‘Have you heard of my new Kickstarter? It’s a combination smart phone/coffee cup. I just need $100,000 to get it up and running. Want to contribute?’

You might have heard or seen a crowdfunding spiel like this once or twice before.

The controversial fund raising method has been in the media a fair bit in recent times, and mostly for the wrong reasons.

That’s because many projects out there promise so much, yet fail to deliver, leaving investors empty-handed – smartphone coffee cup included.

But first, what is crowdfunding?

Crowdfunding is a way of raising capital for a project using a wide group of investors. It’s most commonly used by artists and entrepreneurs who may have a great idea but lack the capital to get it off the ground.

Typically, the person with the project will create an engaging business pitch for their idea, including in-kind rewards for investors.

The pitch is then put on a crowdfunding website, like Kickstarter or Indiegogo, and shared on social media.

If people like the idea, they can pledge funds, which are taken if the funding goal is met.

At this stage, the project should ideally go ahead – yet this is often not the case.

What are the risks?

The decision to invest in a crowdfunded project relies heavily on trust. You need to believe that once the funding goal is reached, the project will go ahead.

Many funders don’t expect to see a substantial financial reward, but they do expect to get what they’ve been promised, whether that be the fully finished product, or a simple t-shirt.

Unfortunately, not everyone who pitches a project is the real deal. The internet is awash with horror stories of project creators going underground once they’ve received their funding.

Other things to be wary of

Even if the project is legitimate, there are a bunch of other issues to be wary of.

For one, most crowdfunded projects are not tax deductible, so your pledge won’t work in the same way as a regular donation to a community project or charity.

Crowdfunding also differs from a regular investment in that there is no monetary reward at the end.

You may be happy with the knowledge you’ve supported something you believe in, but if you’re looking to build your wealth, this is not the way to do it.

The benefits

Still, it isn’t all doom and gloom. There are some benefits of investing in a crowdfunded project. You may want to support someone you know, which can be very meaningful.

Also, while you generally won’t receive a financial reward, if the project is successful you will usually receive something. Virtual reality headsets? Could have been yours if you’d invested in the right Kickstarter.

Still keen to contribute? Come and talk to us and we’ll give you a second opinion on whether you’re onto a winner – or are about to blow your cash on a lemon.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

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Social media teaser. That prototype hoverboard might seem like a fun cause to invest in, but here’s why you ought to think twice before putting your hard-earned towards crowd-funding projects.

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