{"id":6943,"date":"2022-05-31T19:57:29","date_gmt":"2022-05-31T19:57:29","guid":{"rendered":"https:\/\/ifg.local\/articles\/what-is-crowdfunding-and-how-to-make-money-with-it\/"},"modified":"2023-09-21T10:03:40","modified_gmt":"2023-09-21T10:03:40","slug":"what-is-crowdfunding-and-how-to-make-money-with-it","status":"publish","type":"post","link":"https:\/\/www.islamicfinanceguru.com\/articles\/what-is-crowdfunding-and-how-to-make-money-with-it","title":{"rendered":"What is Crowdfunding &#8211; And How To Make Money With It &#8211; IslamicFinanceGuru"},"content":{"rendered":"<p><strong>Investing can be a pain \u2013 but there are certain asset classes that genuinely bring the joy back into it.<\/strong><\/p>\n<p><!--more--><\/p>\n<p>One such asset class is venture capital. Here, you invest in early-stage startup businesses looking to become the next big thing or solve some of the world\u2019s biggest problems.<\/p>\n<p><strong>Crowdfunding is probably the simplest way to introduce yourself to the world of venture capital investment (also known as \u201cVC investing\u201d)<\/strong>. On one crowdfunding website, some people on average make an average IRR of 50% annually! Much more on that below.<\/p>\n<p>For a start-up, it\u2019s a route that companies like <strong>Monzo<\/strong> used to become who they are today (more on that too below!)<\/p>\n<p>In this article, we\u2019re going to focus on <strong>equity crowdfunding, <\/strong>which is a particular type of crowdfunding mostly used by <strong>entrepreneurs<\/strong> and <strong>investors.<\/strong><\/p>\n<p>We\u2019ll cover:<\/p>\n<ul>\n<li>What is Crowdfunding?<\/li>\n<li>Crowdfunding v Angel Syndicate<\/li>\n<li>Crowdfunding v Venture Capitalist<\/li>\n<li>Where can you start crowdfunding?<\/li>\n<li>How can you do it successfully?<\/li>\n<li>Pros and cons<\/li>\n<\/ul>\n<p>After reading, you\u2019ll feel well equipped to make a judgment of whether crowdfunding is for you \u2013 because to be honest, although it\u2019s not too difficult, it\u2019s not right for everyone.<\/p>\n<h1>What is Crowdfunding?<\/h1>\n<p>First, let\u2019s get on the same page \u2013 what is crowdfunding?<\/p>\n<p>Crowdfunding is a <strong>public<\/strong> way of <strong>raising money<\/strong> from <strong>many people<\/strong> for a <strong>specific goal<\/strong>. This is mainly done online and especially through crowdfunding websites. Once all the money is pooled together, the capital is used to finance the project or goal.<\/p>\n<p>Crowdfunding is used by all sorts of individuals, such as entrepreneurs, politicians or charities.<\/p>\n<p><strong>It\u2019s hugely popular.<\/strong> According to <a href=\"https:\/\/www.moneypenny.com\/us\/resources\/blog\/four-crowdfunding-success-stories-to-inspire-you\/\">Moneypenny<\/a>, In 2018 there were 6,455,080 crowdfunding campaigns, and this number is expected to nearly double in the next four years.<\/p>\n<p>An example of a success story includes <strong>Monzo<\/strong>, who in 2016 hosted their crowdfunding on the popular website Crowdcube. They achieved <strong>\u00a31 million investment in just 96 seconds<\/strong>.<\/p>\n<p>There are different methods of crowdfunding. Broadly it can be done in the following two ways:<\/p>\n<h2>1.&nbsp;&nbsp;&nbsp; Debt crowdfunding<\/h2>\n<p>This consists of different types of crowd-based lending, such as peer-to-peer lending (aka P2P) and invoice financing. It works in the same way as a <strong>traditional loan<\/strong>, however, the money borrowed is from multiple people.<\/p>\n<h2>2.&nbsp;&nbsp;&nbsp; Equity crowdfunding<\/h2>\n<p>In exchange for cash, public investors get a <strong>proportionate slice of equity<\/strong> in the business venture.