What is Crowdfunding all About?

What is Crowdfunding all About?

Digital Innovation and the Crowd: Crowdfunding is Democratising the Access to Investment Opportunities

Crowdfunding is a relatively new phenomenon that employs a concept known as “The Wisdom of Crowds,” where the general populous are used to validate an idea. In the case of crowdfunding, that idea is to provide funding to innovative and disruptive projects. The online crowdfunding model is pioneering; however the idea of crowd-sourcing funding is not new.

In 1876 the Statue of Liberty was financed by everyday people. The citizens of France paid for the statue and the citizens of the United States paid for the pedestal. The concept of crowdfunding has also been used to finance the printing of books in 17th Century Europe and nowadays it has become an incredible option for businesses all around the world. The US, UK and Europe lead the way, however countries such as Australia, New Zealand and Asia are following the trend keenly.

Crowdfunding supports the democratisation of investments: on one side, entrepreneurs, start-up founders, artists, non-profits and other groups can raise capital through crowdfunding and, on the other side, it converts everyday people, rich or poor, into micro angel investors to power ideas and business growth.

Crowdfunding could not exist without the development of the Internet and it has been likened to a social media version of fundraising.

As the 2015 research “The future of Finance. The socialisation of Finance” outlines, crowdfunding is potentially the most disruptive of all the new models in finance. Being one of the most social categories of alternative financing, crowdfunding can create 'virality' for a company if investors share the campaign across social platforms, producing a strong network effect.

What is Crowdfunding and How Does it Work?

Traditionally, financing a business meant asking a few people to invest big sums of money, but crowdfunding is turning the process upside down. Crowdfunding is a mechanism whereby a large number of people contribute a relatively small amount of money to fund start-up ideas and projects that they feel strongly about.

According to the author Steven Dresner, crowdfunding is:

“The pooling of the financial resources of many individuals to convert an idea into a project or business. Instead of relying on a few large donors, it requires many small ones.”

The essential elements of a crowdfunding campaign are:

  • An innovative idea, a social cause or business project that needs to be funded.
  • An online platform that coordinates and administers the fundraising.
  • A structured marketing activity to promote the offer to create momentum and reach potential investors.

The Types of Crowdfunding:

Crowdfunding is a blanket term for the many niches, from debt and rewards-based crowdfunding to equity crowdfunding.

  • Donation: Where you donate money to help fund a charitable or community focused project. E.g. on a recent trip to the Congo Sarah has found an orphanage that needs money for a school, so she comes home to Sydney and begins a campaign to raise $20,000 to help build the school.
  • Reward: People contribute to get the first run of a company’s new gadget. E.g. Tim has come up with a great new watch that synchs with your iPhone and integrates sensors to help track certain health measures, he puts a project up and for $150 you will get the first batch made of the product.
  • Debt: Also known as peer-to-peer lending, where multiple people lend money and get a return much like a bond or bank deposit. E.g. James wants to borrow $10,000 to buy a new car, however the bank won’t lend to him as he is a sole trader, he can borrow this money from the crowd repaying it over the next 2years with 8% interest.
  • Equity: Where businesses can raise money by issuing equity so the crowd become shareholders. E.g. Sophia has an app she has developed that allows business owners to better access deals and manage their cash flow, she wants to raise $50,000 for 20% of her business to help her grow and expand. If someone were to invest $5,000 they would get 2% of the overall company (with an implied valuation of $250,000).

Crowdfunding Examples and the Success of Crowdfunding Websites

While a relatively new phenomenon, crowdfunding has quickly achieved great success through sites such as Indiegogo and Kickstarter, that operate donation and reward based platforms, as well as Lending Club which operates through their debt lending platform.

Since 2008, Indiegogo has brought more than 800,000 innovative ideas into reality and at the present time, its group of backers is 9 million strong, representing 235 countries and territories. More than $800m has been raised on Indiegogo to date for creative, entrepreneurial and cause-related projects.

Some of the most successful campaigns? Flow Hive, a community of beekeepers, raised more than $12m from 37,000 backers in more than 150 countries. Social Impact campaign Nepal Earthquake Relief, that send fundings to Nepal after the 7.9 magnitude earthquake that hit the country in 2000, raised USD $476,045 by 5,075 people in 4 months. The Kickstarter campaign for Pebble, the colour e-paper smartwatch, is another example of a successful crowdfunding campaign for startups, where the company has raised $A20,338,986 from 78,471 backers.

The Future of Crowdfunding

The above mentioned examples prove the success of crowdfunding for startup funding. However, there is a new type of crowdfunding which is changing the way people and companies are accessing funds: equity crowdfunding.

This new method has been described as the future of crowdfunding and we will talk about it in next article.

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