The rise of internet-based 'crowd funding'.
One of the more intriguing things about the stock market is the smaller companies' effect; the fact that over the longer term, smaller companies as a group outperform larger companies, though they often underperform over shorter periods of time.
Some people take this a step further and look for higher returns from unquoted companies and business startups. This has become much easier in the last few years with the rise of "crowd funding", where established companies and startup ventures openly solicit funds through privately owned specialist websites like Indiegogo and Kickstarter.
Essentially, these websites let you perform a similar role to that played by the wealthy investors in television's Dragon's Den, by allowing you to back or reject business proposals with your own money.
Raising money becomes easier
Even in the best of times, small companies can often find that it is difficult and expensive to raise risk capital from investors. What these crowd-funding websites do is to connect entrepreneurs with investors and reduce the cost of raising funds, much like eBay (NASDAQ: EBAY.US) helps people buy and sell goods by increasing the size of their potential customer base and the range of available products.
Small companies are generally considered to be riskier investments than large companies because many of them lack the financial strength to cope with an economic downturn and they are often very dependent upon one or two products. But when it comes to companies funded through crowd funding, the risk to investors is far greater if only because the vast majority of business startups fail.
Obviously, it requires a lot of work to gain the trust of strangers to the point that they will invest in your crowd-funded project, which is why the more successful ones tend to have raised up to half of the required capital from themselves, family and friends. There's nothing like having plenty of your own skin in the game to encourage others to invest in you!
Funding creative projects
One of the earliest examples of internet-based crowd funding was seen in 1997 when the band Marillion raised $60,000 from its fans to fund their North American tour. Increasingly, crowd funding is being used for charitable and creative projects like this where a big incentive for "investors" is that they will become part of something.
This is very similar to how "angels" support theatre productions, where a financial return upon their investment is not necessarily the main priority. Crowd funding is becoming more popular and mainstream in the entertainment industry, as was seen at this year's Sundance and Cannes film festivals where roughly 10% of the films shown had been crowd funded.
I was introduced to the idea of crowd funding a few months ago when I came across the live-action fantasy comedy web series JourneyQuest. This was made by the same team who were behind and in front of the camera for the cult classic "The Gamers: Dorkness Rising", which is a feature-length film about role-playing games like Dungeons & Dragons and the whole culture of gaming.
Having made the first series of JourneyQuest with their own money, the producers decided to make a more ambitious second series. So they turned to crowd funding and pretty soon they had raised their target of $100,000 (and more).
High-risk venture capitalism
Investors who get involved in crowd funding should mentally write off much of their investment when they make it because of the high risks involved. That's because they are investing in something where the returns are very uncertain and they may find that it is all but impossible to sell their investment to someone else.
One way to reduce the risk is to act like the textbook venture capitalist who invests in many early stage companies and startups. They expect that the majority of them will fail, but hope to be more than compensated for these losses by a few stellar successes.
Crowd funding isn't my sort of thing as an investment, mostly because of the very high inherent risk. I'll stick to smaller company investment trusts and the occasional high-risk punt in a small oil company, as long as they are quoted on a recognised stock market so at least there is an exit route if things go badly wrong.
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> Tony does not own shares any of the companies mentioned in this article. He owns DVDs of "JourneyQuest" and "The Gamers: Dorkness Rising" and he still plays Dungeons & Dragons.