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Crowdfunding: Why Is It so Popular?

Crowdfunding: Why Is It so Popular?

by Joshua John

Crowdfunding is not a new idea. Charitable organizations, musicians and artists, and individuals have been using platforms such as Kickstarter, Indiegogo and GoFundMe for a number of years to get financial support for their projects. These donation-based crowdfunding platforms allow anyone with a good idea or cause to solicit funding, which is a great way for people to easily get behind causes they believe in. Crowdfunding is no longer just for good deeds and artistic projects, however. A number of different models of crowdfunding have developed that offer businesses the opportunity to raise funds outside the traditional avenues of banks and venture capitalists.

Donation Based

Donation-based crowdfunding platforms such as Kickstarter are also used to fund business projects and products. Money is pledged in return for gifts, prizes or rewards, often connected to the project or product being funded. In order to benefit from this model, the business proposition should be modest, with low fixed expenses and low marginal costs. The benefit to business is that there is no ongoing payback to the investors in terms of interest or equity-ownership. Hand Stylus, a stylus for touchscreens, was successfully funded on Kickstarter. The company, which raised more than $300,000, offered a custom laser-engraved stylus to each $30 supporter.

Debt Based

Another form of crowdfunding is debt-based funding, which is also called P2P (peer-to-peer) lending. With debt funding, people lend money to a business or individual in return for a fixed rate of return in the form of interest. The best-known American P2P lending platforms are Prosper and Lending Club. The Lara Miller Design fashion design company was successfully funded on Prosper; the company received three loans and used them to fund a new website and launch a new design collection.

Equity Based

The new twist on crowdfunding is equity-based funding. With equity funding, people purchase equity in the business with the expectation that the value of the business will grow. Equity-based crowdfunding, which until now was not available in the U.S., is expected to grow exponentially with the Jumpstart Our Business Startups (JOBS) Act, which was implemented in January 2013.

Because equity-based funding is highly regulated by securities laws, opening up this avenue of investment to unaccredited investors has caused a lot of concern about how the investments will be regulated differently than the usual accredited investor methods. Although not all regulations are in place yet, investors can take comfort in the fact that the JOBS Act directly addresses fraud and unethical non-disclosure, including significant company requirements and funding-portal responsibilities that must be met.

Fundable and CircleUp are two of the players in this new market. DecisionDesk, an application tracking system management software, raised $1.25 million on Fundable, while 18 Rabbits, the maker of organic granola bars, raised $500,000 on CircleUp.

What Makes Crowdfunding Unique?

Each model has its pros and cons, mainly because each is aimed at a different type of business. However, all models of crowdfunding have a number of things in common, which allows them to offer unique benefits, especially to small businesses and projects.

Implementation costs:

  • Crowdfunding platforms make it extremely easy to set up and manage a campaign.
  • The costs of raising money are much less than an IPO or a bank loan.
  • A new business can get funding very early in the start-up phase without having to involve venture capitalists.

Attracting investors or contributors:

  • By using a crowdfunding platform, a business can cast a very wide net for potential supporters.
  • The platforms allow a business to interact with these supporters in new and innovative ways.
  • The supporters can become the customer base and can spread the word about the project, bringing in more business and more supporters.
  • Crowdfunding can attract funding for projects that may not appeal to traditional investors because they are too small or are viewed as too risky.

For any crowdfunding model to succeed in the long term, investors and contributors must have faith that their money is being used for the purpose for which it was raised. Each platform has checks and balances in place to protect donors and investors, so carefully investigate the ones you are considering funding.

About the Author

Joshua John is the digital strategist for MBA@UNC, the executive MBA from the University of North Carolina. He also loves gadgets, movies, and all things batman. You can find him on Twitter: @joshuavjohn

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