The dark side of crowdfunding

,  9 April 2013

Crowdfunding is often seen as a fun, fast and safe method of raising cash for a project or start-up. But the risks are still plentiful, and failure can be very public.

A good campaign needs to be carefully crafted before it can be put before a crowd.
A good campaign needs to be carefully crafted before it can be put before a crowd.

Chris Buckingham, founder of the crowdfunding research agency minivation, exposes some of the risks to consider before embarking on a crowdfunding campaign.

With these tips, you should be able to reflect on your project and plan your campaign more effectively – before it’s unleashed into the public domain.

1. Revealing your business idea

Your idea may be very special, even unique. However, using crowdfunding platforms to broadcast it can mean you are giving away the nuts and bolts of what you want to do.

Could it be that a competitor will see the idea, add to it and do something even more special?

Could it be that a competitor will see the idea, add to it and do something even more special?

Imagine you have a piece of theatre and you put it out there to crowdfund. Lo and behold, a competitor does something very similar, but with a twist!

Taking legal action is expensive, and there’s no guarantee you would come out on top.

2. Crowdfunding and intellectual property

You may also have to expose an incomplete Intellectual Property (IP) process.

Patents take time to file and complete. Even a simple trademark in the UK takes three months before being granted, at best.

So before you start your crowdfunding campaign, think long and hard about how much you are going to have to tell potential investors about any IP you hold, or are going to hold.

It may be worth not starting the campaign until you are on a more sure footing.

3. Exposing your business model

Likewise, you may not want to show your business model to the world just yet.

Perhaps you have used an existing model in a creative way, added to one to fashion something new, or even thought of something unique that the world has never seen before.

It would advantage any potential competitor if they were to gain insights into your thinking before you properly hit the market.

4. Taking time to crowdfund

A good campaign takes a lot of time and effort. It needs to be carefully crafted before it can be put before a discerning crowd for inspection.

This means you have even less of an already scarce resource: your time.

Planning needs to be thorough to get you ready to hit the campaign trail. But what about the marketing plan that was due yesterday? Or the business plan you wanted to get ready before that talk in your local civic centre? 

Time is a reluctant friend to any project in most sectors, so getting this element right is really important.

5. Talking to investors

Depending on the crowdfunding model you choose to use, it may be that you have to accommodate a large number of stakeholders in your project. These will have varying degrees of knowledge about the project and its sector.

This may mean yet more time is taken up to persuade stakeholders that you are in control and have considered all sides of the argument.

Crowdfunding also means that traditional means of raising funds is changing. This could be seen as a good thing, as the traditional gatekeepers are swept aside in the rush to crowdfund.

Bear in mind, however, that there was a reason these people existed. They not only helped financially, but also offered invaluable contacts, know-how and experience. These shouldn’t be dismissed too readily.

6. Crowdfunding and tax issues

For all projects, a further layer of complication can come in the tax arrangement of the organisation.

Crowdfunding does not represent ‘free’ money. As with any income to an organisation, you need to declare it to your tax authority.

Depending on the country, this income may be taxed and will add a further issue to the tax assessment you need to complete.

7. Accounting complications

Things may get even more complicated if investors want to know your financial situation. This can take the form of simple requests about your trading figures to more complicated information concerning assets and the distribution of ownership.

Again, the biggest issue here is not so much the information as the time that may be needed to aggregate it. There are also no guarantees that the person requesting it will invest in you or the project.

8. Protecting crowdfund investors

Crowdfunding does not represent ‘free’ money: you need to declare it to your tax authority.

Investors may want to know that they are protected. For this to be the case, they may wish for you to use some asset, such as intellectual property rights or machinery, as collateral against their investment.

If things go wrong then they at least have something for their time and effort.

But what about you? You could be left with not only dented pride, but also the loss of the very thing you need to keep your project going. You might even have to start all over again from scratch.

9. Exaggeration and the law

There is also the risk of you being brought into a court of law if you tell untruths or exaggerate things to make an offer look better.

It’s natural for people to want the world to feel good about both a project and the management behind it. So a little extra number inserted here, or the tale of a big contract or commission on the horizon there, does no one any harm – right? Wrong.

If an investor relies on your provision of information and they later find this information was deceitful or wrong, whether intended or not, they may have grounds to ask for recompense.

Most things legal do not just come at a cost, they often come at a big cost. So tell it how it is and be honest from the outset. Crowdfunding, after all, is about transparency.

10. Failing in public

Failure is not a great feeling. Failing in public can be even worse.

Failure in crowdfunding is very public, as you still have to face up to friends, colleagues and partners if your project doesn’t work out.

Even with these things considered, crowdfunding can be an exhilarating way to get your project funded and garner publicity for it. If successful, it can lead to even greater publicity as local media and enterprise networks hear about your project.

The question is whether your project is in a position to deal with the kinds of risks involved in a crowdfunding campaign.

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