The Blog

Crowdfunding: A paradigm changer in the financing world

Crowdfunding is a recent financial model, which is activated through crowdfunding platforms on the internet to support entrepreneurs, businesses and community projects in identifying funding through alternative methods of finance. The model works as a means for private investors such as you and I to invest into projects or ideas they believe in. The projects are submitted on a crowdfunding platform and are available for public funding. Crowdfunding now represents a market worth of 2.957 million euros.

There are four models of crowdfunding: Donation, Reward based, Lending and Equity.

Donation crowdfunding is a philanthropic way to finance a project in that there is no return on investment attached to a project financed this way. It is valuable for community based projects and charities as it provides new perspectives for financing, allowing them to attract more people.

Reward-based crowdfunding offers some benefits for people who choose to invest in it. It is commonly used by artists, authors, professional video games streamers, recording artists and so on.

Lending crowdfunding is a substitute to the banks for SMEs and entrepreneurs. It provides the investors with a low risk way to put their money in a business without actually investing in it. The risks are low because of the nature of the platform. This means there is a low risk due to the investment being done on a platform that is unrelated to the financial market. It also means there is a low risk for the interest rate because of the small duration of the credit. This way of investing in crowdfunding roughly provides an interest rate of 8 to 10% on an amortizable loan.

Equity crowdfunding is very similar to the way investment funds and other private equities work. This form gives the investors shares of the company for the value of their investment in the company’s equity. The investment can be made directly within the companies, which dilutes the equity of the company or through a holding company in which you concentrate all crowdfunding investors and then the holding invest in the company.

Crowdfunding is a paradigm changer because of the way it conceives finance. It is basically the first time that someone can invest into a project led by someone completely unknown to him without having to resort to a bank or a professional service.

There are currently concerns about creating regulation for crowdfunding given the activity is so new and wide meaning the current framework of regulation is not entirely appropriate for it.

Crowdfunding also has social impacts that must not be neglected in terms of job creation, social innovation and growth in the economy, especially those in the most marginalized or excluded groups.

A recent study conducted in the USA by Crowdfunding Capital Advisors suggests that:

  • 39% of companies hired an average of 2.2 new employees per company after crowdfunding
  • An additional 48% of companies said they intended to use crowdfunding proceeds to hire new staff.

Crowdfunding is a way to promote social entrepreneurship and a more responsible way to handle financing companies.

Crowdfunding is something civil society truly needs. It is the financing that everybody has been hoping for, but never heard of. With the rise this method, there is a need to communicate more on it to launch an era of self-financing. In the end, one can argue that crowdfunding is the true form of capitalism. It is up to us to allow it to benefit the world.

By Jerome Perrout, PHD student and Madi Sharma, Founder of Global Entrepreneur Envoy 

A note from the publisher ahead of next week’s launch

LID Publishing is very proud to be hosting the launch of Chris Buckingham’s book Crowdfunding Intelligence, next Thursday 28th May at The Shed, CrowdShed.

The book serves as an insider’s guide to crowdfunding. As a researcher, founder of Minivation, and crowdfunding expert, Chris will be running a workshop on Creative Crowdfunding to compliment the launch of his book.

We are also delighted to be hearing from keynote speakers from some of the largest crowdfunding platforms such as KriticalMass, CrowdShed and Indiegogo, who will be able to provide our guests with individual insights on successful crowdfunding campaigns. We will also be joined by Alex Watson, Project Manager of Ben and Jerrys Europe, who will be speaking about how the company has benefited from crowdfunding.

Humus Bro’s will be serving up a Mediterranean feast for lunch, and pitching their LIVE crowdfunding campaign to our audience!

The practice of crowdfunding has become the fastest growing way for businesses and entrepreneurs to raise capital and LID Publishing are proud to be promoting such a phenomenon at CrowdNexus.

Last minute tickets are still available free of charge on: http://www.eventbrite.com/e/crowdnexus-tickets-15438465867?aff=es2

We look forward to seeing you there.

By LID Publishing 

 

Getting started with Crowdfunding

There is currently a lot of interest and hype around Crowdfunding as a new way to fund innovations. The success and exponential growth of platforms like KickstarterCrowdcube and Indiegogo means that there is a variety of choice.

We thought we’d share our thoughts and experiences for those trying to understand the pros and cons of when and how to use crowdfunding as a way to secure investment for new ideas and projects.

What is Crowdfunding?

Crowdfunding is the collective effort of people who pool their money (and effort) to support a specific goal. It has an “all or nothing” approach within a specific time limit and there are often other benefits in return for investors such as goods, events, kudos, experiences and even equity .

Whilst crowdfunding is growing fast and powered by the web, the concept is not new. For instance the Statue of Liberty was crowdfunded by the citizens of the USA and France and many church spires have been crowdfunded over the years.

Top 3 Benefits of Crowdfunding

There are many reasons why crowdfunding might be the right approach for you and your project. Four of the main benefits of crowdfunding in our experience are as follows:

  1. The best crowdfunding projects are those that both improve their proposition through feedback from the community  – both positive and negative – and find collaborators with complementary skills.
  2. The ability to build potential customers before you’ve gone any further and, in the case of product innovation, invested lots of time in production costs.
  3. The ability to fundraise very quickly compared with traditional funding routes. In fact many institutional investors now see crowdfunding seed capital as a helpful market validation of your idea before they invest.

