Crowdfunding is most of the rage, with new platforms popping up ever more frequently. Many ponder over it to be the continuing future of investing, others warn that its risks are often underestimated. And then you can find the several types of crowdfunding: reward-based, equity-based, debt-based, flexible, fixed and so on. It could all seem bewildering, but like anything else the underlying logic is simple.
The most crucial benefit to crowdfunding is that it makes investment in small companies and startups accessible to everybody. For this reason, it is more important than ever for people to fully understand why new world, as a lot of the negative publicity around crowdfunding is basically focused on misuse and misunderstanding of the platforms. In this information I will cover the several types of crowdfunding platform, combined with main incumbents in each category, and explain a few of the primary pitfalls that ensnare many newcomers. But first, a definition.
What's the crowd?
Ordinary, everyday people. And that's what the "crowd" in crowdfunding refers to. You see, raising money is not necessarily about business plans or market traction or financial forecasts: it's ultimately about trust. And in life, the higher the chance of being hurt, the more important trust becomes. For this reason, many people don't mind putting a few pounds towards sponsoring a charity run or lending a buddy a few pounds; there's an over-all acceptance that you shouldn't be prepared to observe that money again, and as a result the level of rely upon the individual to whom you're giving the amount of money doesn't have to be particularly high. But when somebody asks you to invest several thousand pounds, the problem is radically different. For many people, this is not an sum of money that they'll afford to lose. Therefore, many people have been locked from the investment world where small businesses need tens of thousands of pounds to be invested.
It's therefore logical that the original routes for founders financing a business have 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 the collateral in the event of a bank loan, or their personal network in the event of investments from individuals, and contains 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 sizable amount of people - has been largely impossible unless the founder happens to learn hundreds of people and is both willing and able to deal with the enormous administrative overhead of dealing with so many people.
Enter the web, with its well-established history of both removing administrative headaches and connecting large categories of people together Crowdfunding Competition. Crowdfunding essentially facilitates the matchmaking between ordinary folks who are thinking about purchasing things and ordinary founders who don't happen to have use of collateral or large networks of wealthy individuals. The program running the crowdfunding platform handles most of the administration, while the web itself provides a vast potential pool of people for the founder to market to, at scale.
In short, crowdfunding makes it possible to raise small levels of money from a large amount of 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 biggest or most popular incumbents. Reward-based crowdfunding.
Main players: Kickstarter, Indiegogo
The closest sibling to the original charity fundraiser, reward-based platforms take money in the proper execution of pledges or donations, and in return you get some kind of kick back or perk from the business. For example, you might get a discounted unit of the item being funded once it's manufactured, and for a greater donation amount you might obtain a personalised version of the same product as a thank you for supporting it. Here is the "reward" in question, and usually the higher the pledge amount the better the reward. For obvious reasons you tend to locate mostly physical products on reward-based sites, where the amount of money is employed to have a concept prototype to first production. Additionally they are generally well-liked by creative projects such as for example movies, games or music albums, where fans can support their favourite artists and get perks such as for instance a credit at the end of the movie in return.
The downside to reward-based sites is they are vulnerable to scams and fraud. There's usually very little or no due diligence on the businesses or individuals raising money, and with the minimum pledge amount starting at less than £1, the barrier to entry on the investor side is minimal too. Scammers will often present fake product prototypes in a video featuring concept art and renders, only to disappear with the amount of money after the campaign is over. The investors, in this case, have little recourse except to complain to the crowdfunding platform itself to obtain a refund, nevertheless 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 performed out of passion for the item you're purchasing, not with an expectation of financial returns.