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Brave new world of crowd investing

Most investors and traders worldwide are accustomed to traditional investment practices and time-proven options and may therefore be reluctant to adopt new approaches or technologies. In a traditional sense, making an investment implies that a person who possesses a sufficient amount of funds puts money into a profitable commercial venture, expecting to receive a return. Some investors prefer to take a cautious, risk-weighted approach and think several moves ahead. Others may appear to be more frivolous with money and trust their instincts, making spontaneous investments and exploring unconventional investment opportunities.

Crowd investing is a way of allocating money aimed at reaping dividends that is slightly different from the traditional investment routine. From an entrepreneur's point of view, it actualizes the principle stated in an old English proverb – “Many a little makes a mickle”. The essential idea of crowd investing is that the money needed to implement some project is gathered collectively, which means that anyone can become a co-owner of a business without huge investments while the startup gets a chance to take off without starving itself of resources.

For a long time, all large-scale projects were financed by a relatively narrow circle of investors, so there was no point in disclosing startup business ideas. This led to the formation of an elite investor club promising enormous dividends to its members. However, times have changed. At present, we are seeing crowds of potential investors ready to back socially significant or lucrative startups that can bring a solid return in the future. The market always reacts to new tendencies, and this time was no exception as it naturally embraced the needs of startup entrepreneurs seeking money for their projects and potential investors looking for new business opportunities. The growing popularity of social networking services and specialized fundraising web portals made it possible for aspiring minds and young startupers to put their revolutionary ideas into action.

From an investor's perspective, crowd investing guarantees each money lender some material reward, offering an excellent investment opportunity for those willing to back a promising venture.

The potential benefits of crowd investing can be exploited through any of the following options:

1. Debt-based crowdfunding (also known as crowd lending or peer-to-peer lending, abbreviated as P2P lending): an investor lends money to a startup that should be repaid with a certain amount of interest at a specified time.

2. Royalty-based crowdfunding: an investor backing a venture receives a certain percentage of revenue.

3. Equity-based crowdfunding: investors provide money to a project in return for shares. That enables them to become co-owners of the business and receive dividends.

The fact that crowd investing exists in multiple forms while plenty of new platforms are being developed to bring new ideas into the world indicates lively interest on the side of potential investors. It allows anyone to co-finance socially significant and/or profitable projects. Such collective investments can serve as a reasonable alternative to bank loans.

Experts attribute the appearance and rising popularity of the crowd investment practice to a fundamental shift in cost structure, i.e. the expenses that an enterprise must take into account when producing a product or providing a service. For example, in the industrial world new projects were mainly related to the modernization and expansion of the resource base, infrastructure and facilities. However, in our post-industrial society it is intellectual solutions that constitute the main object of investing. Capital injections are needed to launch scientific, technological, cultural and social projects that imply the creation of a new innovative product. Crowd investing services keep on top of the latest trends, enabling startup ventures to mobilize funds in order to develop pioneering technologies and ground-breaking solutions. We will go a little deeper into the concepts that crowd investing is based on and explore the way in which these companies operate in Russia and worldwide in our next article.


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