What is Crowdfunding and How Does it Work?

You don’t need to have tons of money to invest in exciting projects nowadays. With that new fangled thing called the internet, almost anyone, from anywhere in the world, can make awesome investments. “How” you might ask. The answer: crowdfunding!

What is Crowdfunding

Crowdfunding is a new and innovative way for people to invest their money and this post will dive deep to answer the questions “what is crowdfunding” and “how does crowdfunding work.” On top of that, you’ll also learn about a few popular crowdfunding sites that you can take advantage of (if you so choose).

Ready to learn more? Let’s get right into it.

What is Crowdfunding?

Put simply, crowdfunding is a way to raise money for a project or investment by pooling money from a large number of people. Hence the name: crowdfund (the fund is comprised of a crowd of people).

The thing about crowdfunding is that you can do it for all sorts of creative projects. This includes crowdfunding for school tuition, for personal expenses, for nonprofit organizations, or even for personal expenses. These would mostly all fall under the category of “for a charitable cause” and aren’t the kind of crowdfunding we’re interested in.

The kind of crowdfunding that we’re talking about in this post is investment/equity crowdfunding. This is basically when businesses raise capital from the public, and in exchange for the capital, offer a small stake in their operations.

Each person will usually give small amounts of money, but with a large number of individuals participating, you can really raise some big bucks. When you take part in crowdfunding like this, you effectively become owners/shareholders in the business/project.

The reason why crowdfunding is so ground-breaking is that in the past (in the United States at least), it was very hard to invest in entrepreneurial projects unless you yourself were an owner already, or you had a relative who was one of the founders (or was in your personal network), or you were a venture capitalist.

With most crowdfunding platforms, there may be some restrictions as to who can sign up, but almost regardless of the funding goal, you can invest with as little as $10.

How Does Crowdfunding Work?

With most crowdfunding platforms, you’re no more than a few clicks away from your next investment.

When you go to the various sites, you’ll find tons of private companies looking to raise money for their next project. They could be people offering real estate projects, start-ups, even masterworks of art!

Usually, there will be a little brief, some pictures, a timeline for the investment, and also the expected IRR. The IRR is a projection of how much your total return might be, over a particular time period, when investing in a particular project.

Then, if you’re interested in any, you can read more about it and make your decision about whether or not you want to partake.

An example crowdfunding process for you might look like:

  • See and read about a startup looking to launch a new product
  • Click through to their crowdfunding website and read more about their project
  • Decide that you think it is worth a shot (and also you think they can realistically achieve their growth and deliver on their promised IRR)
  • Decide how much you want to invest
  • Fill out some information, and invest!

It’s honestly really that easy to participate in a crowdfund investment!

Pros and Cons of Crowdfunding

Of course, like with most things in life, there are both advantages and disadvantages to crowdfunding (compared to other investment options). It’s always important to weigh the pros and cons of any financial decision before jumping right in.

Pros of crowdfunding:

  • You don’t need a whole lot of money to get started – Something great about this kind of investment is that most online crowdfunding platforms set a very low minimum investment threshold. If you were to try and invest in real estate by yourself, you’d need to have TONS of capital to secure a property (potentially upwards of a million dollars). Real estate crowdfunding websites, on the other hand, do all the heavy lifting for you and the minimum investment can go as low as $1000. Likewise, some peer-to-peer lending platforms let you invest with as little as $25.
  • You have the potential to earn above-market returns – With crowdfunding, because you’re mostly investing in early stage startups and early adopters of new technologies, you have the potential to see massive returns. It’s highly likely than on a successful investment, you’ll see returns higher than the average S&P500 return of 10% annually.
  • You can diversify your portfolio outside of the traditional public market investments likes stocks and bonds. Or you can get expsodure to real estate without having to find and manage properties yourself. You can even buy your share of a Picasso.

Cons of crowdfunding:

  • Crowdfunded investments can take a long time to pay off – If you’re looking for a way to make a quick buck, crowdfunding is likely not the kind of investing for you. Most crowdfunding projects (like real estate for example) take years and years to be fully realized.
  • Often, you are investing very serioulsy into the team that is managingthe asset as well as the asset itself. So you’ll want to do some due dilligeance on those folks. But iften the crowdfunding site has done a good amount of due dilligeance for you.

Popular Crowdfunding Sites

So, let’s say you’ve answered the question for yourself “what is crowdfunding”, weighed your pros and cons, and decided that you do indeed want to participate in crowdfunding. If so, here are some of the most popular crowdfunding sites that you can look into!

Real Estate


Crowd Street

Get unparalleled access to institutional-quality real estate deals online. Register for a free account and start building your real estate portfolio today. For accredited investors only.

Diversyfund

DiversyFund creates investment funds of high-value private market assets — multifamily real estate — for the everyday investor.  A real alternative to investing in the stock market. 

Fundrise

Invest in a diversified portfolio of real estate investments across the US with Fundrise. See why more than 170,000 investors have invested more than $1 billion with Fundrise. Get Started in Minutes. 

Realty Mogul

With RealtyMogul, you'll gain access to private real estate offerings which are thoroughly vetted and have the potential to generate both income and growth for you. Worry no more about due diligence and transparency, because RealtyMogul has got you covered in these two regards.

Alternative Investments


Yield Street

With minimum investments as low as $500, Yieldstreet makes alternative investing available to everyone, not just the uber-rich and wealthy. This includes investing in asset classes like art, short-term notes, and real estate. They even accept non-accredited investors!

Masterworks

Use Art as an Alternative Investment to Diversify Your Portfolio. Blue-Chip Artwork. Low Minimums, Simple and Exciting. 66% of Billionaires Collect Art, so Why Aren’t You?

  • RealtyMogul – With RealtyMogul, you’ll gain access to private real estate offerings which are thoroughly vetted and have the potential to generate both income and growth for you. Worry no more about due diligence and transparency, because RealtyMogul has got you covered in these two regards.

Start-Ups


Start Engine

StartEngine is an equity crowdfunding platform that allows everyday people to invest and own shares in startups and early-stage companies.

Recap: What is Crowdfunding

With so many different ways to invest and make money nowadays, you really need to be a special kind of platform to set yourself apart… crowdfunding does just that.

Crowdfunding is when a company raises money online to fund their next project via social media and collects the money from a large number of people in exchange for shares (ownership). This lets almost anyone get into the investing game with minimums as low as $10 on some platforms.

As always, make sure to thoroughly do your research before diving headfirst into any financial decision. That being said, if done right, crowdfunding does have the potential to build you large amounts of wealth and set you on the path to financial freedom!

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