Crowdfunding is a method of raising money from a distributed group of funders (the crowd) who provide a large number of small sums forming a significant total when aggregated together.
Crowdfunding is a product of its time and is a direct response to changing economic circumstances, new societal attitudes and the impact of the availability of low cost, always on social and collaborative technology.
It is commonly described as having four basic models:
Donation or Gift
In this model the funds collected are simply gifts or donations with no tangible return to the provider.
Reward or Perk
In this model “Rewards” or “perks” of different value are offered to investors to purchase. This is the model used for some of the most high profile crowdfunding campaigns.
Debt or Loan
Often referred to as Peer to Peer or P2P lending this is the largest part of crowdfunding by value. A loan is constructed from many small loans collected from the crowd. Many are interest bearing. Available for consumer lending and business lending this has proven to be attractive to lenders as well as borrowers in a market with few retail investment opportunity and a general constraint on credit fro borrowers.
In this model shares are sold in small parcels to a large group of investors. Highly regulated and not permitted in many countries this is much debated and often the most controversial as it is seen to be openly challenging and operating in an area once very closed, protected and privileged.
Most campaigns operate over a stated period and aim fro a specific funding target. Within this her are two main versions, the “keep it all “ model – the fundraisers get to keep all the money they raise regardless of whether they make their target or not. The common alternative is the “all or nothing” option where money is received and rewards and shares or benefits are only paid out if the target is met within the time stated. A failure to make the target means all bets are off!
There is tremendous variety and constant innovation within these four basic models making it a vibrant and exciting sector.
Empowering for all concerned it allows people to engage as investors and supporters to causes, businesses and movements they have affinity with. For those seeking to raise funds it empowers them to do so by removing intermediaries, costs and barriers.
This empowerment is in the best traditions of disruptive digital technologies and some refer to the rise of crowdfunding as the “democratisation of finance.”
Platforms are the online market places where campaigns are typically run. Their proposition is to provide an integrated set of services and tools to allow funded and project owners to meet and perform the transactions they need to at very low incremental cost. There are hundreds of platforms but some of the larger ones have become household names like Kickstarter, Indiegogo, Crowdfunder, Crowdcube and many others. Increasingly popular is the DIY model where a project is run “off platform” on the fundraisers own web site
Crowdfunding is applicable in all sectors but it is VERY hard work.
Success rates remain very low (typically around 30%). Often poor preparation is a key contributor to failure often because people misunderstand what is required or see this as an easy path.
Luckily we have produced a range of blog posts to help people understand the components of a good campaign, and our TAMP process helps anyone take a considered structured and thorough preparation and planning process or audit their own preparations.
Apart from its accessibility crowdfunding is increasingly being shown to have distinct benefits beyond providing funding to those who use it. Validation of business models, endorsement and visibility, speed to market, access to skills expertise and follow on funding are all added benefits that can come from crowdfunding.
Crowdfunding has many distinctive qualities and a sound philosophical foundation that is very distinctive from traditional finance. Concepts like “The Long Tail” are important ideas fro crowdfunding but the main areas of differentiation from traditional finance are around the ideas of how risk is mitigated in crowdfunding scenario and the different and diverse expectations of return for participants. A failure to understand the key differences between crowdfunding and traditional funding – particularly in a business context – have lead to many unfortunate project failures, a certain scepticism from traditional financiers, and some misguided regulations.
Despite all of this it is growing rapidly with projections placing the crowdfunding market place being worth many £ Billions over the coming years and it is undoubtedly disrupting what we have though of as funding options to now.
Our expertise in this new and emerging field has helped many people successfully crowdfund through attendance at our coaching and workshop sessions or our audit and one to one guidance. Many institutions have sought and benefited from our services. Public, civic, governmental, charitable and commercial bodies are all increasingly aware that crowdfunding has benefits to them and we have helped them to understand how they can integrate align and use it to help them create value and more effectively achieve what they are seeking to do.
If you would like to speak to us about crowdfunding do not hesitate to get in touch