10 Good Reasons People Use to Avoid Impact Investing via Crowdfunding--And Why They May Not Apply to You!

Sponsored by: Dealmaker
Devin Thorpe Champion of Social Good,
Posted on 1/18/2023 11:40:54 AM

This post was originally shared at Superpowers for Good.

I suspect some readers are tired of my posts about impact crowdfunding—the practice of making investments via crowdfunding to create a positive social or environmental change while earning a financial return at the same time.

You may be one. You may think, “impact crowdfunding isn’t relevant to me because I can’t participate.” Today, I will review ten common reasons that hold people back. For each, I’ll offer my thoughts to help you see how and why you can participate.

1. I can’t afford it.

I get it. Angel investment clubs expect or require members to invest tens or even hundreds of thousands of dollars annually, sometimes in each deal the group approves. Most of us can’t afford to do that! You’re not alone.

Investing tens of thousands of dollars is not for the faint of heart. It may not be appropriate even for many “accredited investors”—those legally defined as wealthy enough to invest that way.

Here’s the thing, investment crowdfunding is different. You can start investing with just $100. There are a few offerings available (eight now) where you can invest as little as $50!

While I often encourage impact crowdfunding investors to seek to build a portfolio by investing regularly, say once per month, you could accomplish the same risk management strategy by investing once per quarter or even once per year!

If you can afford to ride a bike, which requires you to buy and maintain it, you can likely afford to make a $100 investment once per year.

2. I’m not an experienced investor.

It is intimidating to start investing directly in small businesses and startup companies, especially if you haven’t participated in that community in the past. Investing—even $100—is risky. You aren’t guaranteed to get your money back.

You’d like to get your money back—and then some. That’s the foundational goal of any investment. Experienced investors have an easier time generating financial returns.

How do you think experienced investors got their experience? They started investing.

You will learn. Quickly. By making a single impact investment via crowdfunding, you’ll make the biggest step toward becoming an experienced investor. Each investment you make will teach you more about the administrative process, the legal issues, the financial considerations and the impact metrics that enable you to become an experienced investor.

You will become an experienced investor.

3. I don’t know how to measure impact.

Your goal for investing, like mine, may be to change the world. You may even have a clear goal—reversing climate change, for instance. But that doesn’t mean you know how to measure the CO2 removed by making an investment in a cleantech company.

You’re not alone. Measuring impact is a challenge for the most sophisticated investors and even for the management teams of the companies they back.

Collectively, we’re getting better. We’re all learning more about measuring more than the activities we back to determine their results and effects on people and the climate.

You could invest with blinders on, ignoring impact as a goal. Sticking with climate change as an example, you could look simply for the best financial opportunity. In some cases, that could lead you to back a company that contributes directly to increasing global CO2 emissions.

If you seek to address climate change with your investments, does it make more sense to invest in an oil and gas business, for instance, or a company that makes solar panels, wind turbines or devices to capture wave or tidal energy? Not only are you more likely to have a positive impact on your goal to reverse climate change by investing in renewable technology, but you could also eventually make more money.

Many smart people expect the entire world to discontinue the use of fossil fuels entirely, or nearly so, by 2050. Investing in oil and gas could be a great short-term play, but the long run seems to favor investments in renewables—even if we can’t predict the exact number of tons of CO2 your $100 investment might create.

4. No one is creating impact I want to support.

It is easy to believe that no one is building a company to do the sorts of things you care about—if you haven’t checked.

Let’s say you want to focus on supporting LGBTQ founders but assume it is impossible to find them. Wrong. Click here to find them.

Would you like to back women working on startups with social impact in your state, say, Utah? Click here to see the company that fits those three criteria.

While it is certainly possible that no one is doing precisely what you want this week, check back next week. Dozens of new offerings appear every week.

Here’s something to think about. The better we get at funding the things we care about, the more entrepreneurs will do what we care about!

 

5. For-profit companies can’t create impact.

If you’re like most people, you associate social impact with nonprofits. If you want to do something for the environment, you look for a nonprofit to support. Regardless of your cause, you’re likely to think first of nonprofits as the way to create that impact.

