icon for money

Start ups tap the crowd for funds

Innovations made possible through crowd funding may be the type of investments established lenders run a mile from, but many would have paused to look over their shoulders this year when Facebook paid US$2 billion for a gaming accessory originally bankrolled by a group of online philanthropists.

From humble beginnings Oculus Rift, the virtual reality headset invented by California-based Oculus VR, now sits in the social media titan’s pipeline. Its prototype was developed using $2.4 million donated by 9500 backers on the crowd funding platform Kickstarter in 2012.

But what traditional investors would have seen as a stellar return in super quick time – less than 18 months – enraged original donors who missed out on the US$2 billion windfall.

The seven biggest donors each shelled out $5000. But the most they received on their ‘investment’ was an airline ticket to Irvine to tour the Oculus lab, so long as they lived in the US, a meeting with the inventors and a show-bag of goodies.

Social media matchmakers

Modern crowd funding is said to have been pioneered by rock group Marillion in 1997 when it took to the internet, which was still in its infancy, to raise US$60,000 for an America tour.

Nowadays, social media and viral marketing have vastly narrowed the gap between creators of quirky ideas and funders. It is estimated that more than US$5 billion was raised globally last year alone.

Essentially, crowd funding allows innovators to raise money from the online community, with no questions asked and no reward guaranteed.

Down under, this seed capital market is not yet regulated by the Australian Securities and Investments Commission (ASIC). And until the government digests the long-awaited report on the sector from its Corporations and Markets Advisory Committee, the regulator’s advice is that anyone who is tempted to hand over money should consider it as a gift or donation, rather than as an equity stake in a project that will deliver tangible dividends.

In fact, ASIC warns some projects that successfully raise funds may never see the light of day. Even worse, some may be nothing more than scams.

Sussing out scammers

The phantom Kobe beef jerky business was one such fraud uncovered by Kickstarter. Following a tip-off, online checks of Kobe Red’s owners revealed they were scammers and
Kickstarter was able to block more than US$120,000 of donations just in time.

Part of the problem for anyone thinking of stumping up cash is that potential fund recipient’s bona fides and tax liabilities are generally not checked by the platform matchmaker. In fact,  crowd funders such as Australia’s own Pozible explicitly refuse to take this responsibility.

What’s more, crowd funders do not insist that initiators develop a concept through to fruition or even deliver it on time.

Funders of animated film Anomalisa were still waiting a year after the promised release date for a glimpse of US screenwriter Charlie Kaufman’s project. The filmmakers, who in 2012 received more than US$400,000 via Kickstarter, kept postponing the launch saying the project had become bigger than Ben Hur.

A work in progress

Yet it is likely that as crowd funding gathers momentum some platforms will be able to offer greater legitimacy.

For example, Pozible has recently partnered with charity GiveNow so that donations to charitable projects will now be tax deductible.

While crowd funding success stories are likely to continue to grab headlines, Australians would be well-advised not to hand over any money they can’t afford to lose. Until stricter safeguards are in place, crowd funding is best viewed as personal philanthropy rather than as a hard-nosed investment.

^John, Practice Development Manager

General Advice Warning: This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information.
Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
Disclosure: Beyond Bank Australia Wealth Management is a trading name of Eastwoods Wealth Management Pty Ltd ABN 17 008 167 002 AFSL 237853.

No comments