Investments

What To Look For In A Crowdfund Investment

Crowdfunding is a new buzzword among investors, but few understand how to look at opportunities that are likely to fly and waste time pledging cash to no-hope projects.

Picking the right crowdfunding deal is hard work and many investors do not understand how the process works.

The plain truth is most crowdfunding projects do not achieve lift-off because the organisers put forward a poor pitch or are looking at raising cash for pipedreams.

Crowdfunding pitches are often a last-chance saloon for deals that will never work and have been turned down by every other fund raising channel.

Here are some tips to weed out the wheat from the chaff in crowdfunding:

Seize the right opportunity

Crowdfunders often try to raise money for projects that the process is not designed to underwrite.

Avoid rewards-based projects, in effect you are making a donation not an investment in return for a mug, T-shirt or mention as a donor on a web site. These are philanthropic rather than money-making opportunities.

Similarly, non-profits are called that for a reason, and seeing an investment return by giving them cash is unlikely.

Research successful campaigns

Look at the crowdfunding platform for projects that have achieved funding and make a shortlist of similar campaigns that are running.

Kickstarter reckons on 2% of crowdfunding campaigns run through the platform raise more than £60,000.

Look for quality

The idea may be good, but does the ability to bring campaign organiser have the skills and experience to bring the idea to market. If not, how will you get an investment return?

Many small campaigns raise their initial spurt of funds from friends and contacts of the campaign organiser, not hard-nosed investors.

Search for equity deals

Investors want a stake in the project that gives them some control over how their cash is spent.

Equity stakes should come with a directorship or influence at board meetings.

Keep an eye on the exit

Once you are in and the project is up and running, investors should have an exit route in mind for selling their shares

SEIS tax breaks

Look for ways to wrap your crowdfunding strategy in Seed Enterprise Investment Scheme (SEIS) tax breaks to restrict risk and safeguard cash. This will show the crowdfund campaigners have some business and financial expertise and set a three-year limit on an exit route.

Many SEIS companies resort to crowdfunding because the nature of their new business matches the qualifying rules for the tax breaks – especially creative, technology and pharmaceutical start-ups.

Leave a Comment