I love crowdfunding.
Thanks to this new phenomenon, private investors can now get involved in financial deals that were always closed to them in the past. That has to be good news.
Some crowdfunding sites allow individuals to lend directly to businesses. Others allow small investors to buy into start-up businesses (this is known as ‘equity crowdfunding’).
And new innovations are coming through all the time.
So today I thought I’d highlight three new crowdfunding opportunities that I’ve come across in just the last few weeks…
Convertible crowdfunding – investing alongside venture capitalists
First up is a new concept called ‘convertible crowdfunding’.
Instead of buying ordinary shares in a young company, you buy convertible shares that could convert into ordinary shares later on. Normally that will be when a company raises cash from venture capital (VC) companies in the future.
The first convertible investment opportunity is in an online advertising company called Future Ad Labs, available via the Seedrs website (I should flag up that I own a very small shareholding in Seedrs).
Future Ad Labs has previously raised cash on Seedrs, as well as from a conventional VC fundraising round. It expects to raise more cash from VCs within the next year. But before that, it’s raising some more cash via the convertible crowdfunding offer.
If you buy convertibles in Future Ad Labs now, you’ll then receive ordinary shares when the next VC fundraising is complete, and you’ll get your shares at a 15% discount to the VCs. You won’t have to pay any cash when the shares are converted. So if you invested £850 in convertible shares, those shares would be converted to ordinary shares worth £1,000, at the valuation paid by the VC companies when they invest.
The nice thing is you’re getting the opportunity to invest at a later stage than is normally the case with equity crowdfunding. I hope we’ll see further similar deals in the future.
On the downside, any investment in Future Ad Labs is still very high-risk. The company was only founded two years ago, and we don’t know how much revenue it’s generating, let alone whether it will ever generate a profit.
So while I like the fact that private investors like us are able to get into these sorts of deals now, as with any equity crowdfunding investment, there’s a good chance that you’ll lose all your money. So if you are going to start investing in crowdfunding, it’s probably best to spread your money across a range of investments.
You can find out more about equity crowdfunding in my recent article, How to set yourself up as a Dragon. If you’re not already a subscriber, sign up for a four-week free trial to MoneyWeek magazine, and you’ll also get full access to the web archive where you can read my article.
Lending to landlords
If convertible crowdfunding sounds just a bit too high octane, you could look at Landbay, which offers a new variation on peer-to-peer lending.
Rather than lending money to a business, or offering a personal loan for an individual, you’re providing the cash for a buy-to-let mortgage. You’re effectively a mortgage lender.
You can lend from as little as £100, and you can split your money between lower and higher-risk ‘bands’. Each loan is split into three bands: the A+ band covers the first 60% of the purchase price, the B band covers 60-75% of the purchase price, while the C band covers 75-80%.
This means that if the borrower defaults and the property is sold, A+ lenders will get their money back even if the property is sold at a 40% discount to the purchase price. But B and C lenders will only get their money back if the property is sold at a smaller discount. There is also a protection fund for A+ lenders, which reduces the risk some more.
Currently, A+ lenders can get around 4% interest, B lenders are getting around 6%, while C lenders are getting around 9%.
If you lend on the site, you make clear how you want to split your money between the three bands. Landbay then diversifies your money across a range of loans so that your risk is spread out. Each mortgage is for five years, so lenders’ money is pretty much locked away for that period, but there will be a secondary market if you want to get your money back after three years.
Obviously, there’s a risk here that the property market will collapse in the UK, and that some borrowers may default – particularly if interest rates in the UK start to pick up over the next five years, which seems more likely than not. On the other hand, 9% is a very attractive interest rate. It’s really up to you to decide whether that higher return is worth the extra risk involved.
Just remember that you really need to be able to lock the money away for the full five years – getting early access to the money is likely to cost.
Crowdfunding green energy
My final crowdfunding opportunity is the E2 Energy project. You can invest as little as £100 in this project and in return you’ll get 7.5% a year in interest, and your money back after three years. Your money will be invested in wind turbine projects.
That’s a decent interest rate. Obviously, it’s a riskier investment than a savings account – you won’t get bailed out by the government if anything goes wrong, for starters – and there’s always the risk that something could go wrong with the turbines.
That said, the company behind E2 Energy, the Trillion Fund, acts as trustee of the assets. So if something goes wrong, you should hopefully get your money back. If you’re interested in these sorts of projects, you can also see a range of other environmental crowdfunding projects on the Trillion Fund website.
Just to emphasise – all of these investments carry risks. Don’t invest money you can’t afford to tie up for a while, and be aware that there is the potential for loss (particularly with the convertible crowdfunding).
That said, I do think that crowdfunding is an exciting area for anyone with money to invest and the patience to do a bit of research, and it’s great to see the market developing in this way. We’ve also talked a lot more about crowdfunding in our recent ‘crowdpower’ report – if you haven’t already seen it, then I recommend that you find out all about it here.
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