What's the biggest reason not to invest? Most startups fail — about half don't even make it four years. And even if they do succeed, the value of your equity in the company might not be realized for years, when the company is acquired or goes public. "As it's a startup, you're not going to see any dividends — all the profits are going to be plowed back into growth," Swart said.
The one exception is if you use a platform that allows you to make a loan to the company, in which case you'll see regular but lower returns from interest payments. For instance, on the platform NextSeed, you could lend a food truck company any amount of money you want, and they pay you back at a guaranteed interest rate of 15% (except in the case of default, which is always a risk). A loan is different from an investment, where you aren't guaranteed to see any returns.
One major reason to be careful about investing in a small private business is because there's likely no market for trading your shares once you've invested. That means that you can't always sell it to someone else, even if you think your share has increased increased in value. Compare that with a stock or bond, which have liquid markets, like the New York Stock Exchange, where you can sell your shares to a total stranger who thinks it will be even worth more later.
Also, as the New York Times has pointed out, there is early evidence that some crowdfunding portals are not being properly regulated. SeedInvest founder Ryan Feit told the paper he had turned away "dozens of companies that wanted to raise money from investors on his site "that had clear red flags," only to find they had successfully landed at other portals.
As with all finance offerings, each of the companies is required to disclose material risks to the company to investors, and some of these can be quite long and scary-sounding. For instance, Crema.Co, a coffee subscription startup that gives you monthly deliveries of coffee beans from around the country, says in its risk report, "We may not have enough funds to sustain the business until it becomes profitable." They add that they may be underestimating how much money they need, and how quickly: "Even if we raise funds through a crowdfunding round, we may not accurately anticipate how quickly we may use the funds and if it is sufficient to bring the business to profitability."
They note that they're not even making any money right now — they've lost about the same amount of money the past two years. "Until the company achieves profitability, it will have to seek other sources of capital in order to continue operations," they say. Indeed, given that these companies are not public, many don't have a track record: Swart points out lots of research should be involved before you make any kind of move.