4 things you must know before raising capital through crowdfunding

Just a few weeks ago, Pirate3D made headlines, with reports saying that the company has hit a major cashflow issue and has only delivered 40% of orders.

Understandably, this raised plenty of concerns from consumers, investors, and even entrepreneurs looking to raise funds through crowdfunding. Like it or not, the crowdfunding industry is growing exponentially in this region. As reported by Massolution, crowdfunding will reach a total transaction volume of $34.4 billion globally by end of 2015.

But before you consider crowdfunding as a platform either for investments or fund raising for your startup, there are 4 important things to note:

1) Crowdfunding has been around for centuries

Before the rise of the internet, plenty of businesses have already raised funds publicly. Savvy authors have sold pre-orders for their books before writing a word and product-based businesses have collected payment from customers before even manufacturing it.

With the emergence of digital, such ways of raising capital has become more widely accepted, thus opening up more doors for entrepreneurs. However, with more people jumping on this bandwagon, this would also mean there are naturally more "bad apples," which leads me to the next point…

2) Be committed

No entrepreneur would want to leave a bad name for themselves. When raising money amongst people whom technically are strangers, you would need to be prepared to give a full 100% commitment to your backers.

This commitment extends beyond delivering the products on time. It also means getting yourself educated on cashflow management so that you would not want to end up yourself on a cashflow roadblock. Also, when raising capital from the public, set aside time to answer a myriad of questions from others.

If you think this is too much to handle, then crowdfunding may not be the most suitable platform as of now.

3) The "trust" factor

Jack Ma once said, "I hope 15 years later people forget about ecommerce – because they think it’s like electricity." He also emphasised the early challenges of building trust in ecommerce, "How can you do things online unless you trust? People [on ecommerce] don’t know each other. I don’t know you, yet I send products to you. You don’t know me, yet you wire money to me."

Similarly on crowdfunding, the trust factor plays a huge role for investors as well as fund seekers. If you’re an investor, you would need to do due diligence on the products you're backing. And if you're raising funds, be transparent and open on how you're investing the cash you raised.

4) Which platforms to choose when raising funds?

When investing into crowdfunding or backing new concepts and products, the platforms you choose to put your cash in plays a critical role. Some platforms have a very low barrier of entry, which would easily allow any business to raise cash on their platform. After all, reward-based crowdfuding platforms like Kickstarter or Indiegogo collect a fee ranging from 3-5% from the amount raised.

On the other hand, platforms such as New Union and CoAssets are known to do more risk assessment on the businesses that are seeking funds so as to protect their members from fraud.

So pick your platform wisely. Some platforms have more skin in the game with you as an investor, while others simply take a small cut from the amount raised, which does not align your interest with theirs.

Conclusion

Just like anything in life, there is always a certain degree of risk when it comes to raising funds or investing in crowdfunding. It is important to do a little bit of research first before going ahead.