Top 4 Challenges of Crowdfunding

As with all things there are also many reasons why crowdfunding might not be the right approach for you and your project. Four of the main challenges of crowdfunding in our experience are as follows:

  1. Crowdfunding is increasingly competitive and being able to ‘stand out from the crowd’ is increasingly challenging
  2. Crowdfunding can become somewhat of a beauty contest, where the best videos and pitches succeed but not necessarily the best ideas (but isn’t that true with other business areas as well?)
  3. Even though crowdfunding is a more democratic form of fundraising, the biggest and arguably best crowdfunding platforms still have gatekeepers who can stop your project being listed
  4. There is a risk that innovators will overpromise and even abuse the good will of the community, though we are not aware of specific cases as yet.

Who is Crowdfunding for?

Lots of small companies are extending their reach and successfully raising investment through crowdfunding. However, some larger organisations such at LEGO (with their excellent LEGO Ideas programme), Zopa (with their peer2peer finance models), Unbound (with their crowdfunded book publishing model) and CRUK (with their innovative My Projects approach to fundraising) are implementing some of the elements of crowdfunding to back new and interesting ideas.

Conclusion

In summary, whilst Crowdfunding is not necessarily new, and almost certainly a little hyped at the present, it is also in many ways the future. Whilst the term may lapse with time, the concept of more people sharing more resources in new ways is increasingly becoming the business and investment model of the future.

By Roland Harwood, Co-Founder and Networks Partner of 100%Open, who specialise in open innovation crowdsourcing with the likes of LEGO, Unilever and Oxfam.

Crowd Nexus AGENDA

CrowdNexus Agenda

As you are all aware, our CrowdNexus conference on the 28th May will be an all day event.

The agenda for the day will consist of keynote presentations, workshops, panel discussions and opportunities to network with and meet entrepreneurs. It will also be an opportunity to meet research professional and author, Chris Buckingham, and learn more about his insightful new book, Crowdfunding Intelligence.

The LID Publishing team is very excited to welcome you all to this unique and illuminating event.

Read More

Recommendations to the EESC on Crowdfunding

I am not a crowdfunding expert, but I was invited to give my views to the European Economic and Social Committee, as an entrepreneur and an investor at the European Crowdfunding Network last year in Paris. It must have been impressive as I have been invited to speak now at CrowdNexus, which I am really looking forward to giving as I have been working on several of the issues that came up at the Paris conference.

In my business life and in my work for the EESC I have come across investment models, business angels, crowdfunding and microcredit, but my greatest interest in the subject is entrepreneurship, social entrepreneurship and how crowdfunding supports growth, innovation and generates a drive for change.  It is also interesting how crowdfunding can bring leverage for business development and jobs, innovation and sustainability, an impact Governments around the globe are still failing to achieve.

In today’s changing and challenging world, the solutions tend to come from the people and from communities instead of from politicians. The mechanism of crowdfunding allows for the leverage of funds, but additionally investment in the form of knowledge, networks, new markets, employment opportunities, regeneration, research, development and CSR. Thus the greatest advantage of such a mechanism is as the driver of change.  Change is the only constant in our lives, and as Ghandi said “You must be the Change you want to see.” Here we refer to You as The Crowd; whatever the Crowd wants to see changed, the crowd needs to support – A simple but effective equation to make a difference.

Another attribute to crowdfunding is that it is democratic, inclusive and it engages citizens. As Candace Johnson Chair of EBAN, EU Business Angels Network and I concurred in Paris,  “There are no social entrepreneurs. Entrepreneurs, by definition, do what is needed to bring about change, being freedom of choice or democratization of access to funding. The way they do it is by believing. And their ability to communicate and convince people that they can bring this change is what is important.”

The UK crowdfunding market is 17 times greater than the French market, which is approximately worth 1 million Euros. The UK has implemented an industry Code of Conduct with a positive result increasing trust in the market. The French, Italians, Finnish and many other nationalities have over regulated the market and caused possible restrictions on lending.  Dis-intermediation is an important factor of disruption for established business models and the impulse crowdfunding gives today may well change the understanding of finance to the same degree that the internet search engine has changed the area of knowledge exchange. Which is the direction that the EU should take and furthermore, is it necessary or needed for the EU to take any action?

My recommendations to the EESC are:

1.To prepare an Own Initiative Opinion in the EESC on harmonisation across EU for a fully functioning EU crowdfunding network and to reduce over regulation in each country. Look at ways to prevent market fragmentation – EU commissions are currently looking at crowdfunding but unsure which direction to take

2.Consider an opinion to review crowdfunding in the context of entrepreneurship development and especially social entrepreneurship leverage.

I am looking forward to seeing you all at CrowdNexus and discussing the recommendations and benefits of crowdfunding further.

By Madi Sharma, Founder of Global Entrepreneur Envoy