Tim Aldiss writes for Shadow Foundr: don’t just follow the crowd, follow experienced investors.
Crowdfunding has become the new mainstream alternative for many start-ups and small businesses that struggle to obtain financing from banks or other traditional sources.
Through crowdfunding, businesses can fund their ideas, projects and ventures with the money raised by groups of people. These groups of people (crowdfunders) contribute funds, usually over the web, to the companies that they believe in, allowing these companies to bring their ideas to life.
Unknown to most, crowdfunding is not just some recent internet fad. It has, in fact, been used throughout history in various forms. In one of the most famous historical examples, around 160,000 contributors made donations to fund the building of a monument base at the Status of Liberty. The United States Government had not provided adequate resources to build it, so, inspired by a campaign in the newspaper, the crowd funded the monument themselves.
Broadly speaking, Crowdfunding can be broken down into three areas; Rewards-Based, Equity, and Peer to Peer Lending (P2P).
Rewards Based Crowdfunding is the type which most are familiar with. This is when a group of individuals contribute their money to a company, start-up, or an idea. These contributors however, do not own any of the company and do not gain any monetary reward, should the company succeed. In return for their contributions, these individuals may receive a product or service (usually the finished idea) for what they have funded.
The second type, Equity Crowdfunding, is basically another name for share investment. The funders are buying shares in the company and becoming shareholders. This means they are subject to all the risk and potential rewards associated with owning shares in a company.
The final type of crowdfunding, Peer to Peer Lending, as the name suggests, is when individuals lend money to a company or individual, who normally will put up some sort of security as collateral for the loan. The funders receive a return, which is essentially the interest on the loan. Interest is generally at a higher rate than a bank loan. Over the long term, Equity Crowdfunding holds the greatest potential upside.
Three individual parties are at play when it comes to the implementation a crowdfunding project. It begins with the group (or individual) who seeks funding for their start-up, project, or idea. The second group is the investors, or the crowd, which consists of people who are willing to contribute funds, through any of the three types of funding, to bring the project to life.
Finally, to complete the crowdfunding project, you need a moderator to arrange the funding appropriately. The moderator should be regulated by the relevant authorities and maintains all the legal compliance necessary to ensure both the funders and the companies being funded, are protected. The regulator of crowdfunding in the UK is the Financial Conduct Authority (FCA). Do not risk investing through any crowdfunding platform that is not authorised by the FCA.
The evolution of crowdfunding, from the Statue of Liberty to the modern business world, has been rapid, exciting, and sometimes chaotic. Today through, crowdfunding and the internet, everyday people from anywhere in the world, have the ability to get involved in ideas and companies that were previously only the domain of venture capitalists and private investment firms. Companies, start-ups, and even just ideas can be funded through the will of the people. Crowdfunding is allowing the general public to fund projects directly, see these projects come to life, and make a lasting impact on the consumer market.