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