6 myths of crowdfunding

It's powerful, popular, and changing the face of investment. But what are the biggest misunderstandings around crowdfunding?

1. “It’s only for hobby projects”

Crowdfunding can fund all sorts of things. It’s great for imaginative projects, such as the Exploding Kittens card game and a wildly successful rethink of the bee hive. Back in 1997, rock group Marillion funded a tour of America via crowdfunding, a landmark at the time.

But crowdfunding has a proven track-record in large commercial projects. The Oculus virtual reality headset was funded by 20,000 individuals for over $2 million, eventually being sold to Facebook for $2 billion. Craft beer brand BrewDog raised £41m from 50,000 shareholders over eight years, before landing £213m venture capital funding on a £1bn valuation.

2. “Your cash is trapped for years”

Liquidity is important to investors. Who knows when you’ll need cash at short notice? The truth is that some crowdfunding schemes lock in your capital for the duration of the project. Others offer quick exit routes. Property Partner offers an easy way to cash-out, with zero penalties. Our Resale Market allows for the sale of shares to other investors at a price determined by the seller. For this reason alone, many investors prefer to use a platform, rather than invest in property directly, which really would tie-up their cash for the medium to long term.

3. “It’s under-regulated”

In fact, crowdfunding is rigorously policed. First, UK platforms are covered by national and international law. Second, each organisation must be authorised and regulated by the Financial Conduct Authority. The FCA is mandated to protect consumers, and uphold the integrity of the market. Third, there are government protections, such as the Financial Services Compensation Scheme. This protects funds held in an account. With Property Partner, the funds in your account that are not invested in properties are held on trust in a segregated client monies account at Barclays Bank. This is a separate bank account that is ring-fenced from the monies of Property Partner. Because of the segregation it’s unlikely you′d need additional protection. However, in the event that you are unable to recover your funds, you are protected by the FSCS, to a limit of £85,000 (bank default) or £50,000 (Property Partner default).

4. “Risk is high”

All investments involve an element of risk. However, it is possible to reduce risk. The first is to invest in a sector with an abundance of reliable market data. Property Partner, for example, offers the widest possible spectrum of market indicators. These include a House Price Index, displaying historic price trends for the region; projected yield; the mortgage structure; performance data; and gearing. The status of each property is updated every six months after a valuation by an independent RICS-certified surveyor.

Second, diversification is vital to lowering risk. Investing via a platform, such as Property Partner’s, offers a simple way to split capital between dozens of investments.

5. “The crowd is always wise”

Crowds are often wiser than individuals. The author James Surowiecki explored the phenomenon in his hit book The Wisdom of Crowds. He begins with the the story of an ox at a country fair. The fair-goers guess the weight of the ox for a prize, and although no single guess was correct, the average of all guesses was spot-on. The wisdom of crowds principle holds true in other contexts. A study of crowdfunded venture capital published by the Harvard Business Review concluded: “Despite the diversity of backers, research I have conducted…shows that they are often at least as good at making decisions as experts.”

However, Surowiecki and others note that crowds need specific conditions to function optimally, such as open information and expertise. For this reason, Property Partner employs a team of industry experts to scour the UK for the best opportunities. Key market data is then provided, to illuminate the portfolio. Investors then make selections from the curated shortlist. The approach is structured to harness the best dynamics of both expert and crowd wisdom.

6. “It’s immature”

Crowdfunding dates back to war bonds launched in the 1730s. Since then it’s always been a part of the investment scene. Consumers who buy shares on the stock market are engaged in a form of crowdfunding. Angel investing is also crowdfunding – providing the original funding for hits such as Google and Uber. Angels invest around £1.5bn in the UK alone each year.

Today’s investment platforms utilise the internet, to make it easier and cheaper to invest. Today, crowdfunding is a mainstream asset class worldwide. Even the notoriously risk-averse Chinese government licenses crowdfunding. The World Bank calls crowdfunding “a potential silver bullet” for expanding innovation in the developing world. Along with shares, bonds, and commodities, crowdfunding is now a proven part of any well-balanced portfolio.

Find out more about how Property Partner’s property crowdfunding platform works.
 

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About the author
Charles Orton-Jones is a freelance business writer, specialising in business and FinTech. Former editor of EuroBusiness magazine, he now contributes to many newspapers, business magazines and blogs.
 

 




 

Capital at risk. The value of your investment can go down as well as up. The Financial Services Compensation Scheme (FSCS) protects the cash held in your Property Partner account, however, the investments that you make through Property Partner are not protected by the FSCS in the event that you do not receive back the amount that you have invested. Past performance is not a reliable indicator of future performance. Gross rent, dividends and capital growth may be lower than estimated. 5 yearly exit protection or exit on platform subject to price & demand. Property Partner does not provide tax or investment advice and any general information is provided to help you make your own informed decisions. Customers are advised to obtain appropriate tax or investment advice where necessary. Please read Key Risks before investing.