Posted on: 19 August 2014

Crowdfunding can be a game changer for micro SMEs wanting to raise money and their profile. With the right strategy and approach, it can successfully launch a new product or idea and even secure the future of a business through the longterm relationships it helps create.

However, as with anything there are risks attached to it. If these are left unmanaged, not only can a business be left without the funds it sought but it could also end up in a worse position than when it set out.

Up front investment

Significant investment is required long before a project is launched on a crowdfunding platform. This equates to time and money taken away from other things when there is no guarantee of success. Before committing to using crowdfunding to raise funds, it’s important to understand whether your business can afford it by setting realistic budgets and timelines up front.

Protect your intellectual property

Unlike traditional methods of raising finance, where there are a few potential investors to whom a business presents its ideas, crowdfunding involves a lot of people knowing a lot about the business and its idea. It has an unwelcome side effect in that it gives other businesses the opportunity to copy ideas before they’re real inventors have seen it through to fruition.

It is therefore imperative that businesses get the right intellectual property protection for their ideas before posting their campaign online. This may take the form of trademarks, patents or copyrights. Businesses with good ideas should read the legal disclosure on their chosen crowdfunding platform and get good legal advice before making their invention public.

Control who runs the business

Businesses that choose to raise funds through crowdequity sell a share of their company to investors. As part of this ownership, some investors expect to have a say in how the business is run.  This can be of value to teams looking for expert guidance and advice, however it can be shackling if it holds up progress or takes the business in a different direction to that sought by the original owners.

Be on the look out for fraud

Unfortunately crowdfunding is not immune to fraud. Fake sites are springing up  across the internet, with projects, particularly in the charitable sector, being copied and funds diverted to fraudsters. So it is important that businesses (and investors) check the credibility of the crowdfunding platform they are hoping to use before committing.

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