Crowdfunding has emerged as an innovative way to get a business off the ground. Taking advantage of the Internet and social media, crowdfunding allows businesses to gather resources from people who want to help fund a startup.
Most crowdfunding projects seek contributions from people who think they have a great idea for a company, invention or project – but those who contribute won’t actually become part owners. Instead they may receive mention of their support or a gift, such as a T-shirt.
The concept comes with advantages as well as potential pitfalls. For the creator, there is a risk that details posted online could be copied. For the small time investor, there is a potential for fraud.
Kickstarter recently canceled a project that it determined was a fake startup (Kobe Red – 100% Japanese Beer Fed Kobe Beef Jerky) just days before cash was to be released.
If you would like to give to a crowdfunding project, BBB has the following recommendations:
- Investigate before you give. Find out what you can about the entrepreneur, artist or charity and see if it looks legitimate. Are there details on Facebook or other social media? Do they offer links for further verification?
- Ask questions. Don’t be afraid to request information from the startup before you decide to pledge.
- Budget your investment. Don’t give money you can’t afford to lose.
- Don’t count on a deduction unless it’s a non-profit. Contributions to a crowdfunded charitable cause are not tax deductible unless the group receiving the funds is a 501 (c)(3) organization.
- Report suspicious accounts. If you see a suspicious account on a crowdfunding site, report it. Supply as much detail as you can.
The U.S. Small Business Administration has a few tips for entrepreneurs who are interested in using crowdfunding:
- Understand your commitment. Have a careful strategy, perfect your pitch to ensure it connects with your target investors.
- Have resources to promote your pitch. Maintain momentum by being responsive to calls, emails and social media comments.
- Find ways to create a buzz. Learn who your potential investors are and how to persuade them.
- Be prepared for questions. Be ready to tell potential investors how you will spend the money, about your exit strategy, long- and short-term goals and what preparations you have in place.