CrowdFunding, CrowdInvesting, CrowdLending?
While it may sound like a dream, thousands, if not hundreds of thousands, of entrepreneurs have experienced the reality of complete strangers investing thousands, if not hundreds of thousands of dollars in their businesses online. It’s called crowdfunding.
Whether someone invests $25 or $25,000, this is how business owners are getting an infusion of cash to take their businesses to the next level. What’s important to note, is that it takes more than simply posting a request on a crowdfunding site. As crowdfunding has matured into a $16.2 billion industry, it’s become quite competitive to raise money online.
While many businesses have been successful with this approach to raising funds, many other have not. In fact, only 36% of campaigns get funded on Kickstarter, one of the best-known crowdfunding platforms. In this post, we’ll cover four different types of crowdfunding models and provide examples for each.
With this type of crowdfunding, business owners create a campaign to fund a product or project that includes an offer of rewards in exchange for someone making a contribution. While there’s no limit to the types of rewards, what’s most frequently offered are incentives such as early access to new products, behind-the-scenes factory tours, or something as simple as a commemorative t-shirt.
With Rewards-based Crowdfunding, companies collect feedback about new products, find out what features are important to buyers, and create buzz with fans. As mentioned earlier, not all campaigns are successful which can reflect negatively on future efforts to raise funds. Entrepreneurs should be prepared to invest significant time and effort into creating a fund-raising campaign. Marketing materials, including videos, must be top notch to attract the most contributions.
Over 150,000 projects have been funded on this platform. Check out this example of a Kickstarter campaign that includes multiple tiers of rewards based on contribution amounts.
With equity crowdfunding, investors are actually acquiring a small ownership stake in the business rather than earning rewards. This form of crowdfunding makes angel investing accessible to many more individuals because there are no minimum investment requirements. Equity crowdfunding is booming as indicated by Statista forecasts which predict that entrepreneurs will receive $31.3 billion in investments in 2022, which is nearly triple the current level of $11.2 billion.
What you might not know is that Equity Crowdfunding can introduce entrepreneurs to investors who can share the expertise that can help them grow their businesses. The difference from Reward Crowdfunding is that Equity Crowdfunding provides money that can be used for general business purposes, rather than for a specific product. It is most unusual to land Equity Crowdfunding compared to Rewards-based Crowdfunding, so a successful raise can result in media exposure. Startups can raise a significant amount of money in Equity Crowdfunding. For instance, 3-D printing company Unlimited Tomorrow recently raised $1.57 million on Indiegogo and Microventures’ joint equity platform, First Democracy VC.
But again, like Reward-based Crowdfunding, Equity Crowdfunding is not a quick process. It can easily take 6 months to a year. And there are many startups that won’t meet the high standards of equity investors. The following examples are representative of startups that are pursuing Equity Crowdfunding.
CrowdCube is the largest UK-based equity crowdfunding site where there have been over 700 successful Equity Crowdfunding campaigns. Entrepreneurs who use the platform get a ‘Funded Club’ for networking. Earlier this month, Crowdcube went through a rebranding process following several years of a fairly consistent design. Their rebranding was explained in a blog that declared “crowdfunding 1.0 is dead.”
To quote Crowdcube:
“Today’s savvy entrepreneurs want Crowdcube 2.0; they want funding that fuels their long-term growth, engages their community and is backed by belief in their business. Crowdcube is funding that stands for something. It’s meaningful to people who believe in the business. They love it, and their behaviour changes as a result; they’re more likely to spend more, engage more, tell their friends about you and are more loyal. It’s not the primary reason companies raise with Crowdcube, but the commercial benefits are an increasingly meaningful cherry on top.”
Crowdcube notes that, today, people “don’t just want to buy from a business; they want to buy into it,” reflecting the ethos of securities crowdfunding as more people gain access to invest in companies they support and believe in.
Other examples of Equity Crowdfunding include: Fundable, Microventures, StartEngine, and WeFunder.
The third example of crowdfunding is focused on Crowdlending, which makes it possible for startups to secure a loan online from many individuals instead of going through the process of borrowing money from a traditional bank. For companies that can prove they have a positive credit rating and can tell a story that creates an emotional connection, Crowdlending can be one of the fastest ways to raise cash – in one day or less.
This type of crowdfunding makes it possible to get a loan that can be used for working capital, rather than having to apply the funding to a specific product or project. What’s important here is that interest rates can be sky-high. If the entrepreneur doesn’t have good credit and this transaction ends up being a personal loan, failure to repay means this loan will no doubt affect their personal credit rating.
One example of Crowdlending is a company named Funding Circle. It’s the largest UK-based crowdlending site that is entirely focused on small business. Borrowers with good credit can expect to land borrowing rates starting at 4.99%. Since the company’s inception, Funding Circle has funded $7 billion in loans to 51,000 startups.
