Updated on October 30, 2023
Crowdfunding, or group or crowd financing, has become very popular in recent years. And not only among start-ups, but also among smaller investors. Both sides benefit from it. So if you, as an investor, are looking for an alternative to traditional investment tools, come learn something about crowdfunding. For example, how this method of financing works, how you can benefit from it or how you can participate in it.
What is crowdfunding?
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Understanding how crowdfunding actually works is not complicated at all. Imagine that you are a small entrepreneur who has a well-thought-out project. According to you, it could all work out well. But the problem is that you don’t have enough funds to implement your plan. What with this? You have several options:
Loan at the bank – But here you can encounter more problems. Either the bank will have too high demands on you and will not approve the loan, or the interest rate will seem too high to you.
A large investor – Finding one or a few large investors is not easy at all.
Issuance of shares – This option applies to larger companies, which in this case would have to enter the stock exchange.
Issuance of bonds – Whoever buys your bond becomes your creditor. This can also be a form of crowdfunding. But more on that in a moment.
Crowdfunding – A method of financing where a large number of small investors join your project. Since there are more such investors, each of them can invest a lower amount. And if a sufficient number of these small investors are found, you can wait for financing even a larger amount.
But since we are obviously talking primarily to investors, let’s look at this alternative way of investing through their eyes. As an investor, you will not just participate in the financing of projects. Of course you will expect something from it. You should know your reward – whether it’s a product or revenue – in advance. So it’s good that you know in advance what to expect. However, you will only receive this reward if enough investors are found to finance the given project. Because if not, you get your money back. At least in most cases.
This is relatively new in the investment world. Nevertheless, we can say that crowdfunding has experienced a big boom in recent years. And not only abroad, but also on the Czech scene. It is therefore not difficult for interested entrepreneurs and investors to find a platform that would be able to connect both of these groups, and thereby mediate the successful financing of the project from a larger number of investors, who will receive their promised reward as a result. So if all goes well.
Types of crowdfunding
However, crowdfunding is not just a modern way of investing. There are several types of crowdfunding. And not everyone offers investors some profit. So let’s see what types of crowdfunding you can come across.
Donor crowdfunding is exactly the type of financing where you can’t expect any kind of service in return. In such a case, people participate in a certain project through a donation. It can be various charity projects. For example, when people come together to help people in earthquake affected areas. Or to treat a sick child. Such collections are realized, for example, through the Donio.cz portal, where almost 6,500 projects and collections have already been financed.
When you opt for reward crowdfunding, it means that you donate to a project in exchange for receiving a service or product. We can find application in the music industry, for example, when in 1997 the British band Marillion launched a project where fans could pre-order their album. The person who ordered this album supported its recording, and in return for this support received the resulting album. Today, you can support similar projects for various rewards, for example via the website Hithit.cz
Debt crowdfunding is just what investors are usually looking for. That is, the possibility to participate in the financing of the project, when ideally the invested amount should be returned to them together with interest. The moment you invest your finances in the project, the company, or the entrepreneur, becomes your debtor.
Thus, he has the obligation to repay you both the amount he “borrowed” from you and the financial reward he promised in advance. Debt crowdfunding can take many forms. We will now introduce some of them through individual websites that connect entrepreneurs and investors.
It is a platform where you can find bonds of Czech companies for free. The portal will provide you with information about the given company, its activities and show you the rating evaluation of its bonds. You yourself can then decide in which of the companies you want to invest through bonds. In advance, you have an overview of how high interest the company’s bonds offer and what the minimum possible investment amount is. The actual purchase of bonds then takes place directly at individual companies. You can read more in our review of Dluhopisomat.
Another example of a platform that mediates debt crowdfunding is Bondster. This website allows investors to invest in secured loans. The moment you step onto this portal, you have a choice of several current projects. For all of them, you will find information about what the loan was used for, what it is secured by, and what interest you can expect. Again, you can get more detailed information in our Bondster review.
Similar to Bondster, Ronda Invest is also a platform where you can invest in secured loans. Basically, both platforms work quite similarly. You can also find important information about the loan at Ronda Invest, you know in advance the minimum investment amount and the maturity period. The difference, however, is that you will usually find higher returns with Bondster. Details can be found in the Ronda Invest review.
The Zonky platform will probably be familiar to you. Previously, it mediated a service where individual investors could lend to people of their own choosing. These loans were not only made for business purposes, but also so that people could buy a new car or renovate an apartment. Currently, however, the platform only offers the Rentiér service, where you lend to individual people, but you don’t know to whom exactly. So you don’t have an overview of who and how your finances will be used. On the other hand, you have a guaranteed diversification of the portfolio, when you do not invest in a single consumer loan, but in several. However, the disadvantage here is the low valuation.
Upvest is one of the portals that offers you the opportunity to participate in real estate crowdfunding. And it is currently a big hit. Through this website, you can co-finance development projects. Debt and equity investments are available here.