<\/p>\n<p>The exchange of cash for equity means this method goes a step further than normal crowdfunding.<\/p>\n<p>It\u2019s more common to find <strong>start-ups<\/strong> using equity crowdfunding.<\/p>\n<h1>Crowdfunding v Angel Syndicate<\/h1>\n<p>An<strong> angel syndicate <\/strong>is a group of investors clubbed together to invest in an early start-up.<\/p>\n<p>It\u2019s different from crowdfunding because in a syndicate, the investors could be hand-picked, exclusively invited or would have had to buy in with a larger amount of cash. Crowdfund investors can be anyone \u2013 with very little cash required (usually just \u00a3100).<\/p>\n<p>Angel syndicates often have one lead investor who picks the best deals and then bring the rest of the syndicate in on the deal.<\/p>\n<p>Think of angel syndicates like a sophisticated crowdfunding operation where only selective startups get on, and the host of the whole syndicate is always investing themselves.<\/p>\n<p>As angel syndicates are far more hush hush than crowdfunding platforms, they get access to better deals. The best startups would usually much rather keep very quiet about what they\u2019re doing if they can.<\/p>\n<p>What we do at the <a href=\"http:\/\/ifg.vc\/\">IFG Angel Syndicate<\/a> is therefore a <strong>specialist form of equity crowdfunding<\/strong>, where we\u2019ll only invest in <strong>high-quality sharia-compliant start-ups<\/strong>.<\/p>\n<p>It\u2019s better to use an angel syndicate if you\u2019re not completely sure of what you are doing. You\u2019ll also get access to a sophisticated network, better companies and better deals.<\/p>\n<h1>Crowdfunding v Venture Capitalist<\/h1>\n<p>A venture capitalist (VC) is a <strong>fund manager&nbsp;<\/strong>that has raised many millions of pounds from pension funds, sovereign wealth funds, banks and other institutional investors, who provides capital to companies that they believe show high growth potential. In exchange for their investment, they receive equity.<\/p>\n<p>The difference between investing through crowdfunding or a VC, is that to invest with a VC fund, you\u2019ll typically need a minimum ticket of \u00a3100,000, and often over a million.<\/p>\n<p>VCs are incredibly choosy about their investments, but they have a much shorter time horizon to angel investors as their fund needs to wrap up and give back money to their own investors within 7-10 years.<\/p>\n<p>VC investors probably get access to the best deals. Thereafter you have angel investors. Finally you have crowdfunding platforms.<\/p>\n<h1>Where can you start crowdfunding?<\/h1>\n<p>Now we know what crowdfunding is, where does one begin?<\/p>\n<p>This is done primarily online. A few popular places include:<\/p>\n<ul>\n<li>Seedrs<\/li>\n<li>Crowdcube<\/li>\n<li>Kickstarter<\/li>\n<li>Funding Circle<\/li>\n<li>RateSetter<\/li>\n<\/ul>\n<p>If alternatively you want to go for an angel syndicate, we at IFG have an <a href=\"https:\/\/www.islamicfinanceguru.com\/startup-funding\/\">angel syndicate<\/a> you might want to check out.<\/p>\n<h1>How can you do it successfully?<\/h1>\n<p>We\u2019ve talked about where you can go to invest\/raise money from crowdfunding. Now let\u2019s look at:<\/p>\n<ol>\n<li>How much it costs to use crowdfunding platforms; and<\/li>\n<li>Investing on these platforms \u2013 what you need to know<\/li>\n<\/ol>\n<h2>1. Cost<\/h2>\n<p>As a <strong>start-up<\/strong>, the cost is super important to consider. Crowdfunding websites will <strong>charge to host you<\/strong>. Additional costs (if not already included) may have to be spent on marketing, promo, support, etc.<\/p>\n<p>If you\u2019re an <strong>investor<\/strong>, you should check if they\u2019ll charge you to invest or have any fees on profits you make.