Crowdfunding Best Practices
- Jul 10, 2016
- 2 min read
As the name implies, CROWDFUNDING is the practice of raising capital for a venture by soliciting contributions from people or “crowd.” The practice has risen in popularity as online platforms have made finding and funding opportunities relatively quick and easy.
As the numbers show, crowdfunding is extremely popular.
EQUITY CROWDFUNDING allows individuals to take a stake in a project’s success. It provides the crowd a share in the company, grants decision-making capabilities, and offers financial benefits should the company succeed. The risks of investment are high, and the reward potential is great.
However, there are a number of potential pitfalls investors, especially first time investors, must strive to avoid. Successful investors manage to protect their assets, often reaping high rewards by using these Crowdfunding Best Practices.
Invest only what you can lose - When you invest in equity crowdfunding, you are taking a bet on the venture’s success. As with all bets, only put what you can afford to lose on the table. It is recommended to invest less than a tenth of your portfolio in such high risk/high reward scenarios.
Know the Market - Before you dive in, get to know the market. Look for warning signs such as a recent flood of startups. This may simply indicate validation of demand, but an excessive increase in competition translates to a higher chance of failure
Watch for red flags - Be wary about falling prey to scams. When a project catches your eye, check other crowdfunding sites to see if it pops up. It is considered bad practice to seek funds on multiple platforms.
Do Your Research - It is important to remember that the information provided on a project’s page is usually the bare minimum. To really know your investment, you will need to do your own research. Investigate the owners. Anyone who is serious about online funding will have an online presence, and items like their social media profiles will help verify their identity. Search for past projects. Is this the first project they’ve posted? If not, what is their success record? How does their past experience fit with the project’s goals?
Identify business savvy - When looking for projects to fund, single out those that publish a contingency plan, additional funding streams, and other critical business information. These details show that the owners have business experience and make it more likely their venture will succeed.
Find partners - Try not to go in to investing alone. Look for a partner to provide a second opinion and increase your due diligence. Although it is best to partner with a professional advisor, anyone with experience in small business or entrepreneurship can also prove helpful.
In the end, make sure you invest in something you are passionate about. You are investing your time as well as your money, both of which are important assets to protect.
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