What about crowdfunding platforms?

In the last article we covered the topic, ‘What do you when one of you angel investments returns capital to you?’

In this article, we’ll cover the topic ‘What about crowdfunding platforms? Can't I just invest a few thousand dollars using them?’

As always, we’ll try to explain this using a story. Let’s begin!

Kedar was an aspiring investor who was looking to invest in budding startups. He had heard about stories of Angel Investors making exceptional returns etc. This lit up a fire in his mind to choose the path of Angel investing. The problem here was he knew very little about angel investing. He decided to register for the Planify Angel Investment Masterclass being taught by his mentor Rajesh.

Rajesh was a seasoned angel investor dedicated to teaching budding investors the intricacies of crowdfunding platforms. During a recent masterclass, Rajesh addressed a common question: ‘Can’t I just invest a few thousand dollars using crowdfunding platforms?’

Rajesh began by explaining the key benefits of crowdfunding platforms. “These platforms offer features like syndicates, allowing investors to write smaller checks. Additionally, they provide access to deals for those in areas with less deal flow, expanding investment opportunities beyond local networks.”

However, Rajesh emphasized the need to balance these advantages against significant risks. "While financial capital access is easier, you lose the direct assessment of teams," he explained.

Rajesh further emphasized “There are a few downsides of investing through crowdfunding platforms:

1. Investors often do not know who conducted due diligence
2. Investors are not aware of the quality of the deal lead, or if there is any coaching and mentoring involved.

Furthermore, investors on these platforms may not secure a board seat or have any connection to those who do, complicating oversight and strategic influence.”

As the interest in the topic further boomed, Rajesh emphasized on another downside of investing through crowdfunding platforms. Rajesh highlighted another critical issue: Adverse Selection. "Good deals might already be filled before reaching the platform.’

He further noted “Companies struggling to raise lower-cost capital locally might turn to crowdfunding, implying potential quality concerns. This raises the question: are you investing in deals that couldn’t attract local investors?”

More importantly, The farther the company has to go from that theoretical ideal, and the more it has to pay in fees, time, and work to access capital, the more difficulty it may be presumed to have had raising the lower-cost capital.

Rajesh’s lesson underscores the importance of cautious evaluation when using crowdfunding platforms. While they democratize access to investment opportunities, the lack of direct interaction and potential adverse selection risks require thorough consideration. For budding investors, understanding these dynamics is crucial for making informed investment decisions in the evolving landscape of angel investing.