SA Crowdfunding Blog

Monday, 11 June 2012 21:38

Crowdfunding for Business Investors

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A few short years ago, business investors in South Africa would not have considered crowd source funding as a place to put their money. Now that it has become commonplace in other parts of the world, it is time for South Africans to take a long, hard look at crowdfunding.

Many emerging crowdfunding sites offer portfolios of entrepreneurs and companies looking to build capital. Business investors looking to take the plunge into crowdfunding will do well to take into account some important considerations to protect their interests before choosing an investment.

Protection of Privacy
The top concern for business investors is always how well their personal information is protected against identity theft and other security breaches. It is important to understand the safeguards a crowdfunding site takes with personal and sensitive information.

Information Provided in a Crowdfund
What a crowdfund should make very clear to business investors is the risk involved with each fund they consider and general precautions of this type of investment. The providers should be prepared to answer all the questions business investors have as they relate to what information they will be given about the ongoing processes within any business in which they invest.

Primarily, business investors have two types of investment opportunities in a crowdfund, and the choice of which one of these types an investor wants should be decided before checking out possible campaigns.

Equity based investing allows the investors to receive stock in the company, which should increase in value if the venture is successful. Interest based investing is based on the borrower paying the money back with interest.

Any crowdfund that does not offer to explain everything in detail about how the fund works is best to avoid.

Disclosure by Those Seeking Funds
It is appropriate that the person or company soliciting funds places everything on the table, but in the case of some entrepreneurial enterprises, there may not be much information to present. Startups may have little more than a business plan, a good idea, and the means to put the idea into motion with enough investor funding.

Protection from Fraud
Current background checks should be disclosed to prospective investors shortly before any transactions are made. This might include both criminal and financial. If the business or enterprise is based on manufacturing, the entity soliciting funds should demonstrate the ability to perform the required work.

Understand When the Investment is Due
Some crowdfunds are based on reaching a goal before money changes hands. If the goal is never met, the deal is off and business investors must find another fund in which to invest. In the case of a fund that does not have this requirement, business investors may be requested to put up their fund share as soon as they sign up. In any event, investors should have the right to cancel at anytime up until they commit legally.

Update Issuer Disclosure Information Up Until the Day of Signing
Things may change to affect the value of the enterprise at any time, both before the money is allocated and after, but information disclosure is obviously important before business investors provide their portion of the funds.

Updates after the Investment
What many business investors like most about crowdfunding is how they remain in the loop after the investment. Not all models are the same, but most recipients of financing by a crowdfund maintain dialogue and post important information on their websites or via other methods of communication. Some entrepreneurs send out regular emails to investors, keeping them informed of how things are going.

While this is similar to how shareholders in businesses that go public get information, crowd source funding is generally more personal and the information flows more freely. It is best not to assume that every campaign will feature the same information pipeline. Asking questions about the input of information is a good thing to do up front.

How Crowdfunding Investing is Different from Broker Investing
Crowdfunded investments are more personal than those through the time honored methods of the past. This is partially because those running the fund take a less active role than the professional brokers do with conventional investing. Most business investors make their decisions based on what they believe to be true, not what someone tells them is true.

In many cases, business investors in crowdfunded projects can put less into a venture than would be possible with conventional investment schemes. While investing less, some deals offer a chance for healthy returns. Everyone must realize that, as with all investment vehicles, there is no guarantee that profit will be realized from a crowdfund.

As mentioned earlier, it is important for business investors to take the time and use all their resources to learn as much as they can about what they consider a potentially profitable opportunity.

This means that all the information gathered doesn't need to come from the crowdfunding site, but from sources with nothing to gain from giving out information. Having previously successful crowdfunding projects under your belt is also a big help when it comes to attracting business investors.

Smart investors will look for the negative aspects of any campaign that interests them. Most every venture has a down side that needs to be considered. If the deal were foolproof, banks would be jumping to get a piece of the action, and there might not be a crowdfund for it. The negative aspects contribute to the risk factor, and a campaign that looks shaky for any reason might be one to leave on the table.

When considering all the facts, it is easy to understand why business investors are so serious about the crowdfund way of investing. South Africa is poised to burst at the seams with many and varied crowdfunding programs. Many business investors have already discovered the potential return of making crowdfunding part of their investment portfolio. If the venture proves to be a success, it's a win-win situation for both investor and the fund seeker.

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Ben

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