Crowd funding is a way to raise capital from accredited investors and venture capitalists without accumulating debt. Reward based crowd funding platforms provides tangible gifts to investors in return for the funds. Crowd funds helps cover the risks rising out of unexpected expenses and market validation for a new venture without giving up equity.
The reach of crowd funding is unimaginable, as this form of funding is most effective when social media and referral traffic accesses information through the website. Potential funders and investors and many a times viral marketing spread the word giving exposure to the venture. A venture that raised enough funds is proof enough for the successful concept and market credibility, bringing trust from public. The research done on various options, the opinion of experts in the field and from legal angles will definitely ensure a successful venture.
Crowd funding allows entrepreneurs to understand aspects of their business that they have not thought of. It could also potentially inspire others with great ideas! Messages over the Internet can be in the form of a video or a message and the campaign can provide unique exposure and momentum resulting in larger success and loyal investors.
There is no cost involved if the target fund is not raised and there is no penalty either! (There could be exceptions though!!!) If successful, the average returns for the platforms could be around 5% of the total funds raised.
The rule of the game is to keep crowd funding even after raising funds, updating and evolving and to keep investors updated.
In real estate, crowd funding enables capital growth opportunities and value-add opportunities in terms of strategic investments. For portfolio clients this may bring opportunities for diversification of their investments.
Launching a crowd funding campaign is an opportunity to gauge the market reaction. It may or may not work effectively and is not an easy process. One cannot forge a confidentiality agreement with the internet, and hence business ideas may be exposed to people who will replicate it faster and effectively causing a loss to the original ideator.
Investors who are not patient may bring in lawsuits claiming mismanagement and fraud. The amount of investment involved and time frame has to be clearly indicated to avoid distrust and miscommunication at a later stage.
Investors who have a good credit standing and professionals may not want to be part of the crowd-funding scheme, as this will expose their credit standing. Neither would they want to raise funds since clients may become a partial owner of their business as well.
Crowd funding may not work always and hence it is imperative to have a sound business plan. It is necessary to protect the business with a patent or copyright to avoid being copied/duplicated. The investors may be inexperienced and unsophisticated which may impact the goals of the business, and can keep away genuine angel investors. Lack of accountability and regulation may result in fraudulent transactions.
When the campaign is not successful the money raised is returned to the investors and the platform does not get any returns. Returns to investors need to be calculated properly in order to avoid giving away too much, in case of successful campaigns.
Specific to real estate, crowd financed funds cannot be spread over many entities. So it is a hit or miss in most case. Since funding is huge, only large investors can think of real estate funding and there is considerable friction amongst companies/individuals vying for lucrative options. P2P funding can be an effective model for the Real Estate Industry then crowd funding.
In the absence of an effective regulatory supervision for crowd funds, it is important that funds prepare project reports projecting the actual costs of the project, excluding overheads. This, combined with textual data can convince investors that funds are used for the right purposes, thus invoking trust. It is necessary to know each investor and the amount contributed to map the returns vs. investment graphs to project demonstrated profit earning by investors, fund and the project. Building a solid foundation of dependable clients will enable the foundation to improve market share and revenues. The goal here is to create credible projects for investment. In real estate, underwriting the loans can reduce risks. Similarly, graphs featuring returns can induce confidence in investors. A competent consultant or fund administrator should do all of the above to ensure that the funding momentum is ongoing. Many a times, a happy client may reinvest his profits back into the fund, creating an investment portfolio by itself.
Execution of a profit making deal in real estate can be done only by a responsible consultant. What plays decisive role is the investor communications, strategic introductions and frequent updates. A portfolio consultant can achieve all 3 ensuring greater shareholder support and access to capital.