of the 48 real estate projects that have been funded through crowdfunding so far in Germany, not a single project has failed.
As a rule of thumb, crowd investors should remember: the higher the return, the higher the risk. In order to support our investors with the risk assessment of investments, the internal real estate experts of iFunded have assigned all real estate projects to individual risk classes. For this 9 criteria are considered. These risk assessments are then presented on our website in a transparent and comprehensible manner.
Tip 2: Do not place all eggs in one basket
It is a well-known stock market rule: Do not place all your eggs in one basket. This means that not all of the capital should be invested in a single investment product. This rule is particularly important with crowdfunding investments. In contrast to investment funds, investments are always made in individual investment projects, for example in a new start-up, an energy project or a property. It is therefore important that the investor invests in many different crowdfunding projects. In doing so, he builds up his own portfolio and can specifically reduce crowdfunding risks.
Tip 3: Only those who understand the business model should invest
The investment legend Warren Buffett only invests in companies whose business model he immediately understands. He would therefore rather invest in Coca-Cola than in BioTech companies. Crowd investors should also only invest in projects whose business model they actually understand. Start-ups often have business models that are very complex and not sustainable. The risks are thus correspondingly high.
The business model of a real estate project is usually quite simple. With real estate crowdfunding a property is usually rebuilt or renovated and then sold. Ultimately, such a project depends strongly on the location, the quality of which has to be assessed by crowd investors. This is, however, much easier than evaluating a new, innovative business model of a start-up and its prospects for success.
Tip 4: Only invest “play money”
Regardless of whether startup, real estate, films or energy projects – crowd investing is always associated with risks and can lead to the total loss of the investment. Crowd investors are therefore advised to only invest money, which they can do without in a time of need. Naturally any loss of capital is painful, but it should not lead to financial difficulties for the investor.
Tip 5: Avoid long maturities
To invest successfully, investors also need to assess the future development of the economy well. This look into the future resembles the famous look into the crystal ball. The further one looks into the future, the less accurate and clear the image will be. Not good conditions for a successful investment.
For startups and energy projects longer maturities of 5 to 10 years are rather common.
Even for professional investors, such periods of time are difficult to gauge and assess. With real estate crowdfunding, the terms are usually between 12 and 36 months. Such periods of time are easier to gauge, especially for private investors. Rather shorter maturities also have the advantage that the crowd investor’s capital is not tied up for as long. For some real estate projects there is even a semi-annual interest payment for the crowd.