Another type of crowdfunding that investors are looking for is equity crowdfunding. It means that when you participate in the financing of a given company’s project, you get a stake in the company. So a certain number of shares. To be more precise, it does not mean that you are buying shares of that company in the primary or secondary market. The shares of such companies are not freely traded on the stock exchange.
By acquiring company shares through financing, you have the same rights as any other shareholder. And that includes the right to a dividend. However, you must take into account the fact that start-ups are primarily looking for finance in this way. So don’t expect to make a quick buck on these stocks. And neither on their sale nor on dividends. It can be assumed that in the beginning the company will spend its resources mainly on its development. And so you can expect dividends only after a longer period of time. As well as income from the possible sale of securities.
How to participate in crowdfunding?
If you are interested in crowdfunding, you don’t have to worry about the lengthy search for how to actually participate financially in such projects. You can do everything from the comfort of your own home. Crowdfunding takes place over the Internet. All you have to do is find the right websites that focus on this type of investment, choose a project you like, and start investing. On some portals you have to register for this purpose (e.g. Bonster), on others you don’t (e.g. Dluhopisomat). We have already presented several servers that will offer you to invest in various projects. But let’s mention some others.
Czech crowdfunding platform
- Promissory note
- Bondster Ronda
- Invest Zones
Foreign crowdfunding platforms
When you choose a broker with whom you want to trade securities or financial derivatives, you usually look at how it is with security. Above all, regulation should guarantee you this. This means that the brokerage company in question has the necessary license to be able to offer its services also in the territory of the Czech Republic.
For crowdfunding platforms, this is somewhat debatable. It is a relatively new trend that has only recently begun to be addressed at the level of various regulations. More precisely in 2020. So currently you will hardly find such a licensed platform.
However, the situation should change next month. That is, November 10, 2023. On this day, new rules should come into force that respect the regulations of the European Parliament and the Council of the European Union. According to this regulation, it is necessary for European platforms that offer financing in the form of crowdfunding to be licensed by the authorities involved.
Similar to brokers, so specifically, Czech platforms must obtain a license from the CNB (Czech National Bank). The foreign ones must have licenses from other competent authorities. The advantage is that platforms that obtain a CNB license will then be able to offer their projects to foreign investors as well. At least within the European Union. Conversely, Czech investors will also be able to participate in projects from other EU countries.
Advantages and disadvantages
Crowdfunding is a specific form of investment that, like other types of investment, has its advantages and disadvantages. Now let’s imagine its pluses and minuses.
Thanks to this type of investment, you can participate in very interesting projects and help even small entrepreneurs to realize their project. And that was at the very beginning of the company’s operation. Until recently, this was the privilege of only large investors. And their favor is really not easy to win for budding entrepreneurs. Even small investors can thus contribute their little bit and become part of something big.
Compared to traditional methods of investing, crowdfunding has one big advantage. And the fact that investors can usually invest in individual projects via the given platforms for free. So you usually won’t come across typical investment brokerage or portfolio management fees. In addition, you know in advance how much you will earn in interest and how long you should expect to receive the entire amount. Gold trading, for example, cannot provide you with that.
But it’s important to keep your feet firmly on the ground when crowdfunding. You should keep in mind that you usually finance projects of companies that are in their very beginnings. And so it is not written anywhere that your investment will be returned to you at 100%. It is therefore important to really only invest free funds and diversify your portfolio. That is, not to support only one project, but several different projects. That way, you can count on the fact that if one of them doesn’t bear fruit, the others can thrive.
Another irrefutable fact is that when trading shares or commodities, you can use technical or fundamental analysis. These methods will help you to map the situation also due to the fact that they take into account the development of the asset in the past. But given that these projects are in the beginning, past developments cannot be taken into account here. It is therefore important not only to go through the information on the given platforms, but also to search elsewhere. That is, among publicly available information. Search not only for information about a specific company. But also about the sector in which the subject operates.
Group investing is a modern and currently fast-growing trend, so we will probably see it more and more often. It allows investors to become part of future large projects that they would not have been able to participate in not long ago. In the future, it can bring them the promised interest, but also dividends or income from the sale of securities. But it is important to realize that these are long-term investments. And that in a matter of years. So don’t count on getting rich quick here.
In addition, you should also keep in mind that even investing through crowdfunding is a risk. And that is precisely because these are new, not yet realized projects. Therefore, this method of investing should not be the only one that you do business with. As with traditional investing, you need to diversify your portfolio. Either by using another trading instrument or by investing in several projects at once. For this, we recommend paying sufficient attention to searching for important information not only about a specific company, but also about the sector in which it operates. And don’t forget that you will soon be able to check the security of the selected platform, which should already have the necessary license from November. The Czech ones should be regulated by the Czech National Bank.