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An Introduction to Crowdfunding

 

Crowdfunding could be seen as one of the buzzwords of the moment, a new funding phenomenon that has already established itself as mainstream. But what is it really?

Put simplistically, crowdfunding means funding a project or venture, often but not necessarily a new startup, by raising the required money from a large number of people, usually individuals, and mainly through the internet.

In the past, raising the necessary capital for a new venture or unproven idea relied heavily on what the market called the “three f’s”….., family, friends and fools! Once established, mainstream funders and venture capitalists then became interested. Crowdfunding has opened up whole new funding possibilities for startups and embryonic ventures alike.

Until relatively recently crowdfunding was unregulated, and seen as “niche”, but this is no longer the case, crowdfunding is now regulated by the FCA, and presently there are over 600 sites worldwide.

For investors, previously such funding was the preserve of the wealthy and well connected, with other investors finding it hard to find and invest in projects of interest to them. Crowdfunding has changed all that, allowing businesses and investors alike free and simple access to each other. So how does it work in practice?

• Essentially crowdfunding allows entrepreneurs, businesses and creators to list their project and needs on a “platform” which, using social media, then reaches many thousands of potential funders.

• The crowdfunding platform takes the business through a process to create a compelling “pitch” to attract investors.

• Crowdfunding platforms fall into three categories: donation based; equity based; and debt based.

• On donation based platforms the “crowd” make a financial donation to projects, often in exchange for a product or gift. People invest in large measure because they believe in the cause.

• Equity based platforms offer investors the opportunity to invest collectively in a private business for shares in the company. This is classic investment with all the risks that entails.

• Debt crowdfunding platforms (also called “peer to peer”, “P2P” lending) enable the lending of money without resorting to the mainstream banks. Investors receive their money back with interest.

• Clearly, before investing time and resources in building a Crowdfunding campaign, it’s essential to determine if Crowdfunding is right for your business and if so, which type. Are you looking for simple funding or long-term investors or perhaps merely recognition and increased visibility?

• Just as with other funding, real effort will be required in pursuing Crowdfunding, and there will be costs involved as well. You will need to be fully prepared for the effort required to make your Crowdfunding project a success. Remember also that Crowdfunding is not a route to automatic success. Crowdfunding platforms can give a high chance of reaching out to potential investors, but there will always be competition from many different projects and there is a widespread misconception that people will invest or support any project immediately after the Crowdfunding campaign. This is not the case.

• In summary, for most Crowdfunding will always be principally about raising the required funding, but there are other benefits. Crowdfunding brings attention from potential partners and the media, creating positive publicity, it is also a useful forum for learning about markets and products, and also builds customer relations and a larger customer base.

Crowdfunding has been a classic disruptive innovation and has certainly democratised funding. Crowdfunding is also growing and evolving, with all manner of predictions of billions of funding transactions globally based on recent trends. Indeed, both banks and corporates are beginning to enter the Crowdfunding market creating additional Crowdfunding models to capture revenue. Crowdfunding is clearly here to stay.

Posted on by Mike Halls

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