Crowdfunding has three basic elements: The initiator of the project, the people who support the idea and the platform which brings the two parties together (which the crowdfunding will actually be performed on).
Crowdfunding has expanded with as much as 167% in 2014 and reached an astonishing $16.2 billion raised. Crowdfunding industry has grown from $5.1 billion in 2013 to $34.0 billion in 2015. Having experienced an accelerated growth, crowdfunding has become a huge financial phenomenon all around the world. People expecting figures to confirm the fact that crowdfunding is now raising more than $30 billion annually.Background
Crowdfunding grew first popular among artists and musicians. Crowdfunding appeared in 1997, when the fans of the British Rock band Marillion design an internet campaign to raise funds for their US tour.
Mark TapioKines was the first movie industry director/writer to tap into crowding. Through his own designed web site and over the course of two years (1997-99) he managed to raise funds and finish his movie.
The ‘Free Blender’ appeared in 2002 and was the first crowdfunding open source based software.
Crowdfunding started to become increasingly popular in 2003, after the launch of the application Artistshare. Following that, many other crowdfunding sites appeared.
Catagories
The 2014 Crowdfunding Center’s report identified two catagories of crowdfunding: Rewards Crowdfunding and Equity Crowdfunding.
Rewards-Based Crowdfunding (non-equity crowdfunding) is very popular and has been used to find things as varied as motion pictures, civic projects, software development or idea and invention development. Specialists divide rewards-based crowdfunding in two branches:
‘All-or-Nothing’ (AON) – the project initiator sets a target and will keep the raised contributions only if that goal is attained.
“‘Keep-it-All’ (KIA) – the project initiator sets a goal, but keeps the money no matter if the target is attained
Studies show that people are more likely to contribute in the AON crowdfunding projects because they are more detailed and more transparent. They are also favored because of the certainty which they give the investors that the products in which people invest will actually be developed.
The main identified characteristics of the non-equity crowdfunding are the following:
It is not location related – it can be a two continents distance between a company and their crowdfunding, enthusiastic investors
Funding is not evenly distributed – it is some of the campaigns that receive most of the funding
“Herding behavior”- funding increases as the project gets closer to its goal
Most initial fundraise capital comes from family, friends and acquaintances
Funding is usually concentrated in locations around ‘classic’ financing founding options
The project initiators usually have unrealistic expectations which they later have to revisit
Debt-based
Debt-based crowdfunding is also known under the following names: “peer to peer”, “P2P”, “marketplace lending”, or “crowdlending”. Debt crowdfunding raised in popularity in 2005. This type of crowdfunding is a billion dollar industry which is built around debt and loans. Applicants register online for free. Their applications as well as the credit risk of the borrower and the interest rate are all calculated online. Investors profit of unsecured loans’ interest. The loan operators take a certain percentage of the loan as well as a service fee.
Equity-based
Equity-based crowdfunding is the collective action of multiple individuals to support other individuals or organizations via financial provisions of equity. Equity crowdfunding contains “information asymmetries”, which literally means that the project initiator must not only produce the object of the fundraising, but also create equity by starting a new company. Research shows that syndicates can reduce the info asymmetries and avoid the market failure, which equity crowdfunding is associated with.
Donation-based
Donation BasedCharity-based crowdfunding is often used to support charitable cases. This civic crowdfunding allows funds to be raised which are then used to improve different aspects of public life. The platforms usually take a service fee of 5 to 10%of all donations.
Litigation
Litigation crowdfunding is a semi-private funding option for plaintiffs and defendants. This type of crowdfunding allows the investors to purchase a claim on the property. They can later choose to recompense with it the litigant in case of success. This is often referred to as a contingent fee, a success fee or apactum de quota litis.
Crowd’s Participation
Motivation for crowdfunding and consumer participation usually comes from the desire for patronage, desire for social participation and or the desire for investment. Individuals are also interested in participating in crowdfunding in order to help new products develop and enter the market. Crowdfunding is also a very interesting way of clarifying the financial agreement terms between the contributing family and friends of a crowdfunding project initiator.
The adepts of crowdfunding usually have one or more of the following characteristics: developed innovative orientation, a distinct social identification with the project and/or some form of monetary exploitation expectations.
Crowdfunding platforms generate profit by attracting as many great projects and generous funders as possible.
Different Plateforms
There are hundreds of crowdfunding platforms out there. Each provides a set of fundamentally different services to its users. They may permit people to buy shares or claims or nominating invest in a start-up or small product.
Crowdfunding platforms create the absolutely necessary organizational system in order for crowdfunding to work at a national and global level. Crowdfunding platforms are relational mediators who act as intermediary “network orchestrators” between supply and demand. These platforms link the new generation that wants to grow and revolutionize the world with those who believe in them and are financially willing to support them in order to do so. Crowdfunding platforms eliminate the need of traditional financial intermediaries.
Real estate crowdfunding
Real estate crowdfunding brings together investors, which pool capital to fund various mortgages which are secured by real estate properties. This type of investment is regulated through the Title II of the JOBS Act and requires the investors to be accredited. There are presently hundreds of real estate crowdfunding platforms, all around the world.
REWARDS & RISKS
Rewards
Crowdfunding brings the creator of a project many benefits, some of which non-financial. Here are some of the most common non-financial benefits of crowdfunding:
Profile – the project can raise the profile and increase reputation.
Marketing –a successful project identifies the market, while an unsuccessful campaign provides good feedback.
Audience engagement – crowd funding enables the audience to actively engage in the project.
Feedback – beta-testing opportunities as a part of the incentives ensures a good market testing feedback.
There are also, various financial gains of crowdfunding, one of which is obtaining cheap financial capital for the venture/product/idea. Crowdfunding enables people to literally find funders and clients. Many good and unique ideas can benefit from the wisdom of the crowd to attract the necessary funding. They also enjoy promotion and great early feedback. It is well known that groups are able to quite accurately predict market outcomes, fact which can help some projects ensure their necessary capital.
Risks and Limits
Crowdfunding does also imply risks. It is a registered fact that crowdfunding contains what was defined as being “high levels of risk, uncertainty, and information asymmetry.” Here are a few of the risks the project creator needs to assume:
Reputation – Not meeting campaign goals of failing to deliver the promised goods can negatively impact reputation.
Intellectual property protection –Creators are required to release sensitive product information, exposing themselves to the risk of plagiarism.
Intellectual property exposure- One of the issues with which crowdfunding is battling is the lack of intellectual right protection. Once the idea is posted, and no one is liable for that. Specialized attorneys recommend creators to protect their ideas by using an earlier patent, copyright protection, trademark protection as well as the newly protection idea named Creative Barcode.
Donor exhaustion – if same network of supporters is used multiple times, that network will eventually stop providing the necessary support.
Public fear of abuse – active concern that without regulations, there is a high chance of scams or funds abuse.
Other aspects worth considering when deciding to crowdfund a project is that the project will be under the scrutiny of a crowd which will carefully follow the progress or lack of progress of the venture. Some people discover that it is easier to raise the money for an idea, then actually making it a success. Responsively managing the communication with the disappointed investors is also a very important and sometimes time consuming task.
Most of the successful crowdfunding projects aim to identify new customers and market products/services. In US more strict and clear regulations are expected on crowdfunding investment. This might just mean that the future of crowdfunding will belong to the small companies.