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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.

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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

Help JUXDIT voo m

JUXDIT has recently launched in Virgin’s Pitch to Rich competition, with the hope to win their category and grow their crowdfunding marketplace with the prize. It’s an exciting time for this company, only on Friday was their founder Annie O’Toole named Young Entrepreneur of the Year at the Leaders Summit 2015 in Mayfair. Judges comments stated that she had ‘gone above and beyond to become an expert within the crowdfunding industry, we have no doubt that she will go on to achieve big things with the launch of JUXDIT’s marketplace’.

JUXDIT is a crowdfunding consultancy based in the Baltic Triangle area of Liverpool. Now working on an international level, their mission is to fill the gaps that lie within the before and after services of crowdfunding, making the industry more accessible across Europe.

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Starting out

A question I am often asked by management about to crowdfund their project is “Where do we start?” The answer is always the same – audit both your competition and the platforms available to you.

Once you have completed an audit management can start planning the campaign in much more elaborate detail. But the audit should, no, MUST come first for the planning to have any credibility. An audit can be focused on almost any area and which areas management focus on first is entirely optional.

An audit does not have to be a lengthy opaque exercise it can be a simple matrix that records the bare essentials. There are, however, key basic areas I would expect campaign management to consider in an external audit, these are:

  • Costs
  • Similar campaigns
  • Promises
  • Similar products
  • Success/failure ratios
  • Platforms
  • Alternatives

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The Lean Campaign

Eric Ries published The Lean Campaign in 2011. There was nothing really new about this book – its underlying methodology was rooted in Action Research.

But this got us thinking – what if we took this concept and applied it to crowdfunding. This is a new application of the concept and one born from the frustration of the lack of space to test a crowdfunding campaign before you go live and ask for the money.

In entrepreneurship the Lean Startup [sic] movement was (re)started by Eric Reis in the USA. But the principle goes back to the late 19th Century and the first recorded use of action research methodologies in the field of education.

At its most basic form action research means working alongside the subjects you are analysing. Rather than being an objective observer, as is often the case in the natural sciences, the action researcher can make suggestions that may lead to action on behalf of the agent being analysed. Then one steps back, thinks (reflects) about the results and the process generally starts all over again with this new knowledge in hand.

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A word from Bruce

This post I would like to introduce someone else’s view on equity crowdfunding. At a recent talk I was giving to a Hampshire business network there was some criticism from both panel and floor about equity crowdfunding.

At the end of the evening I was approached by Bruce (not his real name), a handsome young man who made me reflect somewhat differently on the evening and the conversation that had flowed.

Bruce is an investor with Crowdcube – one of the leading equity crowdfunding (crowdinvesting) platforms in the UK. His story was so compelling I asked if he could email it to me for use here in the blog. To my delight he agreed and so below is a summary of that conversation/email.

For Bruce it all started back in July 2012 when he was working in Central London. On his way home he read in the London Evening Standard the headline ‘Forget banks, I raised £75,000 for my business dream via the internet‘. Read More

Controversy

In recent months there have been a number of questions raised about crowdfundings reward model and its application to fund certain projects. This has been brought in to sharp focus with the shooting of Michael Brown by Police Officer Darren Wilson in Ferguson, Missouri on 9 August 2014.

The consequences of the shooting and the circumstances surrounding it are well documented, so I won’t dwell on this here, what I wanted to show was how crowdfunding is adding fuel to the controversial fires over this issue.

The crowdfunding reward model is by far the most popular, and by default it’s often the model referred to when people talk about crowdfunding. Controversy emerged when big stars in the USA started using reward model crowdfunding platforms to fund projects that could produce a commercially successful outcome for the celebrity.

Crowdfunding eliminates the risk for the celebrity as they are not using their own money for an unpredictable product that could fail. They are also tapping into a huge fan base that gives them an unfair advantage over campaigns that are starting from a position with much less of an audience. A stars fan base may simply accept their endorsement of a certain position and thus back them without really considering how they will benefit from funding the project.

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