When Will I See a Return on My StartEngine and Wefunder Investments?
StartEngine and Wefunder can be an incredibly lucrative diversification option if done correctly. But equity crowdfunding investments through StartEngine and Wefunder can take five to ten years or more before investors see a return. This guide breaks down what investors can expect and ways that investors can maximize their return.
Investing in startups has never been easier thanks to platforms like StartEngine and Wefunder. These equity crowdfunding platforms democratize finance by allowing everyday investors to invest in early-stage companies. However, a key question remains: When will you see a return on your investment? This comprehensive guide aims to provide insights into the timelines, potential returns, and strategies you can employ to maximize profits on StartEngine and Wefunder.
Table of Contents
Understanding Equity Crowdfunding
Equity crowdfunding allows companies to raise capital by selling shares to retail investors. Unlike traditional investment methods, the barriers to entry are often much lower, enabling a more diverse pool of investors to participate. With the industry clearing over 1 million investors, many investors are left wondering when they will see a return on their investment, how that might happen and what it will look like.
Equity crowdfunding is similar to investing in the broader stock market in many ways. Investors trade their money for a security interest in companies with the hope of selling that interest at a higher price at a later date. But unlike the broader stock market, it is much harder to sell. Investments in Regulation Crowdfunding investments (Reg CF) must be held for at least one year before selling. After that period, you're holding stock in a private startup which means you have limited, if any, options to sell anyway.
The StartEngine and Wefunder Ecosystem
Both StartEngine and Wefunder operate under Regulation Crowdfunding and Regulation A (Reg A) rules. Reg CF permits companies to raise up to $5 million from accredited and non-accredited investors. Regulation A permits companies to raise up to $75 million. The platforms differ in terms of fees, due diligence, and industry focus, but they share the same core objective of democratizing investment.
Key Features
StartEngine: Offers investment opportunities in various sectors, including tech, healthcare, and consumer goods. Fees are typically 3.5% for the investor and between 7% and 12% for the issuer.
Wefunder: Wefunder has deep roots in the equity crowdfunding and venture capital worlds. Wefunder charges 7.5% of the total fundraise for Reg CF and $375k flat fee for Regulation A raises.
Factors That Influence ROI
Several factors can influence your return on investment (ROI) from startups on these platforms. The ROI will be the difference between the share price you purchased the startup at and the share price you sold your shares at.
Company Performance: The startup’s revenue, profitability, and market position will directly impact your investment's value.
Initial Valuation: If the valuation you invested in the startup at was significantly higher or lower than their market value, then that will effect your long-term ROI.
Market Conditions: Economic factors and industry trends can either boost or hamper growth prospects.
Type of Equity: Preferred shares often come with added benefits like dividend payouts, whereas common shares may not.
Exit Strategies for Investors
There are a number of ways investors can see a return on their investment. Depending on what stage they are raising at largely depends on the timeline. If the startup is at it's seed stage funding, it could take as much as 5-10 years or more before investors see a return. If they are at their Series A, venture capitalists typically expect a return within 5 years and will push the startup to hit that timeline. If it is their Series C or later, the company is likely gearing up for an IPO within two years.
Here's how you could potentially get a return on your investment:
1. IPO
If the startup goes public, you can sell your shares on the open market. This is one of the most ideal ways because it allows for liquidity, the ability to hold long-term if you still believe in the company, and typically a large ROI.
2. Acquisition
In case of a buyout, you might receive a lump sum payment or shares of the acquiring company. Not all acquisitions result in a positive ROI, as the company might have gotten acquired out of liquidation sale simply to pay off debts.
3. Secondary Markets
Some platforms allow for the resale of shares, although this is less common in equity crowdfunding due to regulatory restrictions. StartEngine recently launched StartEngine Marketplace, which allows anyone to sell their shares in nearly any company invested in through equity crowdfunding.
How to Maximize Profits
To increase the likelihood of a profitable exit, consider the following:
Diversify: Invest in a range of industries and startups to mitigate risk. Studies have shown the more startups invested in, the higher return.
Research: Utilize due diligence resources provided by platforms and conduct your own. Democratizing.Finance has a suite of articles and content to help anyone at any stage learn to maximize ROI in their startup investments.
Valuations: There are many ways to calculate valuation. Investing in companies with reasonable valuations is critical to maximizing ROI.
Stay Updated: Keep an eye on updates from startups you’ve invested in.
Consult Financial Advisors: Seek professional advice for personalized investment strategies.
Conclusion
StartEngine and Wefunder have made it easier than ever to invest in startups, but there are many variables that can affect when and how you'll see a return. By understanding these factors and employing smart investment strategies, you can increase your chances of making a profitable exit.
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