This is part 1 of 6 part series

1. 48 May-June 2017 49May-June 2017
Millions of people out there with
similar views might be ready to shell out
their money and fund you. All you need
to do is to convince them to give a small
donation each of $10, $50, $100, or more.
As the number of donors increase, you
will have a sizeable fund.
Crowdfunding refers to raising funds
for projects in small amounts from a
large number of people, typically via the
internet.
Crowdfunding extends support to
people’s funding problems, helping them
turn their ideas into realities. It amplifies
their chances of getting funded by
widening the set of potential investors
beyond the traditional circle of family,
friends, banks and venture capitalists.
With support from policymakers
and institutional investors, and with
increasing influence of social media,
crowdfunding is going mainstream as
an alternative to traditional fundraising
options.
Raising funds via crowdfunding is
simpler when compared to most other
financing options such as bank loans,
angel investors or venture capital
funding. You post the project / product
/ business idea as a “campaign” onto a
crowdfunding website, with a detailed
description.
You need to set a monetary goal
W
hat’s the greatest thing
since sliced bread?
Probably the Internet, every
imaginable part of our life is being
taken over, including funding. In
this multi-part series, we’re going to
be diving into crowdfunding as an
alternative source for funding.
Imagine…
A start-up waiting to be funded. A
businessman aiming to expand his small
business. A movie maker trying to get his
film out. A group of would-be musicians
determined to release their album. An
artist seeking to get his project exhibited.
A bunch of teenagers dreaming of a world
tour. Researchers striving to fuel their
research.
There are limitless options waiting to
be realized. The canopy of crowdfunding
seems to be spreading at a greater rate
than ever. If you are quite determined on
achieving those dreams, and you have the
ability to reach out to like-minded people,
funding should not be a bottleneck.
The mantra seems to be “Don’t be
deterred from aiming at the skies and
achieving your dreams for want of
funding”. The financial world is ready -
you just need to step in and share your
dreams.
by Jose Paul Martin
and a timeframe to achieve this goal.
If people want to support or back
your campaign, they can donate via
the crowdfunding platform to help
you achieve your goal. You can start
with known acquaintances from your
connections, including family and
friends. This creates some traction and
the necessary impetus to kickstart the
campaign.
What Types Of Crowdfunding Are
Available?
There are four main types of
crowdfunding:
Donation Crowdfunding: This is the most
basic and oldest form of crowdfunding.
It refers to raising funds from people
who are personally or socially motivated
to do so for supporting a cause,
without expecting a tangible return.
The donors benefit by the “feel-good”
factor or an acknowledgement. This
type of campaign suits charities and
social organisations most, are often 1-3
months in duration, and are perfect for
amounts under USD 10,000. For example;
DonorsChoose, is a crowdfunding
platform that empowers school teachers
to request much needed materials in
their classrooms. Two applications of
donation crowdfunding are:
Jose Paul Martin is a private
equity investor & advisor
currently focused on IT &
Healthcare sectors in the
Middle East, US & Asia. He
is also MD of Eqoris Group &
Author of The Pitch Process
Framework
http://pitchprocess.com
• Charity: You can crowdfund to
support your cause, be it charitable,
personal or social, or raise funds
to support a homeless family, war
victims, refugees etc.
• Non-profits: Many non-profits are
realizing the power of crowdfunding,
and have started using crowdfunding
platforms. In addition to the funds
raised through crowdfunding, they
also gain publicity, which helps grow
their network further.
Rewards Crowdfunding: Rewards
crowdfunding, similar to donation
crowdfunding, offers tangible or
intangible return and is open to all,
with few regulations. This type of
crowdfunding involves setting varying
levels of rewards based on the amount
donated. The third generation version for
the Pebble SmartWatch, called The Pebble
Time, was one of the highest backed
projects on Kickstarter, a crowdfunding
platform. People could use this to raise
money for either:
• New Product: This is especially
helpful to those minds brimming
with ideas to create new products.
You can find funds via crowdfunding
for the same purpose.