<\/p>\n<h3>Example \u2013 Seedrs<\/h3>\n<p><strong>Let\u2019s take Seedrs as an example<\/strong>. They will only<strong> charge a start-up if they successfully raise<\/strong>. This includes a <strong>6% charge<\/strong> on however much is raised, and a <strong>completion fee of \u00a32,500 (excl. VAT)<\/strong>. You can pay for further promotion and campaign support.<\/p>\n<p>Seedrs also <strong>charge investors<\/strong> 7.5% of their profit when they generate a positive return on an investment and sometimes, they\u2019ll charge direct fees.<\/p>\n<p>There are a few important implications here to keep in mind:<\/p>\n<ol>\n<li>No high-flying startup that all the sophisticated investors in the know want to invest in, will need to use crowdfunding and pay money to Seedrs to raise for them. If you have VC funds and angel syndicates giving you \u00a3500,000 without any fees, why would you take \u00a3500,000 with a 6% fee?<\/li>\n<li>It might seem like you \u2013 the investor \u2013 are not paying fees and that feels good. But ultimately you are investing that money into the startup, and they will just use your money to pay the fees to Seedrs. So while its not actually coming out of your pocket, it is reducing your investment\u2019s cash pile.<\/li>\n<\/ol>\n<h2>2. Investing \u2013 what you need to know<\/h2>\n<p>To help us understand, we can use the Seedrs 2018 Portfolio Update. It\u2019s really good at showing us<strong> who are the people that make the most money.<\/strong><\/p>\n<p>There\u2019s a big difference between those who pick and choose their investments to those who invest in everything without any thought.<\/p>\n<p>Let\u2019s say you had a hypothetical portfolio with <strong>all 577 deals available on the platform<\/strong>. This would produce a platform-wide <strong>IRR of 12.02%* <\/strong>(26.42% when EIS and SEIS tax reliefs are taken into account \u2013 more about these below).<\/p>\n<p><strong>Compare that to the top 10% of investors<\/strong> who have made 10+ investments. They achieved a crazy huge average <strong>IRR of 47.90% <\/strong>(62.45% when tax-adjusted).<\/p>\n<p><strong>In other words<\/strong>, the top 10% of people on Seedrs make 50% annual return. If you invest in everything on Seedrs, you\u2019ll make a 12% return. Therefore, there\u2019s a big difference between those who know what they are doing and those who don\u2019t.<\/p>\n<p><em>*(Note: IRR means \u201cInternal Rate of Return. It shows how much the portfolio has increased or decreased per year. It\u2019s the most common way to measure the performance of a portfolio of private equity or venture capital investments)<\/em><\/p>\n<p><strong>Ensure you diversify your portfolio<\/strong> to spread the risk and increases the chance of success. See if the crowdfunding website has a fund. On Seedrs an investor can create a diverse portfolio through a single investment into a passive fund over a period of time.<\/p>\n<p><strong>Consider fintech<\/strong>. In 2019, it was Seedrs most popular sector by amount raised, generating \u00a373.8 million in investment and accounting for half of their deals. However, if sharia-compliance is a concern for you, then tread lightly here as most fintechs will not be sharia-compliant.<\/p>\n<p>B2C businesses make up nearly 50% of Seedrs\u2019 portfolio, with B2B accounting for 30% and mixed B2B\/B2C making up the rest.<\/p>\n<p>Investors remember this:<\/p>\n<ul>\n<li>Crowdfunding websites can get you <strong>good to get exposure to mass market B2C<\/strong> (business to consumer) related start-ups. This is as the best B2C startups will consider it is worth paying the Seedrs 6% fee to list on their platform just to get their brand out there.