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In the last entry we looked at the interest model and this post I wanted to go a little deeper on this model and show readers the two sides to it; the lenders side and the borrower’s side.
First though I have a confession to make. Even though I deal in crowdfunding I have rarely invested in equity (crowdinvesting) – my confession is my bias toward the interest model (crowdlending).
You see I am a simple guy with simple tastes – I like things straightforward and I like to understand the risks I am taking when I personally invest money. That is not to say I do not take any risks – but these risks are calculated. I get it wrong on occasions too. But the crowdlending model is an opportunity to help businesses with a solution that is simple and transparent.
In other words, I tend to get it quicker than in the crowdinvesting model.
In this post we continue our brief look at the models in crowdfunding and have moved along the DREIM acronym (Donation, Reward, Equity, Interest and Mixed) to ‘I’ which stands for interest. Some people prefer the term ‘crowdlending’ to specify this particular model.
This is by far the most straightforward of all the models. What we are really talking about here is the possibility of the public (the crowd) lending money to companies – in other words – debt!
Simple as it sounds there are still characteristics in this model that need to be considered. Not least of these is the issue of the types of question a company might get asked from the crowd. These can range from questions about finance to personal questions of the nature you would really not expect in a business context.
To give you an example our team were working on a raise with a large platform here in the UK for a company (with all male Directors) that had a significant turn-over but needed to raise some working capital. All was going well until a question got asked that at first seemed really inappropriate for the campaign. The question was “How strong is your relationship with your spouse?”
In this post we continue our brief look at the models in crowdfunding and have moved along the DREIM acronym (Donation, Reward, Equity, Interest and Mixed) to ‘E’ which stands for equity. This model is by far the most complicated to understand.
In part this is because offering equity means offering an investor a chance to share the risk of an early stage business idea, and also because the platforms that exist to facilitate this process vary in what they demand from the entrepreneur.
Government regulation is also very tight in respect of an organisation offering equity to the public. Because of this all UK platforms offering equity are regulated and have controls not just over the types of organisation that can offer equity but also over the types of investors that that can invest in a project.
In the previous post we looked at the DREIM acronym and introduced the first of these models in project crowdfunding; Donation (the others were Reward, Equity, Interest and Mixed). This post we will continue with this theme and introduce the Reward model.
By default most readers of this column will think of the Reward model when they think of crowdfunding. In part this is due to American owned crowdfunding platforms like Indiegogo and Kickstarter providing some sensational funding in the past couple of years.
Reward model crowdfunding is used for all manner of products and services. It is most common to find unique takes and designs on classic utilities of some description, games, software, jewellery and a whole range of other stuff.
What makes this model so special is the ‘promise’ that is offered to the crowd for their money. The crowd are pitched in a traditional sense of the term, if they like what they see they make an offer. In return they get something back that they value as thanks.
It could be as simple as a message of gratitude, a t-shirt, a poster or credit in a film/play etc. For entrepreneurs designing and making things this is about pretailing.
In the last post we introduced the two paths in crowdfunding:
- Consumer Lending; and
- Project Finance
For most business readers of this blog – Project Finance is by far the more important as this is where you can get funding for a venture. But it should be realised that there are also other huge benefits to crowdfunding because of the social nature of the activity.
In project finance I created the acronym DREIM because it’s easily remembered and captures the main models in this path of crowdfunding:
- Donation (philanthropy)
- Reward (pre-tailing)
- Equity (shares)
- Interest (raising debt)
- Mixed (a blend of models).
Welcome to our new blog on crowdfunding. Post by post we will be exploring the complexities and addressing any issues you raise on the topic.
Crowdfunding in the UK is a major source of finance for both entrepreneurs wanting to create a vision and for everyday folk wanting to either borrow or lend money to others.
Tremendous buzz has been generated since 2006 when Zopa.com was launched and this led me to find out more about the concept and how it works, its benefits, features and also to explore the dark side of crowdfunding.
Each post will be explore crowdfunding and the many benefits for both investors and entrepreneurs. But to help set the scene we are going to define what we mean by the term crowdfunding and what exactly the buzz is about. In the following weeks this blog will get more complex and begin to introduce broader dynamic issues related to the core topic but before that, the basics.
Crowdfunding is really about people (the crowd) adding value to a person or a project and in return they get some form of value back. Value in this context can mean many things and it all depends on the crowdfunding paths and models we are talking about.