Crowdfunding is most of the rage, with new platforms popping up ever more frequently. Many consider it to be the ongoing future of investing, others warn that its risks tend to be underestimated. And then there are the different types of crowdfunding: reward-based, equity-based, debt-based, flexible, fixed and so on. It could all seem bewildering, but like the majority of things the underlying logic is simple.
The most crucial benefit to crowdfunding is that it makes investment in small companies and startups accessible to everybody. Because of this, it is more important than ever for people to totally understand this new world, as the majority of the negative publicity around crowdfunding is essentially focused on misuse and misunderstanding of the platforms. In this information I will cover the different types of crowdfunding platform, along with the main incumbents in each category, and explain some of the primary pitfalls that ensnare many newcomers. But first, a definition.
What is the crowd?
Ordinary, everyday people. And that’s what the “crowd” in crowdfunding refers to. You see, raising money is not really about business plans or market traction or financial forecasts: it’s ultimately about trust. And in life, the bigger the chance to be hurt, the more important trust becomes. Because of this, most people don’t mind putting a few pounds towards sponsoring a charity run or lending a buddy a few pounds; there’s a broad acceptance that you shouldn’t be prepared to observe that money again, and as a result the degree of trust in the individual to whom you are giving the money doesn’t have to be particularly high. But if somebody asks one to invest thousands of pounds, the problem is radically different. For most of us, this is not an amount of money that they’ll afford to lose. Therefore, most people have now been locked from the investment world where small businesses need tens of thousands of pounds to be invested.
It’s therefore logical that the traditional routes for founders financing a small business have now been channels like loans from banks, high net worth individuals and friends and family. A founder’s ability to raise money has depended largely on their collateral in the case of a bank loan, or their personal network in the case of investments from individuals, and contained big chunks of money from a tiny number of people who trust them and/or have thoroughly vetted them. The choice – raising small chunks of money from a large number of individuals – has been largely impossible unless the founder happens to know hundreds of men and women and is both willing and able to manage the enormous administrative overhead of coping with so many people.
Enter the net, with its well-established history of both removing administrative headaches and connecting large sets of people together. Crowdfunding essentially facilitates the matchmaking between ordinary folks who are thinking about buying things and ordinary founders who don’t happen to own use of collateral or large networks of wealthy individuals Medical startup funding. The software running the crowdfunding platform handles all the administration, while the net itself supplies a vast potential pool of men and women for the founder to advertise to, at scale.
Simply speaking, crowdfunding makes it possible to raise small amounts of money from a massive amount total strangers. For that reason, it’s great. The key forms of crowdfunding platform You can find four main forms of crowdfunding platform, all with different advantages and risks. Listed here are the key ones, with links to the largest or most well known incumbents. Reward-based crowdfunding.
Main players: Kickstarter, Indiegogo
The closest sibling to the traditional charity fundraiser, reward-based platforms take money in the form of pledges or donations, and inturn you get some type of kick back or perk from the business. For example, you may get a discounted unit of the item being funded once it’s manufactured, and for a higher donation amount you may get a personalised version of exactly the same product as a many thanks for supporting it. This is actually the “reward” under consideration, and usually the bigger the pledge amount the better the reward. For obvious reasons you tend to locate mostly physical products on reward-based sites, where the money can be used to have a concept prototype to first production. They also tend to be well-liked by creative projects such as movies, games or music albums, where fans can support their favourite artists and get perks such as for instance a credit at the conclusion of the movie in return.
The downside to reward-based sites is they are susceptible to scams and fraud. There’s usually very minimum due diligence on the firms or individuals raising money, and with the minimum pledge amount starting at as little as £1, the barrier to entry on the investor side is minimal too. Scammers will often present fake product prototypes in a movie featuring concept art and renders, only to disappear with the money when the campaign is over. The investors, in cases like this, have little recourse except to complain to the crowdfunding platform itself to acquire a refund, however the lines of responsibility around risk are somewhat hazy. You can find fantastic opportunities to back exciting projects on reward-based platforms, but the chance is highest and the return generally not appreciable. Investing on a reward-based platform should be achieved out of desire for the item you’re buying, not with an expectation of financial returns.