Why Crowdfunding?

A new equity based crowdfunding platform will be launched in the coming weeks called CrowdAhead. The last steps are being taken to ensure the platforms acts according to FSA regulations.In the meantime CrowdAhead is looking for suitable projects to launch  and is seeking suitable investors. If you know of people who are interested, please go to www.crowdahead.com and register.

Crowdfunding is the phenomena whereby anybody can put money into a project, an idea, a business or a charity. The way it works is really quite simple. Lets say you have a band and want to make your music more widely available. Rather than sending endless copies to music producers or joining X Factor you put in the web, let people know through the social media and let people download your music in return for a donation or a signed copy of your first CD or even a T-shirt.

With the growth of the Internet and then Social Media this kind of promotion and fund raising increased in popularity and especially in the creative sectors there is a growing fan base. Do we really want Simon Cowell to tell us what music we should listen to, even though I think the X-Factor needs to be renamed the Simon-Factor as he is brilliant on it.

This has led to what is now known as crowdfunding – the crowd funds the idea, the project, whatever.

Aside from the funding aspect, there is another important spinoff from this – if someone can sell their idea to enough people to fund it, the likelihood of the idea gaining some  kind of market traction increases. In other words, the funding cycle also becomes a marketing cycle, all for the same price. This point is going to come back in a next blog as it is rather important.

There are lots of different ways to crowdfund, so I am just going to hit the major ones here. The others tend to be spin-offs of these major ones.

Donation based crowdfunding: this is the one I mentioned above and is widely used in the creative sectors and it is a perfect fit we all hope it will grow. The big advantage is that it allows new creative areas to grow and develop before any kind of commercial interests grab it or dictate the direction. It does not mean that every bit of creativity that tries to crowdfund itself will work because the crowd is discerning also, very much so.

Debt based crowdfunding: as our banks pay very little for our savings and many people have been paying off their debt and increasing  their savings, an appetite has grown to lend money directly through so called peer to peer lending sites. There are many examples and I am told that debt default is lower than that experienced by banks, whilst, because the overheads are so much smaller, the rate paid to lenders is higher and the rate paid by borrowers is lower. Everyone is a winner.

Equity based crowdfunding: this is where the funder puts money into a business or project in return for a share in the company and therefore in future profits. Where the crowd had no access to the likes of Facebook or Google, with this type of crowdfunding, this market suddenly opens up. President Obama has pushed it with the JOBS Act, and in the UK it is already working. The regulators still struggle with the idea, as it is inherently risky, but to be fair to them, they have been reasonably supportive in their own little way.

So we are left with three big questions:

  1. should you give a look at crowdfunding?
  2. what kind of crowdfunding should you choose?
  3. how much money should you put in or ask for?

The answer to the first question is absolutely yes. It is very easy – simply find a crowdfunding site of the type you like and browse through the proposals. It is simply interesting to see what people are doing without any obligation to actively participate.

Whether you should participate is a very personal question which nobody but you can answer. There are many questions to address which go well beyond this blog. Whatever you, either as a fundraiser or as a funder understand the risks. As a funder you must understand that their is an inherent risk that you not see a return, even with donation based fundraising. There are examples of donation based fundraising where the promised goods were not delivered, delivered late or not delivered in the form promised.

The last question, how much money should you put in or ask for is also complex. Only money you can afford to lose should be put in. How much should you ask for? Only ask for what you can afford to pay back but ask for enough to ensure you project is successful.

Crowdfunding is fun and exciting and is the future, but it should always be considered very carefully.

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