In our previous article Insights into crowdfunding the concept of crowdfunding was explained while the following article focuses on investment. Crowdinvesting is not a miracle. However, there are a few myths due to misinformation about some basic principles and due to still changing legal provisions of this new financial instrument. Some of these myths are related to the expectations about the parties involved. The following facts are supposed to dismantle the myths of crowdinvesting.
The rights and obligations will be defined in contracts between different parties, leading to a legal structure.
The entrepreneur who proposes the project.
The investors who support the project financially.
A platform, which brings the parties together (like a broker), prepares the documentation and takes the necessary steps to launch the project.
Myth 1 – Crowdinvesting looks desperate. Entrepreneurs choose the crowd if they are unable to raise money from other sources
This is not the case.
Crowdinvesting is an additional source of funding businesses, not only used for start-ups but also for companies in a later business cycle. The most important impact for entrepreneurs is to become visible and to build a community to support the project in the long run. In some cases, Venture Capitalists and Business Angels may become attentive to the company because of the floating of a crowdfunding campaign.
Myth 2 – Crowdinvesting is expensive
This is true and not true.
A typical crowdfunding platform will charge the entrepreneur between 10 to 12% of the capital raised as an upfront payment at the start and 1.5% p.a. for the years to come. However, in exchange the company gets the following: a second opinion on the project (economic & legal), a check and eventual readjustment of the business plan, the campaign including marketing tools (like a video) and investor relation activities, and last but not least, access to a new group of investors, that otherwise would not have known about the project. If the entrepreneurs had to organize all this on their own, it would cost the same, or even more, not to speak of time.
Myth 3 – Crowdinvesting requires to rethink the company structure, the communication strategy and the policy to disclose information (transparency)
This is more than true for RDI projects.
Investors need to get information about the entrepreneur’s product and business model at the start of a campaign. In later years they have to be provided with financial statements or comments on the company’s performance. To fulfill these requirements not only skills and a proper company structure have to be implemented, but also the disclosure strategy has to be taken care of. It is especially critical for RDI projects to find the narrow path between protecting IP and disclosing information about the product. So far, the awareness of the platforms has been low. Only a few of them introduced a layered information process to the public and the lead investors.
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