Even if one does not approve of the hype surrounding crowdfunding, one can still not deny that it is helping businesses to achieve funding and visibility when traditional funding seems to be out of their reach.
Across the globe, thousands of crowdfunding platforms have come into existence and it has become a multi billion dollar industry which is directly and indirectly offering employment to millions of people.
Despite their evident popularity, there are many myths regarding crowdfunding due to which there is a fair degree of unawareness among entrepreneurs, making it the least understood approach to startup funding. Because of these factors, entrepreneurs generally rely on venture capital and angel investors.
Following are some common models of crowdfunding:
In a rewards based crowdfunding platform, small businesses ask for funding commitments and in return for their investment they offer a pre-defined perk or reward such as a handmade basket or t-shirt. The ownership of the startup seeking investment is not up for grabs in such a type of crowdfunding. There is minimal risk involved and the crowd gets the satisfaction of helping without any expectation of a high return.
Product Pre-order Model
In this model of crowdfunding, the start-up which is seeking finance pre-sells their product at cheaper prices in exchange for a pledge. Kickstarter and Pebble Watch are some successful examples of this model as the orders on their websites have already exceeded £7 million. Naturally there are also those companies on such platforms which fail to achieve their minimum goal and as a result have to return the contributions that they have received.
Donation good-cause Model
The altruistic element involved in this crowdfunding model sets it apart from the rewards based crowdfunding where investors expect to receive something in return for their investment.
This model facilitates donations to creative projects and charities and has been in existence for quite some time now with sites such as Rockethub. No financial return or startup ownership should be expected. However, those contributors who have a passion to change the world can find satisfaction in making contributions for genuine causes.
You can find campaigns of this nature on platforms like JustGiving which lists charitable events and personal causes. You can also find several ‘tech-for-good’ companies here that build tools by investing their profits and in this way make ‘giving’ easier for everyone. Since 2001, JustGiving has been successful in raising close to £3.3 billion.
Interest on Debt Model
This model goes by other names such as peer-to-peer lending (P2P) or micro-financing wherein people contribute with the intention of creating a pool against which multiple companies can borrow. The risks can be higher compared to other sources of finance but there are many advantages such as excellent returns from interest or the ability to get small loans easily.
Peer-to-business is another type of crowdfunding based on the Interest on Debt model. There are several P2B platforms but Funding Circle clearly dominates in this industry as it has raised nearly £4.7 billion in the UK. These platforms enable local councils, everyday investors, institutions and the government to make investments in promising businesses across the UK.
Similar to the P2P lending, there are many factors on which the interest rates depend such as the term of the loan or the risk band. There may also be an annual fee of 1 percent on borrower repayments on such crowdfunding platforms. One must also take into account the possibility of bad debts as repayment failures may occur.
Startup Equity Model
Different countries have different regulations regarding equity crowdfunding. For instance, in Europe there are platforms such as Seedrs that allow investors to buy equity but in the U.S crowdfunding sites like EquityNet can only be used by accredited investors if they wish to buy ownership in a startup of their choice.
If you pick the next Facebook you can expect huge returns but backing the wrong horse can make you lose your entire investment thus making equity investment a risky model.
As the owner of a growing business it is natural for you to place a lot of emphasis on obtaining funding but you must not overlook the importance of securing your personal and business assets by writing a Will using a free Will kit.