Over Thanksgiving dinner, my brother-in-law told everyone about an investment he’d just made.
He’d put money into a new board game called “The Witcher: Legacy.” Inspired by a Netflix show, the game is a multi-player adventure that takes place in a world of heroism and revenge.
Everyone at the table could see how excited he was. There was just one problem:
He didn’t know it, but my brother-in-law hadn’t made an “investment” at all.
Let me explain.
It Pays to Invest in Startups
Over the years, my brother-in-law has heard me rave about the benefits of startup investing:
- The opportunity to invest in cutting-edge sectors like AI, robotics, and space exploration.
- The chance to diversify your portfolio with an “alternative” asset class that can move in a different direction than the stock market.
- And most importantly, the returns. According to Cambridge Associates, startups have produced average annual returns of 58% over the last twenty-five years.
So it didn’t surprise me to learn that he had dived into startup projects. What did surprise me was the project he’d put money into…
All The Rewards, None of The Equity
You see, he’d gotten into the project through a platform called Indiegogo.
Indiegogo was one of the first sites to offer “crowdfunding,” back in 2008. The thing is, Indiegogo offers what’s known as “rewards-based” crowdfunding.
With “rewards-based” crowdfunding, donors contribute capital toward projects. In return, they receive a reward. For example, if the project is a movie, the reward might be tickets to the first screening. If it’s a video game, the reward might be a copy of the game.
The rewards can be intriguing, and an effective incentive to contribute funds. But if the project becomes a hit, the donors don’t receive any of the profits — not a dime!
A Legendary Startup Leavers Its Backers Without a Cent
For example, consider what happened with Oculus…
In 2012, Oculus launched a rewards-based crowdfunding campaign to develop the Oculus Rift, one of the first virtual-reality (VR) headsets designed for immersive gaming.
In exchange for a financial contribution, Oculus promised backers an early version of its headset.
The campaign was hugely successful, for Oculus, anyway. After raising $2.5 million, it was soon acquired by Facebook — for $2 billion. But since the people who contributed capital didn’t own an actual stake in the company, they didn’t get one cent of the profits!
If only this historic campaign had used the other type of crowdfunding…
Equity-Based Crowdfunding
The other type of crowdfunding is “equity-based” crowdfunding.
This has similarities to rewards-based crowdfunding, but there’s one major difference:
When you invest in an equity crowdfunding deal, you receive equity — an actual ownership stake — in the business you back. So if you invest in a startup and it becomes the next Uber or Facebook or Oculus, you’ll receive your share of the profits!
Know the Difference
I didn’t mention anything about this to my brother-in-law. Not yet, anyway.
He’d only contributed a small amount, and I didn’t want to rain on his parade.
But I did want to make sure that you knew the difference:
At Crowdability, we focus exclusively on equity-based crowdfunding.
So every deal that comes into your inbox — whether through our Deals email, or a recommendation from me or Matt in essays like this one, or a recommendation from Private Market Profits — gives you the chance to own equity in a high-potential private startup.
And that’s how you position yourself to reap the benefits of startup investing.
Happy investing.
Best Regards,
Editor
Crowdability.com
