Until recently, financing a business involved asking a few people for big sums of money. Crowdfunding is turning this idea on its head, using the internet to help entrepreneurs talk to thousands – if not millions – of potential funders that each contribute a small amount.
The idea is the latest in funding innovations. It means small business owners that are being turned down by High Street banks now have an opportunity to appeal directly to small investors. Equally, whereas investing in small businesses was previously the domain of the very rich, this new concept means anyone can reap the benefits of investing in fledgling start-ups – whether you want to risk £20,000 or £5.
The sector is not without its challenges. While partial industry regulation has now been established, discussions are ongoing between crowdfunding pioneers and regulators in an attempt to find a balance between protecting investors – many small businesses flop early on – while allowing for the creativity and freedom needed to make ventures a success.
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Companies requiring huge amounts of start-up capital may continue to be funded in more traditional ways – venture capitalists, for example, are likely to carry on plugging the funding gap.
However, in the immediate term, crowdfunding is poised to alter the entrepreneurial ecosystem significantly – just like angel investing, venture capital, and private equity before it.
How does crowdfunding work in practice?
Crowdfunding is a fairly new sector that is still developing. While it is an exciting prospect for many – and gives small businesses access to funding opportunities like never before – it can be a confusing arena for most people because it is presented in such a wide spectrum of ways.
Investments or donations are usually made through online platforms, which then coordinate and administer the fundraising.
Projects will range from those helping to finance community-based projects for no financial return (but a fuzzy, warm feeling inside), to sophisticated portfolio-picking, purely for monetary gain.
You could also opt for something in the middle. Abundance Generation, for example, offer investors the chance to invest in green energy and even allow you to visit your windfarm, but is FCA regulated, has shares on the stock market and offers pension investment options.
According to the UK Crowdfunding Association (CFA), there are officially three different forms of crowdfunding: donation, debt and equity, which it lays out here:
Donation crowdfunding
People invest simply because they believe in the cause. Rewards can be offered such as acknowledgements on an album cover, tickets to an event, regular news updates, free gifts and so on.
Returns are considered intangible. Donors have a social or personal motivation for putting their money in and expect nothing back, except perhaps to feel good about helping the project.
UK Sites include: www.banktothefuture.com, www.buzzbnk.org, www.crowdbnk.com, www.peoplefund.it and www.gambitious.com.
Debt crowdfunding
Investors receive their money back with interest. Also called peer-to-peer lending or lend-to-save, it allows for the lending of money while bypassing traditional banks. Returns are financial, but investors also have the benefit of having contributed to the success of an idea they believe in.
Where crowdsourced money is lent to the very poor, most often in developing countries, no interest is paid on the loan and the lender is rewarded by doing social good. This is sometimes referred to as ‘microfinance’.
Sites include: www.abundancegeneration.com, www.banktothefuture.com, www.buzzbnk.org and www.trillionfund.com.
Equity crowdfunding
People invest in an opportunity in exchange for equity. Money is exchanged for a share in the business, project or venture. As with other types of shares if it is successful the value goes up. If not, the value goes down and you could lose your money completely.
Sites include: www.banktothefuture.com, www.crowdbnk.com, www.crowdcube.com, www.gambitious.com, www.microgenius.org.uk, www.crowdmission.com and www.seedrs.com.
Interested in finding out more? Watch this video guide by crowdsourcing company Trillion Fund:
Credit: http://www.thisismoney.co.uk
ZBIN Comment: We are going to be researching more on this topic and finding out how Crowd funding can help our members.
