How Crowdfunding is used in a Digital Economy
With the passing of the JOBS Act in 2012, crowdfunding has become a popular method for receiving funds while using online platforms. Day-by-day this worldwide industry is growing and gaining desirability across a variety of funding sites. Crowdfunding is by definition, “The practice of funding a project by raising many small amounts of money from a large number of people, typically via the Internet.” There are multiple ways in which a company can receive funds or a financier can invest in a company. Throughout this composition I will discuss the four types of crowdfunding, their benefits and drawbacks, and different websites individuals use to advance their crowdfunding projects.
Rewards-based crowdfunding is commonly used to digitally finance a creative project. Small businesses, non-profit organizations, entrepreneurs, illustrators and musicians use this popular model. The Balance describes reward-based crowdfunding as an outlet for people to pledge money for a new artistic project, novel development, or a songwriter or singer producing a new album. This model of crowdfunding is not only an easy and attractive way to quickly fundraise money, but it also allows inventors to capture the hearts of customers. In return for a donation, the financiers of a project receive some type of incentive for participating. As a participant it is important to know what you are contributing toward and how your donation is being used. Creators are highly encouraged to engage with their audience with a well-crafted crowdfunding campaign and have the intention to be hands-on. According to Fundable.com, founders who have successfully raised capital with committed backers do two things well: “They have a market-validated product or service that fills an unmet need better than any competitors, and they are able to share that product or service with enough people, anticipating their specific questions and making compelling asks”. Individuals who ensure supporter engagement, take time to adequately participate with first level network of friends, family and supporters, will in turn reach their funding goal in a shorter span of time.
Kickstarter, a trending rewards site founded in 2009, has more than 8 million backers. Since the site has launched, $1.6 billion has been pledged toward projects. Kickstarter believes that to create a successful campaign one must obtain the following techniques: Firstly, tell your story from the heart, conveying a genuine message can be your moneymaker. Secondly, decide on a number, dream big but be realistic when calculating figures. Thirdly, it is important to shoot a stunning video, or show high quality visuals. People are naturally drawn to videos rather than written documents. This is also important as it can capture the story you are telling. Fourthly, it is essential to design a simple, well-thought-out rewards system. Keep it brief yet meaningful — giving back to your supporters is a better way of saying thank you. Next step is to anticipate how you will carry out manufacturing and fulfillment. This can be the biggest challenge, but when thought out and properly budgeted this task can be accomplished. Subsequently, you should find blogs that will help you spread the word. Networking online is crucial in building a convincing project. Following online networking, creators must craft a bulletproof email pitch. This is imperative because if done well your project could be featured in a blog(s). As your campaign develops, fundraise like it’s a full time job. Kickstarter influencers urge creators to devote time to working on your campaign each day, hard work and dedication will make it much more likely to succeed. Lastly, involve your backers. This may be the most important step in creating your campaign or creative project. Your backers are the building blocks to your project. They want to be a part of the development. Dedicate a page to them on your Kickstarter campaign where thoughts, memories and emotions can be shared. These nine tips will help individuals to create a “kick ass” Kickstarter and furthermore they will enhance the sense of community to your campaign.
Equity-based crowdfunding is different from other types of online funding because people who donate receive company shares, ownership opportunities, or future returns. According to Syndicate Room, people (i.e. the ‘crowd’) will invest in a company that is not listed on a stock market and is still in the development phase of the project. This method of crowdfunding can be beneficial for shareholders, a benefit that investors could profit from should the company do well. There was a time when only accredited investors authorized by the Securities and Exchange Commission were sanctioned to participate in equity-based crowdfunding. As a prospective investor one must have an income of $200,000 a year and a net worth exceeding $1 million, or be offered by a general partner or executive officer of the security. As this online funding resource becomes more popular, soon anyone will be able to donate to a project in exchange for company shares, with some restrictions. In an interview from Lightning Guides Crowd-sourcing, “More people will be able to get more funding in [equity crowdfunding] than they ever did before, “ said Slava Rubin, co-founder and CEO of Indiegogo.
Angel investors are popular equity funders because in addition to financing they provide mentoring, knowledge and networking connections. Venture Kamloops describes an angel investor as an affluent individual who provides capital for a business startup. These individuals invest in companies early on, this is known as the seed stage of project development. It is the shareholders best interest to choose a startup company/and or project because the company has not yet hit their peak, or they are only a few steps away from spiking in growth. A popular equity crowdfunding site that tailors to angel investors is Crowdfunder.com, an online platform available for raising investments not rewards. As Forbes points out, companies that have successfully gained rewards-based funding from other sites, often give prosperous shareholders the opportunity to invest using Crowdfunder.com. Equity-based crowdfunding sites like Crowdfunder.com house top investors such as Kevin Harrington, an Original Shark on ABC’s Shark Tank. In the past, certain companies have not been successful and investors have lost some, or all, of their investment. This is a major drawback of equity-based crowdfunding, as early-stage businesses include risks, involving loss of capital, jeopardy of investment, lack of operation and diversification.
WhichWinery, Inc. is a startup company currently using Crowdfunder.com. It is raising $495,000 with a minimum reservation of $5,000.
