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What crowdfunding is, how it works, and why it might be the solution to some of your old but not forgotten plans.

Have you always wanted to start a business? Maybe you’ve got a product you’d really like to design? Getting the funds can be difficult, especially when you’re retired. One relatively new method of fund-generation is crowdfunding, which not only provides the money you need to start your initiative, but can also advertise it to potential customers.

Crowdfunding is a unique way to give substance to some of your more entrepreneurial ideas. And if you’re looking for interesting ways to invest, or causes to support, it can be a great outlet.

What is it?

‘Crowdfunding’ refers to a method of raising funds through the collection of small financial contributions from a large number of investors. It’s used to fund the production of an as yet undeveloped product. Crowdfunding can take one of two forms. The first is what is known as ‘rewards-based crowdfunding’.

This encourages people to contribute money for the creation of an undeveloped product by guaranteeing that investors will be the first to receive the product or related rewards if enough money is raised to produce it. The second form is ‘equity crowdfunding’, which allows investors to own a slice of the company they are contributing towards.

Getting involved

There are two main ways you can get involved in crowdfunding. You can either be a financial backer, or receive financial backing for an idea of your own. Crowdfunding is a great way to take an idea or product you have, and make it available for public sale or mass production.

To do this, you need to familiarise yourself with a crowdfunding platform and the process involved in starting a campaign on that site. Then you can get campaigning.

There are many examples of crowdfunders with compelling campaigns who end up raising far more than they required. Flow Hive, a beehive with a tap, raised over $15 million from over 35,000 backers in 2015. It was crowdfunded on Indiegogo by a father and son team from Byron Bay. The Fidget Cube is a desk toy designed to help you focus at work – by fidgeting. It raised almost $6.5 million on Kickstarter from over 150,000 backers.

Crowdfunding can also be seen as an opportunity to invest or donate. Investing in crowdfunded ventures can be rewarding and profitable.

Unfortunately, equity crowdfunding is currently restricted to wholesalers under Australian law. This means that individuals still aren’t able to buy a slice of a privately listed company through the crowdfunding model.

Platforms such as Artesian Venture Partners can provide a portfolio of start-ups for you to invest in. But as far as true equity crowdfundingin Australia goes, we’ve still got a long way to go. That doesn’t mean you can’t use crowdfunding to donate to a cause you value.

Plenty of crowdfunding platforms, such as GoFundMe, aim to provide financial solutions to the needs of individuals or communities. If you have the money and want to help people, crowdfunding can be a great tool.

Things to consider

Some crowdfunders are dishonest. There have been a few cases where campaigners have run off with investors’ hard-earned money. If you’re considering investing in a project or crowdfunded equity scheme, there is always the risk that you might not get back what you were promised.

So how can you minimise these risks as an investor? Here are three good questions to ask to ensure you don’t get burned, according to well-known crowdfunding platform Indiegogo:

• Has the fund-seeker clearly explained what they will do with the money if they reach their target?

• Have they been clear and transparent in their campaign message and communications?

• Have they responded quickly and clearly to questions on social media platforms?

A campaigner should be ticking all these boxes if you’re considering investing your money in their product. It’s important to approach crowdfunding with the same kind of caution you would approach any other form of investment, according to Tim Heasley, Partner at Artesian Venture Partners. “It’s not a gold rush, it’s not a get-rich-quick-scheme. It’s just another means of offering an asset class to investors, and all the normal rules apply,” says Heasley.

“This is a risky asset class, and although it seems attractive when you hear the stories from Silicon Valley about the enormous amounts of money that can be made, people need to be cautious and know the risks before they go and put it all on black.” Steve Johns, Partner at law firm Norton Rose Fulbright, agrees.

He advises anyone thinking about investing in this way to proceed with caution. “From a legal perspective it’s what you’re getting in return for your money, and you generally participate at a pretty low level, so you don’t get much. You get a promise or the hope of a promise of an economic return,” says Johns. “You’re going to have no real ability to direct what the company does, you’re going to have no say in that company at all.”


Getting started

1Come up with and design your product/idea.

2Plan a campaign outlining why people should invest.

3Build a community around the campaign.

4Launch the campaign on a crowdfunding platform.

5If successful, and it meets the platform’s requirements, start receiving funds.

6The production stage begins, and you continue to grow the community around the campaign.  

What should you include in a campaign?

1A catchy title and tagline that is clear and simple and captures the audience’s attention.

2An eye-catching image for your ‘campaign card’.

3A funding platform. Choose which funding platform you want to work with, and make sure it fits with the style of campaign you want to run.

4 A compelling and shareable pitch video that explains what you are trying to do or create and why potential backers should be involved.

5A campaign deadline and schedule of what milestones your campaign will reach and when. This gives potential backers an understanding of when they should expect to see tangible progress from your project.