<\/li>\n<li>However, you <strong>won\u2019t get access to an elite start-up, which focuses on B2B<\/strong>. This is because most of the time elite start-ups in this category couldn\u2019t give a hoot what the mass market thinks of them.<\/li>\n<\/ul>\n<p>So Crowdfunding is great for B2C startups. Take a look at Monzo and Revolut. They raised from VC investors but they also crowdfunded. They like their customers owning a bit of their business as it provides allegiance and brand awareness.<\/p>\n<h3>Tax reliefs<\/h3>\n<p><strong>EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Scheme) tax reliefs may be available for your investments, so consider them. <\/strong><\/p>\n<ul>\n<li>EIS \u2013 you can claim back up to 30% of the value of your investment in the form of income tax relief up to \u00a31million per tax year.<\/li>\n<li>SEIS relief \u2013 this has so many benefits. Examples include an income tax relief of up to 50% and a \u00a3100k gov contribution allowance per tax year.<\/li>\n<\/ul>\n<p>Other reliefs include capital gains tax reinvestment relief, capital gains disposal relief, inheritance tax exemption and loss relief.<\/p>\n<h1>Pros and Cons<\/h1>\n<h2>Pros<\/h2>\n<ul>\n<li>Crowdfunding is the easiest way for entering start-up investing.<\/li>\n<li>Can start investing with as little as $100 \u2013 making it a good way to learn.<\/li>\n<li>You could claim EIS and SEIS tax benefits on your investments.<\/li>\n<li>Potential for huge returns on your investment.<\/li>\n<li>Encourages business and job creation.<\/li>\n<\/ul>\n<h2>Cons<\/h2>\n<ul>\n<li>The start-ups that are crowdfunding won\u2019t be of the highest quality.<\/li>\n<li>Potential to lose all your money as an investor<\/li>\n<li>Start-ups are illiquid, and not always easy to sell your stake in.<\/li>\n<li>They carry a human risk \u2013 what if a founder leaves\/has a dispute? Could they recover?<\/li>\n<li>Crowdfunding websites will charge\/take fees \u2013 Seedrs charge start-ups 6% on any profit made.<\/li>\n<li>Minimal information may be available on the start-up.<\/li>\n<li>Usually a last resort for the start-up.<\/li>\n<li>No further due diligence is done by more experienced people.<\/li>\n<li>Mainstream crowdfunding platforms do not sharia-screen the start-ups they list, meaning there\u2019s no way of guaranteeing that that company won\u2019t take haram debt in the future.<\/li>\n<\/ul>\n<h1>Conclusion<\/h1>\n<p>Now you know not just the basics of crowdfunding, but the key ways in which people can make money from it.<\/p>\n<p>If you\u2019re an investor, don\u2019t be scared of taking the plunge. It\u2019s an easy, cheap and halal (depending on the company) way to make money.<\/p>\n<p>Have a look at what we do at the <a href=\"http:\/\/ifg.vc\/\">IFG Angel Syndicate<\/a>, it\u2019s a good place to start if you\u2019re interested in investing.<\/p>\n<p>Any way you invest money, it carries risk. Equity crowdfunding carries greater risk due to the nature of the asset class. However, the rewards could be huge and it creates huge opportunities for people to grow their business and there are great tax reliefs.<\/p>\n<p>If you\u2019re still not feeling investing in crowdfunding, <strong>it\u2019s probably better for you to join an angel syndicate instead<\/strong>. And, if you can invest in a \u00a31m ticket, you could put that in a VC fund.<\/p>\n<p>If you enjoyed this article, you can follow me on&nbsp;<a href=\"https:\/\/twitter.com\/haidersaleem_\"><strong>Twitter<\/strong><\/a>&nbsp;or&nbsp;<a href=\"https:\/\/www.linkedin.com\/in\/haider-saleem\/\"><strong>LinkedIn.