“Ready to be a partner in the world’s largest, searchable winery directory? With over 20,000+ wineries across 47 countries listed on the site, WhichWinery will be the # 1 search based site for the global wine industry. WhichWinery is looking for partners that are passionate about wine, travel and excited to help make our company a household name. WhichWinery is a unique search and social platform for wineries and wine enthusiasts worldwide” (Which Winery, Inc. is fundraising on Crowdfunder, 2016).
Peer-to-peer (P2P) lending is a way of cutting out the middleman, allowing individuals to get money to others who need it fast, all while providing a reliable investment plan for investors. Debt-based crowdfunding, also known as “crowd lending”, is somewhat different than equity-based crowdfunding; however, it is gaining attention. This model involves requesting sustenance and funds from other investors in exchange for interest. If you are a startup company or need individual funding then debt-based crowdfunding is a model to use. According to Crowdfund.co, debt-based crowdfunding allows users to reach out to people via online crowdfunding sites and they will receive shares for their investments. It is important to know that shareholders are also investing in a security plan of the company, which means the funds being loaned will have a fixed repayment term and the business pays investors a calculated interest rate during the time of the loan. The benefit to this crowdfunding resource is the process is cheaper and quicker for borrowers rather than using traditional lending methods such as banks and credit services. Like other crowdfunding methods, debt-based crowdfunding has its risks. One risk, according to Crowdfund Insider is individual sites have their own policies on default. Investors need to understand these policies prior to loaning funds as this will help to protect their shares. There are further disadvantages that affect both the investor and startup company. If the startup is unsuccessful then the investor may never see a return on their investment. As for startups, they are at risk of finding a suitable investor who agrees to partner with them.
To avoid these risks when seeking debt-based crowdfunding people are advised to use reliable online resources like Prosper, FundingCircle and Lending Club. Prosper is a peer-to-peer lending site that tailors to both borrows and investors. For borrowers you must have a minimum credit score of 640, with this you will receive a loan up to $35,000 within a two week period. If you have a higher credit score or a respectable loan repayment history, your loan will take less than 14 days. Prosper will offer a greater interest rate for a loan to individuals with excellent credit score. The loan will be paid out much faster then a bank would issue the funds. A standard borrower’s interest rate is <7%-35%. Investors follow a different procedure when lending money via Prosper. They begin by making a minimum investment of $5,000, after the funds have been allotted out to its fees and losses due to default, typical investor returns are 5–10%. Prosper lets both parties work together by either building a business, making a big life purchase or providing investors the opportunity to make excellent returns.
Donation-based crowdfunding is one of the first crowdfunding methods introduced to the online world. This form of funding was established before equity-based crowdfunding and debt-based crowdfunding. It differs from rewards based-crowdfunding because it does not apply to the financing of new products. The donation-based crowdfunding model is changing the way our world can contribute directly to cause or a venture. It enables individuals who feel strongly about a fundraiser to donate and share their money candidly, thereby inspiring others to donate to a cause. This method of online funding is appealing to the online crowd as it allows for funds to pay for medical expenses, funeral costs, and memorial funds. Donation-based crowdfunding is popularly used for personal issues such as medical or educational funding. Commonly used sites for donors to contribute to borrowers seeking personal student funding or school projects are hubbub.net and codeclub.co.uk.
Donation-based crowdfunding attracts users and donors who want to help people with real-world problems and aims to make personal dreams come true. The forerunner of donation-based crowdfunding sites is GoFundMe.com. According to Lightning Guides Crowdsourcing, GoFundMe.com has raised over $850 million in 350 campaigns from 10 million donors since 2010. Like many other sites, GoFundMe.com charges a 5 percent fee on funds. The fee covers operating expenditures such as payroll and technology set-up, services, Internet traffic and financial support. Donation-based crowdfunding has received criticism from online donors as creators of funding campaigns have abused this resource. For example, individuals will create a campaign to receiving funding assistance; however, they will use the money for subjective uses. It is misused for fundraising as dishonest people use it for personal gain rather than aiding in their need. Nevertheless, this method of online fundraising is used in many positive ways.
A Kamloops, BC GoFundMe campaign was created in September 2016 after a local man died from a fentanyl related overdose.
This campaign is an extraordinary example of how a small community can come together and show their support through online funding. The Paul Adkin campaign raised nearly $30,000 by 275 people in one month. The funds received were to help the family cover various expenses such as funeral costs, travel, and living costs. The remaining funds will be put towards a commemorative or educational awareness campaign in remembrance of Paul. This source of funding is a remarkable reason why donation-based crowdfunding can help turn a sad occurrence into an opportunity to educate, aid and prevent these types of tragedies from happening again.
In summary, depending on the platform that best suits your requirements, each type of crowdfunding method can provide reliable and beneficial results to ensure the success of your needs. There is no doubt that online funding will continue to gain popularity and change the rules of fundraising and investing. This is only the beginning for future entrepreneurs and individuals seeking financial assistance. With just a small donation people can help create a new innovation, which could change the way we develop ideas and make dreams come true.