In crowdfunding, a number of investors or lenders contribute financially toward the expenses that a project has incurred or would be incurring. Also in crowdfund-ing, the amount of contributions and the desired outcome varies across investor and lending communities. Crowdfunding has a long history of existence and has been done in the past for multiple religious and social causes. The biggest exam-ples are building a temple or planting a community garden. Crowdfunding for the most part of last century was informal and typically recognized as a partnership. Crowdfunding has seen a large upswing since the financial crisis of 2008 as faith in the banking system eroded and investors and borrowers were looking for avenues to invest more as a partner and/or help the cause they always wanted to fulfill. Crowdfunding is also closely related to donations but unlike a donation where the only outcome expected is emotional satisfaction, in crowdfunding the expectation is for material gains, in addition to emotional satisfaction from goal achievement. If we eliminate crowdfunding done for donation activities, then crowdfunding is used for funding some of the following causes:
- Funding for equity
- Funding to build an innovative product
- Funding for a research project
- Funding for emotional reasons
Out of above, the most common causes are for crowdfunding are #1 and #2. They are primarily driven by contributors who are interested in a business concern or building a product that will address an opportunity gap. In fact, most of the FinTech companies themselves are a big benefactor of crowdfunding. Contributors who encourage entrepreneurship or are interested in seeing a new product launch, start contributing toward corresponding projects. One of the reasons why some of the contributors contribute is because of the co-achievement feeling associated with something path-breaking happening. Crowdfunding has also been extensively used for funding artists, publishers and works of art. The coverage of the topic in this book will be focused around different operating and business models adopted by crowdfunding platforms rather than on the causes of crowdfunding. In some of the crowdfunding platforms, the royalty from the publishing of a work of art/innova-tion is shared among all the investors as well.
Crowdfunding platforms usually charge either commission for the entire fund received or service fees for enabling an investor transaction.
Crowdfunding helps investors, since the crowdfunding platforms charge very low transaction charges and the platforms help find the right opportunities easily to respective investors. These platforms enable to invest small amounts of money and are accessible to a larger audience. Therefore, it helps small investors to invest in opportunities which would typically be available to only large investors like venture capitalists (VCs) and fund houses. Crowdfunding platforms, beside facilitating the funding for the fund seeker, helps get an early feedback on their projects or product by engaging with investors and getting their views on the same. In some cases, the product owner benefits by discovering features that would be key to the user. In some cases, such discussions also lead to bringing up-front some features to keep the prospects engaged. All these interactions help promote the product before the launch, through word-of-mouth and without spending on commercial marketing and communication media.
Though crowdfunding faces regulatory issues in multiple countries, it is one of the best forms of partnering with entrepreneurs, artists and innovators. Therefore, the platform capabilities in crowdfunding are usually restricted to the regulatory compliance and allowable causes they can support and encourage. It is estimated that billions of dollars have been raised globally using crowdfunding.
Some of these platforms help innovators, artists and entrepreneurs to ask for funding on their platform. These platforms have been funding hundred of thou-sands of projects globally, aggregating to multibillion dollar propositions. The fund-raiser defines his/her project, the funds required for the same and then sets up a deadline for achieving the funding goal. The fund-raiser in some of the FinTech platforms can post his/her video explaining the project as well. The investors on the website start committing the amount they can contribute for the cause or the project. If the fund’s goal is met, funds are collected from investors. Until the funding goal is met, none of the investors are charged. A fund-raiser could define what the outcome of the project could be and how the investors will get rewarded for the same. The reward could be a thank you note or a guarantee to send the pre-view version. Some of these FinTech firms charge a certain percentage of the total funds raised. The fees charged is usually a very small percentage of the total funds raised. Besides the fee charged by these platforms, the investor and fund-raiser will have payment processing charges deducted by the respective payment provider from their contribution. These platforms have identified a set of rules to be followed on their websites for the work of art as well as other projects, including providing a physical prototype for an engineering product. All these guidelines and monitoring of the projects uploaded has made these platforms less prone to being misused for promotions and campaigns. Also, these platforms are taking measures to ensure that it does not become a buy/sell site for actual products by scrutinizing the proj-ects being uploaded. These platforms help fund-raisers get visibility and publicity through the investors on the platform and word-of-mouth publicity.
There are equity crowdfunding platforms that are more of an online market-place that connects start-ups with early-stage investors. The platform, unlike other platforms, is not open for all but instead open to only accredited investors. To ensure the investors on the portal are valid, the FinTech platforms employ differ-ent techniques, including making phone calls to the investors upon registering, to determine if they are accredited investors. Some of the platforms could have a mix of accredited and non-accredited investors, but despite this, these platforms are far from being open to all and access to them is restricted to a certain verified group of investors. Some of the equity crowdfunding platforms are on a registered dealer-broker platform, thereby helping investors and fund-raisers to legally sell shares of the company that wants to dilute its equity holding. The FinTech firms that do not have the valid licenses for operating as dealer brokers will have to go through a bro-kerage or a third party to sell/buy equity within a company/project being invested. Some of the large social media giants have raised funding using the crowdfunding equity platforms.
There are other platforms that are open to all and people can post multiple projects, and there have been success stories from these platforms as well. These platforms have enabled small investors who can get together to create something meaningful, artistic and innovative. Unlike established banks who would always look toward evaluating a business case, the crowdfunding platform enables inves-tors to evaluate the business themselves. This also helps these small investors to ascertain the risk based on their judgment and then can contribute accordingly for the project they think is the right one. Crowdfunding also helps the fund-raiser by enabling them to get funds quickly from investors on the platform as against a lengthy process with large established banks.