Tim Aldiss writes for Shadow Foundr: don’t just follow the crowd, follow experienced investors.
If your company is a small business or possibly a start-up, securing funding can be a tricky area. Many businesses are finding that getting financial help from their bank simply isn’t possible. That’s why crowd funding is rapidly becoming a major way to secure the funding sources people need to help their business move forwards.
What is crowd funding all about?
Crowd funding raises money to fund any kind of business project or venture by tapping into contributions from diverse sources. Usually, this process is carried out online.
With the rise of the internet, crowd funding is undoubtedly becoming a big thing. However, the concept behind is not new and has been implemented for some time.
As far back as 1885, the US Government was struggling to fund the building of a base for the Statue of Liberty monument. By using a campaign through the newspapers, they managed to accumulate a number of smaller donations from 160,000 funders. This was an early type of the crowd funding that we see so much of today.
Crowd funding can be divided into three basic types. These are:
1) Rewards-based crowdfunding
2) Equity crowdfunding
3) Peer to peer lending
Rewards-based crowdfunding encourages donors to give money to a business for a project. As the name suggests, there’s an element of reward for doing this. The donors actually get goods or services in return for their support. These investors don’t own any part of the company, as shareholders would. In the future, they won’t benefit from any kind of future reward or profits other than the goods and/or services they receive.
Equity crowdfunding is a process where funders buy shares in the company or organisation. By becoming business shareholders, investors will benefit from any profits and returns if the business thrives and succeeds in the future. On the other hand, if the business doesn’t succeed, the investors stake the risk that they could lose all of the investment funding they put in in the first place.
Peer to peer lending
This type of lending involves individual investors lending money to businesses, which usually provide some kind of security in return. Returns are usually bigger than they are for typical financial institutions. However, they aren’t as high as the potential returns that equity crowdfunding can deliver.
For crowdfunding to work well as a process, there are three main stakeholders:
1. At the centre of the project is its creator or entrepreneur. This person or group of people will propose the initial concept or project for which they need funding.
2. The investors or the ‘crowd’ who provide financial backing for the project or idea.
3. To co-ordinate the whole funding initiative, a moderating organisation or platform is required to set it all up in the first place. This must be a regulated body to ensure that both the business seeking funding and the investors have protection and that the correct legal framework is in place. The Financial Conduct Authority oversees Crowdfunding in the UK. Anyone who wishes to set up a crowd funding project using a platform must make sure that it’s authorised and regulated by the Financial Conduct Authority.
Crowdfunding has made significant progress since its humble beginnings and especially with the rise of the Internet. Using crowd funding is a very good idea to get businesses, ideas and projects off the ground. It also provides smaller investors with the opportunity to take a stake in a company without needing to be in the venture capitalist arena or part of a large financial institution.