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2013-08-28 00:00:00Money & FinanceEnglishRisks Of Crowd-Funding Of The Risks Of Crowd-Funding

Beware Of The Risks Of Crowd-Funding

2 min read

Crowd funding is slowly picking steam in India. In a market that has been rather stagnant for some time now, first time entrepreneurs who are digital media savvy have been encouraged to tap the crowd funding route to source funds for their business. Be it for the initial take-off of a business idea, a project, a movie or music videos or festivals, people are emboldened to tap their vast network of friends on various digital channels such as Facebook, Twitter, LinkedIn, Google+ to get funds. We spoke about Crowd-Funding and its basics in an earlier blog. Today we will talk about some of the inherent risks in this type of funding avenue and discuss what can be done to best manage those risks.

Cost Estimation –

Remember, even if your venture is likely to be crowd funded, you still have to go about your business plan like any other business. That means well thought out cost estimates, SWOT analysis, cost-benefit analysis and so on. In the absence of a proper business plan, your business model will falter, thereby wasting the money you would have collected via crowd funding. It may also result in loss of confidence.

Make Proper Use Of The Money –

Have you made a sound checklist of what you intend to do with the funds once they start coming in? A number of entrepreneurs do not have a sketched out plan of their outlays vis-à-vis the funds received, thereby resulting in a loss of opportunity. Make sure that you have pin-pointed your funds requirement to the actual spending requirement so that assets are created or operations supported.

Absence Of A Mentor/Guide –

Funds sourcing via angel investors or venture capitalists often bring in a mentor or guide in the from experienced business leaders by default. This is conspicuously absent in a crowd-funded situations. Entrepreneurs should save themselves from hitting the ground without a guiding hand; they ought to find suitable mentors who can guide them in the course of running the business.

Managing Expectations on ROI –

Crowd funding is a new phenomenon and is therefore, still evolving. People often pledge their money towards a start-up or project with no stake or expectation of return. However, if you, as an entrepreneur and receiver of the funds, make money, you become morally bound to share the returns with the bunch who helped you take off. Try to specify the ratio or the percentages in the event of a profit-sharing, so that no one is disgruntled over the basis on which the returns were apportioned.

As mentioned earlier, crowd-funding is still in an evolutionary stage. As days go by, corporate and governmental regulations will come in to regulate the market and such type of sourcing. In the meantime, use this avenue judiciously and accept funds only from those profiles who you know somewhat. That is because, the internet is filled with people who can cause more harm than good. Beware of imposters and do a proper background check to save yourself to accepting funds from wrongful sources.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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