<\/strong><\/a><\/p>\n<h6><strong>Sources<\/strong><\/h6>\n<p><a href=\"https:\/\/www.investopedia.com\/articles\/investing\/102015\/invest-through-equity-crowdfunding-risks-and-rewards.asp\" rel=\"noopener\">https:\/\/www.investopedia.com\/articles\/investing\/102015\/invest-through-equity-crowdfunding-risks-and-rewards.asp<\/a><\/p>\n<p><a href=\"https:\/\/www.moneypenny.com\/us\/resources\/blog\/four-crowdfunding-success-stories-to-inspire-you\/\">https:\/\/www.moneypenny.com\/us\/resources\/blog\/four-crowdfunding-success-stories-to-inspire-you\/<\/a><\/p>\n<p><a href=\"https:\/\/www.investopedia.com\/terms\/c\/crowdfunding.asp\" rel=\"noopener\">https:\/\/www.investopedia.com\/terms\/c\/crowdfunding.asp<\/a><\/p>\n<p><a href=\"https:\/\/www.investopedia.com\/terms\/v\/venturecapitalist.asp\" rel=\"noopener\">https:\/\/www.investopedia.com\/terms\/v\/venturecapitalist.asp<\/a><\/p>\n<p><a href=\"https:\/\/islamicfinance.guru\/articles\/investment\/startup-investing-what-is-it-and-how-can-you-get-started\" rel=\"noopener\">https:\/\/www.islamicfinanceguru.com\/investment\/startup-investing-what-is-it-and-how-can-you-get-started\/<\/a><\/p>\n<p><a href=\"https:\/\/www.seedrs.com\/learn\/help\/what-fees-does-seedrs-charge-investors\" rel=\"noopener\">https:\/\/www.seedrs.com\/learn\/help\/what-fees-does-seedrs-charge-investors<\/a><\/p>\n<p><a href=\"https:\/\/www.seedrs.com\/learn\/blog\/seedrs-takes-the-crown-as-the-uks-most-active-investor-after-facilitating-215-investments-in-2019\" rel=\"noopener\">https:\/\/www.seedrs.com\/learn\/blog\/seedrs-takes-the-crown-as-the-uks-most-active-investor-after-facilitating-215-investments-in-2019<\/a><\/p>\n<p><a href=\"https:\/\/www.seedrs.com\/learn\/blog\/2019-a-record-breaking-year\" rel=\"noopener\">https:\/\/www.seedrs.com\/learn\/blog\/2019-a-record-breaking-year<\/a><\/p>\n<p><a href=\"https:\/\/www.companyfundingoptions.co.uk\/seedrs-reports-12-irr-across-its-platform\/\">https:\/\/www.companyfundingoptions.co.uk\/seedrs-reports-12-irr-across-its-platform\/<\/a><\/p>\n<p><a href=\"https:\/\/www.privateequitywire.co.uk\/2018\/09\/24\/268675\/seedrs-reports-platform-wide-irr-1202-cent-and-top-quartile-investor-irr-3134\">https:\/\/www.privateequitywire.co.uk\/2018\/09\/24\/268675\/seedrs-reports-platform-wide-irr-1202-cent-and-top-quartile-investor-irr-3134<\/a><\/p>\n<p><a href=\"https:\/\/www.privateequitywire.co.uk\/2018\/09\/24\/268675\/seedrs-reports-platform-wide-irr-1202-cent-and-top-quartile-investor-irr-3134\">https:\/\/www.privateequitywire.co.uk\/2018\/09\/24\/268675\/seedrs-reports-platform-wide-irr-1202-cent-and-top-quartile-investor-irr-3134<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Investing can be a pain \u2013 but there are certain asset classes that genuinely bring the joy back into it.<\/p>\n","protected":false},"author":61,"featured_media":6944,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":"","wds_primary_category":0},"categories":[10,5,13],"tags":[33],"acf":[],"_links":{"self":[{"href":"https:\/\/www.islamicfinanceguru.com\/wp-json\/wp\/v2\/posts\/6943"}],"collection":[{"href":"https:\/\/www.islamicfinanceguru.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.islamicfinanceguru.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.islamicfinanceguru.com\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/www.islamicfinanceguru.com\/wp-json\/wp\/v2\/comments?post=6943"}],"version-history":[{"count":0,"href":"https:\/\/www.islamicfinanceguru.com\/wp-json\/wp\/v2\/posts\/6943\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.islamicfinanceguru.com\/wp-json\/wp\/v2\/media\/6944"}],"wp:attachment":[{"href":"https:\/\/www.islamicfinanceguru.com\/wp-json\/wp\/v2\/media?parent=6943"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.islamicfinanceguru.com\/wp-json\/wp\/v2\/categories?post=6943"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.islamicfinanceguru.com\/wp-json\/wp\/v2\/tags?post=6943"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}