What is Crowdfunding?

31 July, 2013 — 4 Comments

Crowdfunding. Photo by Colbrain on Flickr used under a Creative Commons licence

Crowdfunding is the action, by which a person, company or organization asks a multitude of people to finance his/its projects via Internet, each of them giving a small quantity of money.

Some entrepreneurs and organizations have developed different crowdfunding platforms. They are web platforms that offer projects creators a display space to publish their projects in order to get financing. These platforms also allow the projects to use a secure payment page to ensure that the projects receive their money. In exchange, most platforms receive a commission based on the amount collected.

Which kinds of crowdfunding exist and what do the financial backers receive in exchange?

  1. Donation-based crowdfunding: the financial backer is altruist, he do not receive anything in exchange. Examples: migranodearena.org (spanish)
  2. Rewards-based crowdfunding: project backers receive some reward. The reward could be something symbolic like the backer’s name in the credits, a thank you card, a poster, a photograph or a product which the company have manufactured thanks to the financing collected. Platform examples: kickstarter.com goteo.org (español).
  3. Debt-based crowdfunding: backers lend the money to an entrepreneur or company who must give it back over an established period of time with interest. There are platforms specialized in financing entrepreneurs in developing and developed countries. Examples: Somolend.com In Spain:  sociosinversores.es, arboribus.com
  4. Equity-based crowdfunding: backers become stakeholders or similar in the company. This kind of crowdfunding have a big potential to fund startups. If the startup succeeds, then  its value increases a lot and backers earn much money if the startup is sold. On the contrary if the startup fails, backers lose their money. Examples: startupvalley.com, crowdcube.com, seedups.com. In Spain thecrowdangel.com, bestaker.com

Debt-based and equity-based crowdfunding are also called “investment crowdfunding” or “crowdinvesting” or “crowdfund investing (CFI)”.

Some figures about crowdfunding in 2012 by Massolution taken from venturebeat.com and universocrowdfunding.com 

  • 1 million successful campaigns.
  • $2.8 bn. collected (91% more than in 2011). $1.6bn in North America and $945 millions in Europe.
  • $1.4bn.is donation-based and rewards-based crowdfunding.
  • $1.2bn is lending-based crowdfunding (grew 111%)
  • $116m is equity-based crowdfunding (grew 30%)
  • Social causes drive 27% of all activity and the category “Entrepreneurs and SMEs” drives 17%.
  • 536 platforms worldwide, 50 in Spain.

Legal issues:

Crowdfunding has found difficulties with certain laws that protect investors. In the U.S.A., pioneering crowdfunding has been legislated in JOBS Act, signed by President Obama on April 5, 2012. Other countries such as UK, France and the Netherlands have various laws promoting collective financing. In Spain there is no specific legislation. Some Spanish organizations ask the Spanish Government to include crowdfunding on the future law of entrepreneurs.

The previously mentioned platforms are only some examples. There are hundreds of them. To know more please check crowdsourcing.org/directory (in English) or universocrowdfunding.com (in Spanish).

In a following post I will give some very good examples of startups, which have gotten finance by crowdfunding in different countries, including Spain.

My opinion about financing startups with crowdfunding:

The crowdfunding is not a panacea. It is not as easy as it seems. Moreover there are legal obstacles depending on each country and depending on the type of crowdfunding. Even so, it is a really interesting option for many startups. It is expected to have a huge growth in the coming years, complementing  or competing with other ways of financing such as banking, business angels and venture capital. Definitely in my opinion crowdfunding will dramaticaly change the way startups are financing. And it will happen very soon!

Some interesting links:

Do you think that crowdfunding is a viable option to finance a start-up or do you see some difficulties?

Trackbacks and Pingbacks:

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    […] What is Crowdfunding? […]

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    […] top of all of this, you can add the new crowdfunding investment phenomenon, which has been helping to develop the concept of business angel. Some people who start investing […]

  3. “Being from a big family helped me as an entrepreneur”. An explanation of the 3F’s (Family, Friends and Fools). « Passion for Startups - September 5, 2013

    […] If you want to know other financial possibilities, I tell you in these articles: business angels, venture capital and crowdfunding. […]

  4. If You Don’t Have Financing, Bootstrapping is the Solution and the Matrix’s Red Pill is your Best Medicine. « Passion for Startups - September 16, 2013

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