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August 24, 2017   Fundraising, Investing, Trading, Voices   No comments

Understanding the Differences Between Crowdfunding Investing & Traditional Canadian Investments

NCFA guest post | Aug 23, 2017

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The success of crowdfunding since its early beginnings in Canada when regulators approved its use has been a surprise to the broader investment community that felt it might be a fad. Early adopters around the world have shown that the interest in crowdfunding is only growing with small investors and affluent investors alike able to tap into equity and lending opportunities that formerly they couldn’t hope to gain access to.

Because of this popularity, it’s useful to take a step back to appreciate the fundamental differences between investing via crowdfunding and traditional Canadian investments.

The Different Risks of Crowdfunding

The risk profile of crowdfunded investments is entirely different to buying into the Canadian bond market or purchasing some ETFs to index the entire Canadian stock market. Quite often, the businesses are new and unproven. In other cases, established businesses are looking for funding outside of the banking sector to complete their expansion plans.

It is difficult for people without proper industry experience to appreciate the type and amount of risk when investing in a specific sector. For instance, only when having worked in real estate is it possible to fully understand what an investment in a commercial building entails. You can become better educated on the risks or the cap rates for commercial real estate, but in many cases, there is no substitute for experience in that industry.

Income & Return of Capital Differences

For many crowdfunding investments, the return of capital comes when the business is sold, equity bought out or the company is listed on a public market. Income from earnings is not necessarily part of a crowdfunding investment model. Investors understand this aspect of capital investing into startups but it’s worth noting as a fundamental difference.

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With public equities, investing in pipelines, utilities, gold mines, timberland holdings, real estate in the form of REITs, and other operating companies often involves the receipt of a cash dividend. This steady income stream is available to investors to cover current expenses and avoid the need to sell shares during a market downturn when the income is sufficiently high enough. The cash flow tends to be a substantial and visible component of the investment return received by the investor.

Getting to Know the Company’s Management

Access to a company’s management is restricted to business contacts, suppliers, brokers, and institutional investors with billions on the line. Unlike this situation, with crowdfunded investments, smaller investors have greater access to ask questions directly of the management and to see how they respond. Many of these leaders with a bachelors in management have had lifelong careers in business management. Their comments often provide key insights to understand their businesses’ better than through the quarterly company calls of public companies where questions are restricted to approved brokers only. For curious crowdfunding investors, access to management is a considerable plus.

There is clearly a place for a mix of traditional and crowdfunding investments in people’s portfolios. Certainly, for companies that wish to invest in smaller startups without taking a significant stake early on, crowdfunding is an interesting opportunity for their businesses too.

NCFA Jan 2018 resize - Understanding the Differences Between Crowdfunding Investing & Traditional Canadian Investments The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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