Some of you probably might have heard the term crowdfunding or those in the businesses sector or entrepreneurial world often might have utilised the whole concept already. Crowdfunding being a new a relatively new concept in our economy might be little known even to some of the “accomplished” businessmen in our economy. Meanwhile I’m developed economies such as the United States of America and the UK, crowdfunding is a vibrant tool that many young entrepreneurs and seniors alike are using to bring their ideas and dreams to life. A comprehensive understanding of this funding concept and it’s execution could make that startup a reality. Afterall, a good idea through the right channels always attracts finding!
Crowdfunding in brief refers to the practice of funding a project or venture by raising small amounts of money from a large number of people and typically vuabthe internet and it’s a form of alternative financing. In 2015 alone, over $34 billion was raised worldwide by crowdfunding! Interesting figures right? This statistics show that crowdfunding is a form of alternative financing model that is fast being embraced to fund ventures. This modern crowdfunding model is based on three types of actors: the project initiator who proposes the idea or project to be funded, the individuals or grouosbeho support the idea, the moderating platform that brings parties together to launch the idea.
Crowdfunding has been used to fund a wide range of for profit and entrepreneurial ventures among others as well as charitable ventures such as medical expenses, research based scientific ventures and social entrepreneurship projects. Crowdfunding as a capital raising technique has highly been linked to sustainably although empirical validation reports indicate it plays only a fraction of sustainability. It’s use has also been criticised for funding of costly fraudulent projects! There exists several types of crowdfunding out there and the following could make sense to you;
Rewards crowdfunding; here the entrepreneurs presell a product or service to launch a business concept without incurring debt or sacrifice equity or shares to the funders
Equity crowdfunding is the collective effort of individuals to support efforts initiated by other people or organizations through the provision of finance in the form of equity (they receive shares for the money pledged.
Debt-based or peer to peer lending is also another crowd funding type: Borrowers apply online generally for free and their application is received and verified by an automated system which also determines borrowers credit risk and interest rate. Investors buy security in the fund which makes loans to individual borrowers and they make money from interest on the unsecured loans.
Donation based crowdfunding is a collective effort of individuals to help fund charitable causes such as religious, social, environmental among other purposes. The major aspect of donar based crowdfunding is that there is no reward for donating.
Digital security is also another kind of crowdfunding to raise funds for a project where a digital security is offered as a reward to funders which is known as an initial coin offering (ICO). This is most applicable to the tech industry.
Now that we have overview of what crowdfunding is, it’s types among others, alot can be deduced about how sustainable and rewarding the concept is, to both the Creator and investors. Mind you, these benefits are both financial and non financial. Crowd funding gives creators the following non financial benefits…
Profile: a compelling project can raise a producer’s profile and provide a boost for their reputation.
Marketing: project initiators can show that there is an audience and market for their project. Incase the campaign is unsuccessful, the feedback comes in handy.
It provides a platform where project initiators engage audiences. Updates about projects cna be shared and feedback can be received from the audience.
Offering pre-release access to content to backers as part of funding incentives provides initiators with instant access to good market testing feedback.
One sole important financial benefit of crowdfunding to the project initiator is attainment of low-cost capital to kick start their projects running…how cool is that?
A well regulated crowd funding platform may provide the possibility of attractive returns for investors…such benefits include:
Crowdfunding reduces costs for the investor. Such costs which include search and transaction costs among others which the investor would otherwise incur while joining an Angel group for example.
Crowdfunding platforms open up the consumer section thereby giving a clear picture of the market unlike venture capital firms which often neglect the consumer sector.
Investors can add value to companies when they act as brand advocates. It allows individual investors to be part of the company they invest in.
However much crowd funding ventures are more often successful, a reasonable degree of risk is involved to both the creators and investors alike, some of which include;
Failure to meet campaign goals or generate interest results and being unable to deliver on a project can severely damage a Creator’s reputation!
Intellectual property (IP). Many Digital media developers and content producers are reluctant to publicly announce details of projects before production due to concerns about idea theft and protecting their IP from plagiarism.
There is also risk of donar exhaustion incase the same network of supporters is reached out to several times.
The likelihood of scam projects is very high. Such is not new to our Ugandan setting…we’ve seen certain companies mysteriously disappear with millions of investor’s money. This can become a barrier to engagement.
One great risk especially for the investment is that his ability to conduct due diligence is highly reduced with crowd funding platforms. Hence the investor is likely not to know the and understand risks involved in the venture and this can lead to either partial or total loss of money.
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