Crowdfunding or crowd financing has, arguably, been around for quite some time but it has not had the international exposure that it claims today.
An entrepreneur has always been seen as a leader, an innovator and a necessary part of the economic structure but in the post-recession world the entrepreneur is almost an urban legend.
Creativity in the world has not ceased to exist, however the funding required to turn creative ideas into businesses has.
The general population are trying very hard to hold on to their money and their jobs and high risk high reward is, at least temporarily, a thing of the past.
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Connected investors direct with entrepreneur’s is the main goal of a crowdfunding platform.
All have similar structures and requirements. The entrepreneur’s idea has to be ‘pitched’ to the investors using video or uploaded presentations.
Many startups are flocking to crowdfunding platforms such as Kickstarter and Indiegogo to collect donations for their young ventures.
Then if the potential investor is interested, they can donate a certain amount of money in return for an instant reward and a certain ROI.
The size of the reward, naturally, depends on the size on the investment and may vary from a T-shirt to a large share of the business and the percentage of interest depends on the venture. The required amount is also specified and the amount collected is available for the public to see.
The idea behind crowdfunding is rather than getting a large sum of money from few, wealthy individuals, that the business can be funded by a large number of people including the entrepreneur’s personal network of friends and family.
This allows a higher chance of obtaining funds as there is a higher number of interested parties. The platforms are setup in a way that amounts large and small are accepted and rewarded. This encourages any and all capital to be recognized motivating the investor to contribute.
Typically, it is inexpensive to pitch your idea on a website. However, once you have reached your desired target a percentage fee of usually less than 10% will be charged.
Crowdfunding is not limited to startup ventures. Charitable causes have now followed suit and are pitching for donations rather than investments using the same methodology.
Also, individuals have stormed to crowdfunding sites in order to fund artistic projects such as films, novels, comic books and the likes although in these cases investors should not expect their money back.
There are other crowdfunding platforms that are designed for individual goals. For example, there are those who would like to obtain their master’s degree but do not have the funds to do so, others in similar situation would like to attend a dance school that is too steeply priced for their budgets to accommodate.
It is clear that crowdfunding has taken the internet by storm and is here for the long run. Using new technology, entrepreneurs can assist the economy by creating jobs and dreams can be achieved encouraging philanthropy for generations to come.
Where To Find Independent Information
Increasing numbers of investors are attracted to crowdfunding to generate a higher return from their cash than banks and ISAs are offering.
Crowdfunding is also popular with small businesses and entrepreneurs because the money they raise is an equity stake rather than debt that must be covered from their start-up cash flows.
But before deciding if crowdfunding is the best option, investors should consider the pitfalls as well as the risks.
According to industry statistics, crowdfunding saw an 11% improvement in the first three months of 2017 compared with the same time last year.
But finding independent information about the sector is hard – most guidance is published by crowdfunding platforms and trade bodies that have a vested interest in encouraging investors to stake their cash.
How crowdfunding works
The first place to look for guidance is the European Commission’s guide to crowdfunding for small businesses.
Although the advice is skewed towards entrepreneurs seeking funding, the guide gives an overview of how crowdfunding works across all the major European markets.
Crowdfunding comes in three flavours for investors:
- Equity crowdfunding – Taking a stake in a business in return for shares. The aim is to see the company succeed and to reap a profit from the increased value of the shareholding
Look at Seedrs for more information
- Peer-to-Peer or P2P lending – In P2P, investors group small sums of money together into a larger sum and lend the money to a business which repays the loan at an agreed interest rate
The market leaders are RateSetter and Zopa
- Rewards-based crowdfunding – Not generally of much interest to serious investors, reward crowdfunding offers discounts, web mentions and free gifts in return for donations
Where to find crowdfunding deals
Business charity Nesta has a database of UK crowdfunding platforms with details about finance costs, returns and sectors.
The data is on a searchable web site called CrowdingIn
Although the returns from crowdfunding can beat most of what is offered elsewhere, remember the risk of losing money is high and disposing of unwanted shares or debts before the transaction term has ended is not easy.
Crowdfunding is not protected by the Financial Services Compensation Scheme (FSCS) and the only recourse when a deal goes wrong is likely to be through the courts.
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