Unfortunately, the losses at Funding Circle grew during the first half of 2019, as weak demand and an increase in bad debts in its largest market, the UK, have increased the London-based company’s year-over-year pre-tax loss from £27m to £31m. This trend is expected to continue after the company predicted that revenue growth would slow in the second half of 2019 as a result of tightening lending criteria.
Funding Circle was originally founded as a peer-to-peer lender, which means they rely on retail investors to fund the loans they originate. Since that time, the company has shifted its focus with most of the funding is now being sourced from institutional investors. While the company’s 2018 initial public offering was considered a milestone, shares in the company fell more than 75 percent due to a series of negative updates that discouraged investors from committing to new or additional funding.
Many platforms are now using hybrid models. One example is Indiegogo which combines rewards and equity as its business model. The platform has options such as equity crowdfunding arm, First Democracy VC, that Kickstarter and others have not yet incorporated. To date, $1.5 billion has been raised, and the Indiegogo campaigns are structured so startups can ‘keep what they raise.’ It’s also possible for startups to move a successful campaign from another platform over to Indiegogo, which allows them to raise additional funds after the deadline—or, sell their merchandise in Indiegogo’s marketplace. Additionally, Indiegogo launched a Chinese site in 2015.
First Line's crowdfunding platform development experience
First Line Software has developed several crowdfunding platforms for the Dutch market, all of which are aimed at attracting Dutch and European investors. The business model for one of them is to offer securities and create a portfolio of shares for the user based on information they submitted which takes into consideration the degree of risk that the user is ready to assume, as well as the timing of the investment, its size, and stability. Once the crowdfunding platform offers the investor a specific block of shares and they accept the offer, the buyer transfers money to the electronic wallet to purchase the shares and then manage the securities portfolio within a secure folder. The FLS technology experts have:
- Developed algorithms for working with financial products on the platform
- Created software applications for analyzing securities quotations
- Written an algorithm to control the volume of data used and to reduce the costs associated with customizing portfolios and specific content
- Performed systems integration with brokers
- Developed the capability to establish personal user accounts and define workflows for the portfolio transaction
The second Dutch crowdfunding platform developed by the FLS team was a project for European startups. Its modus operandi is quite simple: the site provides an opportunity to raise funds on the principle of safe financing for investors. During the initial stage, the system selects startup applicants using open data sets and recommends the most relevant campaign tactics for launching the project. FLS specialists have developed algorithms for collecting information and subsequent operation of the "startup-investor" chain.
Five trends in Crowdfunding for 2019
While it’s estimated that there are more than 600 platforms in the crowdfunding market, there are no definitive sources of information to confirm the actual number of crowdfunding platforms in operation around the world.
Here’s what can be expected during 2019:
- Despite the apparent risks, the maximum potential from the multiple players in Equity Crowdfunding makes startup investing among the most promising type of investments.
- According to Statista’s latest available data for the global crowdfunding industry of 2017, equity funding accounts for only US$2.5 billion annually. Despite the release of some basic infrastructure, the lack of Security Offerings is noticeable as is the specific individuals continuing to postpone the opening date — due to legal concerns or lack of interest.
- Entrepreneurs usually have limited opportunities to fund their businesses, and investors have a difficult time assessing small and medium enterprises. 70 percent of the world’s population is classified as potential investors who do not possess the large available capital typically required, given their limited resources. The retail investors in this group are actively looking for solutions which will enable them to invest small amounts of money where only large capital is typically accepted — and which usually represent the most profitable investments. Fortunately, there are already platforms like Roobee that are introducing new and different funding models to supplement venture financing.
- Two of the most successful crowdfunding platforms are charging fees which surpass the confirmed campaign contribution of 8 percent. Interestingly with blockchain claiming to make the entire process completely transparent, it is expected that with the integration of blockchain and the acceptance of cryptocurrencies, investors can expect fees to be reduced significantly.
- With the era of non-regulated crowdfunding platforms that has already passed and the rise of ICOs and blockchain technology, many new platforms have been incorporated into exotic tax-haven destinations without comply with their respective regulations.
Big opportunities ahead
According to the Technavio Research Report, the “Crowdfunding Market by business model (P2P lending, equity investment, reward, hybrid, and others) and geography (Americas, APAC, and EMEA) is expected to grow USD 89.72 billion, at a CAGR of 17% from 2018 to 2022.”
In less than a decade, crowdfunding has already been recognized as one of the most typical methods of fundraising for technological products. It has assisted millions of innovators to bring their ideas into the market.
In less than a decade, crowdfunding has already been recognized as a leading method of fundraising in the tech space, assisting millions of innovators with the funds they require to bring their ideas and products to market. With the exponential growth of cryptocurrencies over the past few years, crowdfunding has reached new milestones and holds the increasing probability of continued growth despite the slowdown of Initial Coin Offerings (ICO). According to the “Crowdfunding’s Potential for the Developing World” report by World Bank, the industry is predicted to be worth more than $95 billion in the near future.