Your Views: Crowdfunding, Yay or Nay?

Crowdfunding on the internet, contrary to popular belief, has been around for a very long time. Dating back to 1997, British band Marillion achieved $60,000 in funding and subsequently used crowdfunding for their studio albums (Masters, Tim, 2011). Not so recently in 2008, Indiegogo was founded and thereafter the beginnings of the crowdfunding craze.

The concept is simple, share your idea with everyone and for those that like it, will give you the amount you’re asking for. With proper marketing techniques, projects can achieve their targeted funding in a very short period of time – Ouya, an open-source gaming console achieved funding of US$ 8.5 million in a span of only 29 days.

It is considered risky business

Crowdfund.co has an impressive list of 9 risks associated with crowdfunding. I found 5 of them important to discuss today:

1.      Risk of fraud, where funds may be used for a different purpose than what was initially disclosed.

2.      The possibility of resulting in crowding out of other forms of financing

3.      Business owners and project creators must learn how to balance the short-term influx of cash raised through Crowdfunding efforts with the daily cash flow expense requirements of their business. As crowdfunding transaction is only a one-time occurrence.

4.      There are limited follow-up mechanisms. Sponsors will not know how their money is being used, neither can they follow up on promised rewards if the project owners choose to dishonour their promises.

5.      Tax laws governing the e-commerce environment are not clearly defined.

So why is crowdfunding still popular?

For business owners, crowdfunding may serve as an affirmation to the recognition of the company or product. Crowdfunding is an effective way to achieve capital injections. Crowdfunding allows anyone to contribute. Crowdfunding also serves as an alternative instead of an equity sale of the company.

Crowdfunding may not necessarily be for a company or product, crowdfunding is used for charity, for financial assistance for medical bills. On the non-commercial end, crowdfunding is indeed helpful for those who are in need of financial assistance.

For contributors, crowdfunding is a convenient way to invest. Most crowdfunding sites require an individual to register, take a photo of their ID and bank statements and complete KYC requirements. Crowdfunding can, in some situations provide a relatively attractive return on investment as well. 

The future of crowdfunding.

Crowdfunding will undoubtedly still be around for a very long time as the internet progresses. With the ease of communication, it will be easier for companies to reach out to a wider audience. In my opinion, it is a matter of time where Blockchain Technology, with its’ ability to provide the security in each transaction to integrate with traditional crowdfunding processes. Do not confuse this with ICOs, which I will elaborate more into with my next article.

What are your thoughts on crowdfunding, would you participate in one? Let me know in the comments.

References: http://crowdfund.co/nine-risks-associated-with-crowdfunding/