Crowdfunding is Dragons’ Den online introducing investors and entrepreneurs with projects to pitch worldwide.
The crowdfunding market will soon be mobbed as big time US investment site Kickstarter has announced plans to launch in the UK.
Crowdfunding lets one or more investors group together to offer funding to a project while splitting the risk.
With around 40 web sites offering a wide range of business opportunities, investors can inject funds in to all types of projects from funding artists, musicians and writers to more serious entrepreneurs with niche business ideas.
A few sites even try to link small businesses in the Third World with investors, but many do not expect any return on their cash.
A few projects have yielded good returns – particularly via Kickstarter
The web site says fewer than 50% of projects hit their funding targets, with successful pitches securing investments of around £6,500.
Pledges over £100,000 are regular, while investors have shattered the £1 million barrier seven times in 2012.
The most common projects involve music, film and video.
Like many investments, crowdfunding generally calls for high risk money to fund projects that cannot raise funds from more conventional sources, like banks.
The problem for serious investors is due diligence and tax – the investments are so small that due diligence costs outweigh the input of cash and other investments are more tax effective.
In most cases, investors regard crowdfunding as a bit of fun and write-off the investments as charitable donations.
Some UK crowdfunders offer Seed Enterprise Investment Scheme (SEIS) and enterprise investment scheme (EIS) participation that offers much improved tax breaks for investors based in the UK. Expats who are UK tax resident can still benefit from SEIS and EIS.
Business seeking crowdfunding generally offer gifts or rewards in return for cash from investors. The details are included in the pitch and can be anything from free product samples to shares in the company.