We live in a time when raising capital is easier than ever due to the wide range of funding alternatives available to us. The Internet has a large part to play in this because it has disrupted the funding arena once dominated by snobby High Street banks by introducing less stringent financing options.
A great example of these disruptive funding options is crowdfunding, a way through which common folk like you and I fund for-profit and non-profit ventures through the Internet. More recently, crowd investing seems to be all the rage, and this is largely due to the shortcomings associated with crowdfunding.
But before we proceed, it is apt that we draw a line between the two.
Crowdfunding is a vast category that involves people pooling to donate a set amount of funds for a certain project or cause in exchange for various forms of rewards. Funding can either be equity-based (funding in exchange for equity), debt-based (funding in exchange for financial return and/or interest later on), or donation-based (funding in exchange for non-monetary rewards).
There is no arguing that crowdfunding is an impressive financing option and grants many benefits over traditional sources of funding. However, this does not mean it doesn’t have faults, and this has spawned crowd investing.
Crowd investing can be said to be similar to crowd funding only that in this type of funding, the investor(s) eyes a share in the business in return for equity finance. Unlike crowdfunding where fund recipients aren’t obligated to give up a stake in their business for a variety of reasons, crowd investing is more of equity and debt funding (as well as hybrid forms of the two) where the donor becomes your business partner.
Issues with Crowdfunding
Let’s not take anything from crowdfunding; it is a great funding option in some cases, but not in all. It works nicely mostly as a viability plan for startups. For anyone trying to prove an idea, this is the go-to platform. However, the funders may have the money, but they won’t represent how your product will perform in the real world.
In other words, your project may receive funding through the Kickstarters and Indiegogos but that isn’t a sure-fire guarantee that you’ll witness wide-scale market adoption. Some funders who pre-order things pitched on the crowdfunding platforms are mostly early adopters who like that type of thing, but not by all means mainstream buyers.
This partly explains the reason crowdfunded companies are going bankrupt because the idea just didn’t resonate with the buyers out there. Contrast that to the headway an entrepreneur could gain from crowd investors who are personally invested in your success, offering mentorship and other assistance along the way.
Another takeout from this is that crowdfunding seems to work best for startups in their earlier stages when a company wants to finish prototyping and commence mass production on a first product, or for one-off products that won’t require expanding into a line. This could also potentially expose the idea to potential theft, another big issue.
For businesses that have a stable customer base and looking to expand, however, crowd investing is the better option. It’s easier and less time consuming since you already have working figures to lure investors in, and the key thing is deciding how much equity you’re willing to surrender (and how flexible you are in keeping investors smiling).
Crowdfunding has also been accused of taking a huge bite into the funding pie because of the large fees involved (usually about 10 percent commission of the amount raised) as well as its rewards-based nature where entrepreneurs use the same funds to ship the product to a bunch of backers scattered across a wide geographical area.
Thus, the reserve capital left at the end of the day is quite minimal, given the effort and time dedicated into the project.
The time and effort notwithstanding, another crowdfunding deterrent is the need to have an adequate form of reward – one of the keys to crowdfunding success – which locks out many good ideas whose concept may not allow for the development of such a reward.
There is also the issue of fear of public failure and exposure amongst investors for lacking the foresight, as well as among recipients for pitching a doomed idea, which could be damaging in more ways than just ruining the image of both parties.
While raising money for business is not the easiest task in the world, crowd investing promises to make it easier and more efficient for businesses to get off the ground or expand while offering funders a new way of adding diversification to their portfolio. A win-win for all.