What Is Crowdfunding?
Crowdfunding is a newer funding model that enables anyone to contribute to a project if they feel it should be made. On sites like Kickstarter and Indiegogo, people are putting their money toward everything from video games in development to new gadget ideas to charitable contributions.
Eager to jump on new economic opportunities, some states have allowed the creation of crowdfunding sites focused on business. For example, CraftFund is a crowdfunding effort dedicated to craft breweries and food establishments in Wisconsin. Michigan has a platform for state residents to invest in crowdfunding opportunities within the state at CrowdfundingMI.com.
The market in these crowdfunding sites has become big enough that the SEC has been asked to issue national regulations.
There are a few major benefits to the crowdfunding model:
- You can help bring products to market that might otherwise not get funded through more traditional channels.
- By investing, you may be among the first to get a product and/or receive it at a cheaper price.
- Crowdfunding allows you to invest in not just products, but causes.
- Contributing as part of a group allows you to contribute smaller amounts of money while still seeing a project through to its goal.
Crowdfunding campaigns have been used to raise money to protect public trail space, fund a “Veronica Mars” movie and bring back “Reading Rainbow.” (If you now have the “Reading Rainbow” theme song stuck in your head, you’re welcome.)
With these factors working in favor of crowdfunding, it can be easy to think this is the next big thing in investment. That may still prove to be true, but there are risks involved.
Any investment in a new endeavor carries risk. The biggest risk is that projects or causes often just don’t pan out.
It’s important to think of crowdfunding sites the same way you think of regular investments. They may or may not work out. Investing in a product on Kickstarter isn’t like buying a product on Amazon – there’s no guarantee that you’ll receive it.
Too often, people back products simply because they’ve been promised that they’ll get the product first. That’s fine if the product actually goes to market. Sometimes it doesn’t work out that way. With that in mind, there are some things you can do to minimize risk.
You should look at the feasibility of the idea first. This includes not only the idea itself, but the experiences of the person leading the project. It’s all well and good for someone to say they’re going to create the hover board from “Back to the Future,” but ask yourself if the person seeking funding has the requisite background in physics or propulsion systems.
Watch for Scams
Take the con on your crowdfunding investments; don’t get taken by a con. Evaluate all investments to see if they pass the sniff test.
Kickstarter protects against scams by only allowing crowdfunding for physical goods, and by requiring that people give a tangible example of what they’ll be doing in the form of a prototype or a video.
Indiegogo and other sites like Go Fund Me allow you to contribute to a wider variety of causes, including charities. While this opens up more opportunities, these platforms may also be more vulnerable to scams. Use the same intuition to judge the credibility of causes online that you would in real life.
Have you invested in a crowdfunding project before? Did it work out? Do you have any tips or war stories for other readers?
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