What are the risks of investing on Wefunder?
As with any investment, there is always a risk that you will lose your money. Because Wefunder is an equity-based platform, there is also the risk that the company you invest in will not be successful, and you will not see any return
How can you invest on Wefunder?
The minimum amount you can invest is $100. However, most investments on Wefunder are much larger, typically around $1,000. You do not need to be an accredited investor.
To invest, you first need to create an account on Wefunder's website. Once you have created an account, you should log in on Wefunder. Then you can browse through the different investment opportunities available. When you find an opportunity that you are interested in, you can click on it to get more information.
Once you have decided that you want to invest, you will need to fill out a short questionnaire. This is to ensure that you understand the risks involved with investing.
Once you have completed the questionnaire, you will be able to make your investment. You can pay for your investment using a credit card or a bank transfer.
What kind of companies raise on Wefunder?
Wefunder is open to companies of all types, from tech startups to restaurants. However, the vast majority of companies that raise on Wefunder are tech startups.
How does Wefunder make money?
Wefunder makes money by charging a success fee to the companies that raise money on its platform. The success fee is 7% of the total amount raised.
Unrealized gains on Wefunder
An unrealized gain or loss is a gain or loss that has not yet been realized. For example, if you purchase a stock for $100 and it is now worth $150, you have an unrealized gain of $50. This is because you have not yet sold the stock and so you have not realized the gain.
Similarly, if you purchase a stock for $100 and it is now worth $80, you have an unrealized loss of $20. Again, this is because you have not yet sold the stock and so you have not realized the loss.
Investors typically only realize gains or losses when they sell their investments.
It really does not make sense to look at unrealized gains in the crowdfunding space because the vast majority of gains on a paper actually result in a 100% loss of the investment. For example, you bought 0.1% of a startup at a $1M valuation. Then a startup increased its valuation to $1.5M. Excluding dilution, your unrealized return is 50%. However, most of the early-stage startups go bankrupt; so your real returns will be $0 in most cases.
Most startup investments take 5-7 years to realize their returns. So, we will look at if you have invested in around 100 companies on Wefunder in 2016-2017 how much returns you would have generated.
Realized gains on Wefunder
A realized gain is a gain that has been realized. For example, if you purchase a stock for $100 and sell it later for $150, you have realized a gain of $50.
Investors typically only realize gains or losses when they sell their investments. Therefore, in order to calculate your realized gains, you need to look at all of the investments that you have sold.
Which companies on Wefunder had an exit?
From the pool of companies that raised on Wefunder in 2016-2017, none had any exits. So, realized gains would be zero (this excludes companies that issued dividends or returned interest on the loan). However, there are 2 companies that have raised very large rounds of funding recently; these companies have probably around a 50% chance of exiting (taking into account the chances of success for companies with a similar amount of funds raised).
Beta Bionics raised over $57M in its Series C round earlier this year. Another company - Meow Wolf raised over $150M in 2019. Let's assume that based on a 50% probability mentioned above, one of these companies will succeed. I will probably pick Beta Bionics as a winner as their funding round happened less than 12 months ago whilst Meow Wolf has not raised major funding since 2019 according to Crunchbase data. Per discussion on Wefunder, the company's valuation was around $100M when it raised on Wefunder in 2016.
What does Beta Bionics do?
Beta Bionics is a medical device company that is developing the world's first bionic pancreas. The company's mission is to provide patients with Type 1 diabetes with greater freedom and better health by creating an artificial pancreas that can automatically deliver the right amount of insulin at the right time.
Based on looking at the list of around 10 publicly traded companies that are in the business of diabetes treatment, we can assume that Beta Bionics will IPO at a valuation of $5B. If we assume that the IPO will happen in 2026, and assume a 60% dilution of investors who invested in 2016, an investor would have generated an annualized return of around 37.97% and 10-year cumulative return of 2,400%. However, if we assume that we have lost money on the other investments we made on Wefunder, the total return dramatically changes.
Let's say that we invested $100 in each of the 100 companies on Wefunder in 2016. So, our total investment would be $10,000 in that year. Based on the analysis above, we would lose $9,900 on 99 startups and generate a return of 2400% on the $100 we invested in Beta Bionics. This means that we would have turned our Beta Bionics investment into $2,400. When we sum up total losses of $9,900 and total gains of $2,400, we will be left with a total loss of $7,500. This means, that in 10 years, investors would have had a negative 75% return on their investments on Wefunder. This is a terrible return. In comparison, investors would have generated around 7% a year, historically speaking, by investing in SP500 with much less risk.
There are a few things to take into account before we jump to the conclusion that it might be hard to generate returns on Wefunder. First, investment opportunities that existed in 2016 on Wefunder might have been a lot worse than opportunities that are today (because of dramatic changes in the crowdfunding space). Second, there might be other companies other than Beta Bionics exiting which might change the returns dramatically. Third, there are few biotech companies that IPO-ed at much larger than $5B. In this case, potential returns on Beta Bionics will be much larger. Fourth, in our analysis, we have invested 100 in every company that was raising on Wefunder. Instead of investing in every company, if we selected a few, and one of those companies was Beta Bionics, our total returns would have been positive.
Alternatives to Wefunder
For investing in startups and early-stage companies, some popular alternatives to Wefunder are AngelList, SeedInvest, and Netcapital. For example, GenesisAI is currently raising on Netcapital. They are building a global AI marketplace. Founded by a Harvard alum, GenesisAI is revenue-generating and has raised over $5M. If you would like to join the AI revolution, investing in GenesisAI might be a good fit.
Wefunder is a legit crowdfunding platform that enables investors to invest in startups and early-stage companies. However, it is important to note that these investments are high-risk and might not generate any returns. If you're looking for alternative investments with less risk, you might want to consider investing in publicly traded companies or investing on Netcapital.
Based on our analysis you are most likely to generate a negative 75% return in 10 years after investing $10,000 in 100 startups on Wefunder in 2016.
Disclaimer: I am not a financial advisor and the information above is my personal opinion and is for educational purposes only. It is not intended to be investment advice.