Despite my enthusiasm for crowdfunding, I continue to give to nonprofits. Last year, Gail and I donated about 15 percent of our taxable income. So, please don’t interpret my enthusiasm for impact crowdfunding as an alternative to your philanthropy.

Still, it is essential to note that for-profit businesses do have significant impact—sometimes for good. Elon Musk has become a lightning rod for criticism in recent months. Still, it is hard to name a company that has done more to advance practical climate solutions—EVs, solar panels, battery storage—than Tesla. And despite its stock performance in 2022, an investment in Tesla at the stage Musk joined the company would have yielded astronomic financial returns.

For-profit companies are part of the solution. Supporting them as we do nonprofits is now part of the model for social impact.

6. Impact investing is someone else’s job.

There is no doubt that big philanthropists donating to nonprofits wield a lot of influence and make a more significant dent in social problems than ordinary folks. As you may suspect, there are large impact investors—institutions and wealthy families—deploying funds by the billions.

However, very few of them are investing directly in crowdfunding campaigns. UpStart Co-Lab is working with the crowdfunding site Honeycomb Credit to help foundations invest some of their capital to build communities. The effort is in the pilot stage.

The reality is that impact investing is up to us. As the saying goes, we’re the people we’ve been waiting for. Together, we have almost unlimited power and influence.

7. Investing $100 doesn’t make a difference.

You’re right. Putting $100 to work in a company is a rounding error in most situations. Your money doesn’t matter.

Unless 100 other people also invest a little bit. The average crowdfunding investment is closer to $1,000 than $100. Your $100 is a signal to other investors in much the same way seeing swimmers in the water is a signal to others that swimming is safe, the water is warm.

Your investment, however small, is just one of many. If all the many investors said, “My little investment doesn’t matter,” no crowdfunder would ever raise any money. The entire premise of the crowd is that everyone’s little bit matters.

8. I don’t want to spend hours scrutinizing boring documents.

No one does. OK, I’ll admit, maybe someone does. Almost no one enjoys scrutinizing documents to understand the company’s prospects and risks.

Crowdfunding is a team sport. Here at Superpowers for Good, we formed the Impact Cherub Club to screen impact crowdfunding deals as a group. We divide up the work and meet together monthly to consider investing.

We’re having a ball, making a difference, and no one is overwhelmed by what we call due diligence.

9. Impact investing doesn’t offer good financial returns.

Some impact investments fail to deliver market returns. That’s true.

Many do. Some are not designed to provide market returns. Investors in those situations must choose whether to invest with the primary focus on impact. Sophisticated impact investors see their philanthropy as part of their investing strategy.

Donating money to a nonprofit yields social impact but no financial return. Investing money in an impact crowdfunding opportunity likely to yield only 50 cents on the dollar provides you with social impact and an infinitely greater financial return than your philanthropy!

But you never have to invest in any business that isn’t poised to provide you with the financial return on the structure you want. If you want only high-yield debt opportunities, you can pick them! If you prefer only high-potential, fast-growing startups of the sort venture capitalists back, you can choose them.

The choice is yours. You choose your investing style. Impact can still be part of your investing strategy.

10. Investment crowdfunding is too risky.

Investment crowdfunding is risky. There is no doubt. Don’t let anything I’ve said convince you that it isn’t risky. It is.

People still do it because it isn’t too risky. You need to understand how much money you’re willing to risk.

I like to think of the money I invest via impact crowdfunding as more like a hobby than retirement savings. I’m pretty sure I invest less—with the prospect of getting all the money back—than most golfers, skiers or tennis players spend on their sports every year.

My sport is running, and it costs me about $100 per year for a new pair of shoes. It’s a cheap sport, but note that if that were your annual impact investing budget—$100 per year—you are invited to the party.

So, it is true that my impact crowdfunding portfolio likely won’t yield the returns of my IRA. That’s why I’m not moving all my money from my IRA into impact crowdfunding. But that doesn’t mean I can’t play.

You can too.


If you’d like to join the Impact Cherub Club, there is no cost or obligation. Sign up here.

If you’d like to learn more to minimize your risk, optimize your financial returns and maximize your impact, join us for SuperCrowd23. Get your tickets at half price here.