• Music/Arts: Artistshare brought
in the concept of crowdfunding
in a professional manner with
their launch in 2003. Now many
musicians & bands use this for
funding their tours, albums,
exhibitions, performances, etc.
• Films: Filmmakers have started
relying on crowdfunding, which
offers better creative space with
minimal interferences. They can
make use of different crowdfunding
platforms for funding the production
of films, short films, videos, etc.
• Education: Universities, students,
and research scholars are using
crowdfunding to support the
educational initiatives of both
students and the faculty.
Equity Crowdfunding: Raising funds from
the crowd, in return for a stake in the
equity of the project or business, is known
as equity crowdfunding. If the venture
succeeds, the share value increases and
the investors stand to gain; they lose if
it is the other way around. You can set
investor caps, minimum pledge amounts,
and so on.
Equity crowdfunding was accessible
only to accredited investors till the JOBS
Act (Jumpstart Our Business Startups
Act) was passed. According to SEC
regulations, accredited investors are those
investors who have a net worth of at least
USD 1 million individually or earn an
annual income of at least USD 200,000 or
USD 300,000 combined with their spouse.
With the JOBS Act, investors are able
to invest irrespective of their annual
income or net worth, thus making equity
crowdfunding all the more accessible.
Equity campaigns usually extend up to
many months in duration and are perfect
for start-ups seeking USD 100,000 or more
in funding. Let’s have a look at you can
make use of this:
Start-ups: Start-ups are now benefitting
in a large way with the passing of the
JOBS Act, allowing startups to solicit
investments from both accredited and
non-accredited investors in exchange for
equity. The expectation of investors is the
financial pay-off as a percentage of profit,
once the startup is sold.
• Small Businesses: Small businesses
may offer a part of their equity to
the crowd in exchange of funds. The
risk in crowdfunding is less than
that of a bank loan. However, as the
business grows, so will be the size
of the investor's investment in your
business.
• Business Expansion: Equity
crowdfunding can also be
undertaken by established
businesses for expanding their
product line or geography.
• Real Estate: The opportunity for
crowdfunding real estate is making
big waves, with each funding
platform taking a different approach.
It is an opportunity for investors to
invest money in quality institutional
properties. The top players in
this arena are RealtyMogul and
CrowdStreet.
Debt Crowdfunding: When you raise
funds from the crowd in the form of
loans to be repaid with interest, it is
called debt crowdfunding or Peer-To-
Peer (P2P) lending. This lending may be
secured, usually against property/asset,
or unsecured. The financial returns, in
the case of debt funding, are in the form
of interest. Default risk is inherent in this
type of funding.
Every site has their own policy on
default, and investors need to have a
clear understanding of these policies
in order to protect themselves. These
campaigns typically need a shorter time
span of around five weeks and fit those
entrepreneurs who are not ready to give
up equity in their start-up.
Debt crowdfunding is suited for
individuals and larger companies who
are not ready to share equity ownership,
and who do not mind resorting to multiple
rounds of funding and may again be
broken into four categories:
Unsecured Peer-to-Peer (P2P)
Lending: Individuals lending to
individuals without any security is known
as unsecured peer to peer lending. It is
widely used for small amounts but is the
most risky form of P2P lending, as the
lender is at the risk, in case of default
by the borrower. To tackle this, some
platforms now insist on a kind of safety
fund to pay back in case of a default.
• Unsecured Peer-to-Business (P2B)
Lending: In this type of lending,
individuals lend only to businesses
without any security, thereby
assuming a business risk.
• Peer-to-Business (P2B) Secured: Here
the individuals lend to businesses,
but the loans are secured, mostly
against property or bills receivables.
• Business-to-Business (B2B) Secured:
Small companies who lend money to
other businesses, with security, come
under this category.
In short, crowdfunding is an evolving
concept, and so there are no hard and fast
rules to which type will succeed or not.
You need to select the type based on your
requirement, product, risk tolerance and
legal compliance. Stay tuned for the next
part, as we dive deeper into the world of
crowdfunding.
The Ultimate
Crowdfunding
Guide Series
(Part 1)
Expert Viewpoint | Investor BehaviourExpert Viewpoint | Investor Behaviour