Risks and rewards of a crowdfunding transaction

A backer in the crowdfunding transaction is often warned “buyer beware”, but it should also be “buyer enjoy”. The crowdfunding transaction can be very risky, with a risk of losing money as well as the opportunity cost and other non-monetary losses. But, the rewards can be very satisfying!

Let’s understand why a crowdfunding transaction is risky but also what the rewards are for backers.

Key takeaways

  • Crowdfunding is speculative, because the backer does not have a guarantee of delivery of rewards.
  • The main risks in a crowdfunding transaction relate specifically to the project creator’s business ability and experience.
  • The lesser risk is that the backers don’t receive the rewards as described, in the quantity and of the quality expected, including any unlocked stretch goals or add-ons.
  • The risks are offset by the characteristics of the crowdfunded transaction, namely limited edition features or supporting entrepreneurs.

Main risks of a crowdfunded transaction

Even though a backer could do full research on the project and project creator, and feel confident in backing the project, there is a still a chance that the backer will not receive the rewards paid for.

The main risks inherent in the crowdfunding transaction relate specifically to the project creator. The risks relate to the following issues:

  • Does the project creator have the expert business know-how and skill to design, manufacture and ship the reward?
  • Is the project creator a start-up?
  • Does the project creator’s team have complementary skills to ensure that the business can be successful? For example, in the team listed, is there a product designer and business person, or are all team members designers?
  • The manufacturing of any product is subject to production, quality and time delays; accordingly, has the project creator selected a suitable manufacturing partner?
  • The shipping of any product is subject to custom delays, courier delays, damage in transit etc; accordingly, has the project creator selected a suitable shipping method?
  • Has the project creator factored in the impact of vastly exceeding his original funding goal and securing more backers than originally planned for? Is there a contingency manufacturing and shipping plan in place?

Lesser risks in a crowdfunded transaction

There are two categories of lesser risks in the crowdfunding transaction, relating to the actual crowdfunding platform and then to the reward.

The risks from the crowdfunding platform are:

  • Has it vetted the projects as per their terms and conditions, so that backer are confident in reviewing and backing the projects?
  • Will it process the funds as per their terms and conditions?

The risks relating to the reward are:

  • Was the reward manufactured with the described features and to the described quality?
  • Is the reward as described?
  • Are all the add-ons and unlocked stretch goals included in the delivery?

Rewards

Even given the risks of crowdfunding,I think that crowdfunding can be very rewarding for backers.

For any of the risks assumed, there are the rewards inherent in the crowdfunding process that accrues to backers. These rewards include but are not limited to:

  • being part of a crowdfunding transaction, as an innovator and early adopter of products and services;
  • being one of the first to receive a new product or service;
  • receiving exclusive or limited edition products only available via the crowdfunded process;
  • paying a reduced amount compared to the market value of the product.

At all times, backers need to understand what they are backing, what the risks are, and most importantly, whether all the benefits and the actual reward commensurate the backer for taking the risk in the crowdfunding transaction.

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