As Generation Z (Gen Z) comes of age, traditional financial pathways seem less appealing compared to innovative alternatives like crowdfunding and peer-to-peer (P2P) lending.
If you are a Gen Z, now entering the workforce, and seeking new avenues for investment that align with your values and lifestyle, learn about these methods that present exciting opportunities, however, also be aware of the risks.
Understanding the landscape
Crowdfunding has transformed the way startups and creative projects secure funding. Platforms like Kickstarter, Indiegogo, and GoFundMe allow individuals to invest in projects they believe in, often in exchange for rewards, equity, or future returns. Meanwhile, P2P lending platforms such as LendingClub and Prosper connect borrowers directly with investors, allowing users to earn interest on loans.
These methods appeal to Gen Z for several reasons: they are digital-native, socially conscious, and often seek to support entrepreneurs who align with their values. According to a 2022 report by Deloitte, 70 per cent of Gen Z prefers to invest in companies that prioritize social responsibility. This preference fuels the appeal of crowdfunding, where many projects aim to make a positive impact.
“Crowdfunding and peer-to-peer lending have become popular alternative investment strategies for Gen Z, and they offer a unique way to grow capital.
“Palmer Luckey (founder of Oculus Rift) is a notable example of successful crowdfunding; he began his campaign in 2012 at the age of 20, resulting in more than 9,500 backers, raising over $2.4 million (Dh8.8 million), and becoming one of the biggest crowdfunding success stories at the time.
“Other successful efforts of crowdfunding include the likes of Peloton - which also saw a 66 per cent increase in sales and a 94 per cent increase in subscribers during the early stage of the pandemic - and Veronica Mars, a film starring Kristen Bell, among other proven cases,” said Bas Kooijman, CEO and asset manager at securitisation company DHF Capital S.A.
The rewards
1. Accessibility and inclusivity: One of the most significant advantages of crowdfunding and P2P lending is their accessibility. Unlike traditional investment avenues, which often require substantial capital and financial acumen, these platforms allow even small investors to participate. For Gen Z, who may have limited financial resources, this facilitates the investment landscape.
2. Potential for high returns: Investors can potentially see higher returns compared to traditional savings accounts or bonds. Successful crowdfunding campaigns can yield significant profits, especially when backing innovative startups.
3. Supporting innovation and change: Gen Z is characterised by a desire to effect change. By investing in startups through crowdfunding, they can help bring innovative ideas to life, often in fields like sustainability, technology, and social justice. This alignment of values can make investing feel more purposeful.
4. Diversification opportunities: Both crowdfunding and P2P lending offer unique ways to diversify a portfolio. By investing in a variety of projects or loans, individuals can spread their risk across different sectors and asset classes.
“The accessibility and potential for high returns that a platform like Kickstarter, for example, offers is key especially when starting with smaller investments.
“It’s also helpful to understand the different types of crowdfunding platforms, such as equity-based (where you receive a share in the company) and rewards-based (where you get a tangible product or other perks), so you can choose the one that aligns best with your financial goals and risk tolerance.
“For Gen Z investors, who may not have large amounts of capital to invest, these options provide an entry point into the investment world that’s both exciting and innovative,” added Kooijman.
The risks
Despite the enticing rewards, these investment strategies are not without their downsides.
1. High risk of failure: The majority of startups fail within the first few years. Investors in crowdfunding projects can lose their entire investment if a company goes under. Unlike public companies, which are subject to regulatory scrutiny, many crowdfunding campaigns lack the same level of oversight, making it challenging to assess a project's viability.
2. Illiquidity: Investments made through crowdfunding or P2P lending are typically illiquid, meaning that funds are tied up for extended periods. Investors may not be able to access their money until the project succeeds or the loan is repaid, which can take years. This lack of liquidity can be particularly concerning for younger investors who may need quick access to their funds.
3. Regulatory risks: The regulatory landscape for crowdfunding and P2P lending is still evolving. Changes in laws and regulations can impact the viability of platforms and the security of investments. Gen Z investors should stay informed about potential regulatory shifts that could affect their investments.
4. Potential for default: In P2P lending, there is always the risk that borrowers may default on their loans. While platforms often conduct credit checks, there are no guarantees. In cases of default, investors may not recoup their initial investment, highlighting the importance of understanding borrower risk.
“However, as with all investments, there are risks; crowdfunding and peer-to-peer lending typically come with a higher level of it, mainly because the investments are less regulated and may lack the oversight that traditional investments have.
“For instance, if a startup fails or a borrower defaults, you could lose your investment entirely. Additionally, these types of investments can be less liquid, meaning it might be difficult to pull out your money quickly if you need it.
“With careful research and by spreading your investments across multiple projects, you can mitigate some of these risks,” added Kooijman.
Making informed decisions
For Gen Z investors, the key to navigating the world of crowdfunding and P2P lending is education. Understanding the potential risks and rewards is essential for making informed investment choices. Here are some strategies for mitigating risks:
- Conduct thorough research: Before investing in a crowdfunding campaign or P2P loan, it’s crucial to conduct due diligence. This includes reviewing the business plan, assessing the project's feasibility, and understanding the team behind the venture.
- Diversify investments: Rather than putting all funds into one project or loan, investors should consider diversifying across multiple investments to spread risk. This strategy can help cushion the blow if one or two investments underperform.
- Start small: For those new to these investment strategies, starting with smaller amounts can help mitigate potential losses while gaining experience in the space.
Bhavik Mehta, deputy head research - investment products, at investment company Century Financial shared insights with Gulf News saying,
When it comes to Gen Z and millennials, side hustles hold particular appeal. These younger generations prioritise flexibility in their work arrangements, seeking opportunities that align with their passions and offer a sense of purpose.
“They are digital-savvy and comfortable leveraging technology to explore and excel inside gigs. With the gig economy providing a platform for remote work and flexible arrangements, side hustles have become a means for Gen Z and Millennials to pursue their interests, gain experience, and achieve financial independence,” said Bhavik Mehta, deputy head research - investment products, at investment company Century Financial.
- Stay informed: Keeping up with industry trends and news can provide insights into market shifts and help investors make informed decisions.
“Crowdfunding and peer-to-peer lending also allow you to support causes or innovations that align with your values, which can make them particularly appealing to younger investors looking for more than just financial returns.
“Yet, it’s imperative to always approach these alternative investment strategies with a clear understanding of the potential rewards and associated risks,” added Kooijman.
As Gen Z continues to reshape the financial landscape, crowdfunding and peer-to-peer lending present compelling alternatives to traditional investment strategies. While these options offer the promise of high returns and the ability to support innovative projects, they also come with inherent risks. By taking a proactive approach to education and risk management, young investors can navigate this evolving landscape and potentially reap the rewards of their investments.
Ultimately, the future of investing is not just about financial gain; it’s about aligning investments with personal values and contributing to a better world. For Gen Z, crowdfunding and P2P lending may be the perfect blend of purpose and profit, provided they tread carefully and thoughtfully.
