Crowdfunding or microsponsorship: what does group funding consist of?
In the last decade, many anonymous people have made their dreams come true thanks to crowdfunding, which is also known as micro-sponsorship. Ideas of all kinds, from the world of culture, through solidarity, leisure, politics to the world of business; all have been possible thanks to the convergence between enterprise and community. This is what makes crowdfunding great: the fact you can have an idea, launch it on any group funding platform and convince the public that your project has added value to achieve economic investment.
The latest date available on micro-sponsorship confirm the success of group funding. According to the study ‘Participative financing in Spain, annual report 2016’ by the Universo Crowdfunding consultancy, made in collaboration with the Universidad Complutense de Madrid, crowdfunding in Spain raised 113 million euros in 2016, 116% up on 2015.
Despite the good data, Ángel Gonzalez, Adviser for the European Commission in the area of, believes we are only at the beginning. “The EC wants to continue promoting ‘crowdfunding’, for although growth is stable, in Spain we are still three or four years behind the United Kingdom, there is still a lot of work to be done”.
Group funding methods
In Spain in 2016, 48 different platforms funded some project with the technique of micro-sponsorship. The growth of ‘crowdfunding’ has diversified the different group funding platforms, pushing them towards specialisation.
54% of all investment in micro-sponsorship comes through crowdlending; 17% goes on real estate crowdfunding, 14% on equity ‘crowdfunding’, 11% on reward crowdfunding, and finally 4% goes on donation crowdfunding. The differences between these are:
- ‘Crowdlending’ consists of micro-sponsorship based on loan platforms. This is mass financing by means of loans or credits to a company in exchange for an interest rate. This is the kind of group funding that moves most capital in Spain, with a figure of 100 million euros. Certain platforms stand out, like LoanBook Capital, which since it started up, has loaned more than 46 million euros in credits; Circulantis, has provided more than 37 million euros, and Grow.ly, over 11 million.
- Real estate ‘crowdfunding’ approached investments of 20 million euros in its first year of life. Today it accounts for over 50 million. This kind of micro-sponsorship involves participative financing in the purchase or development of real estate among different investors, without a large outlay. Some of the main platforms are Housers, where more than 50 million euros were invested in 453 real estate projects, bringing a profit of 8 million euros; Inveslar: The Urban Investors, with 3,503 investments adding up to a total 2 million euros and returns of 888,000 euros, and; Privalore, with more than 6 million euros in investment and a profitability of 18%.
- Equity ‘crowdfunding’ is that in which mass investment is made in a company in exchange for shares or participations. This is the form of group funding now growing fastest in percentage terms. One of the platforms that provides this interaction between entrepreneurs and investors is Sociosinversores, with over 100 funded from different areas. Also outstanding is Crowdcube, with 490,332 investors spread between 630 companies. Capital Cell, which specialises in biomedicine, has provided investments valued at 12 million euros in 23 campaigns.
- Reward ‘crowdfunding’, which is popularly known as ‘patronage’, is that favoured by the creative community. In this form, investors making economic contributions to launch a project, expect a reward for their contribution in exchange. In 2016, more than 12 million euros were invested. Some of the main platforms here are Verkami, the largest platform in Europe, with the highest success rate in the world, which funded Stockholm, the first crowdfunded film to be awarded a Goya; Kickstarter, with more than 14 million sponsors and 143 thousand projects, and the Pebble smartwatch, which managed to raise 10 million euros, 10,266% more than expected, and; Lanzanos, with over 7 million euros raised for 2,500 projects.
- Donations ‘crowdfunding’ is that in which the community can make monetary contributions without expecting any profit from the transaction. In 2016, contributions exceeded 4 million euros. In Teaming 2.4 million euros were invested, Migranodearena raised 1.6 million euros and Crowdants, over 170,000 euros.
5 success cases
We have already mentioned successful ‘crowdfunding’ projects like Stockholm and Pebble. Now we give five examples that have demonstrated the feasibility of group funding.
- Kingdom Death Monster: Board games are more alive than ever. In 2017, this game of terror, already turned into a cult work, achieved more than 12 million dollars via Kickstarter. It was so successful that within two hours of its launch, it had already achieved more than the 100,000 euros it had targeted.
- Tempo Rubato by Mayte Martín: The record world has also felt the effects of reward micro-sponsorship. In 2017, in Verkami, the popular singer songwriter Mayte Martín raised more than 36,000 euros to publish a record she had worked on for 22 years. Crowdfunding gives artists the freedom to self-publish.
- Fundación Santuario Gaia: Teaming allows philanthropic donations to be made to projects over time. For example, the Satuario Gaia Foundation, a vegan centre of farm animal rescue and recovery in Camprodon (Girona), has received €117,907 from 5,215 teamers since 2013.
- Hemav: Equity crowdfunding is one of fastest-rising forms of group funding in which people can invest in exchange for shares. Hemav achieved 450,000 in investments from 73 investors, with which it was able to offer unmanned aircraft solutions, like drones, in civil applications.
- Goya: The Housers website gives different success cases of real estate crowdfunding. For instance Goya; an investment with the purchase, complete refurbishment and sale of a dwelling in the exclusive Salamanca district in Madrid. The net accumulated profitability was 9.94%.
Benefits and drawbacks
Although group funding has opened new windows, it is still very much in its early stages. The opportunities it offers are enormous, but not devoid of risk. Here are some of the pros and cons of this formula.
- Diversification of the forms of funding.
- Having new customers.
- Empowerment of users.
- Speed in receiving money.
- Cheaper money.
- Saving in time and resources
- Possible fraud related to:
- Delays in meeting the obligations established by entrepreneurs and financiers.
- “Setting valuation” (how much is offered for the amount of capital that is expected to be collected), the communication between entrepreneurs and financiers after the investment.
- Lack of awareness of the codes of good practice.
- Greater emphasis by the players on mitigating risks and possible conflicts of interest of investors using private information on the project to their own benefit.
- The limited capacity of the platform to mediate in the conflicts between entrepreneurs and financiers and other communication problems between the parties concerned after the funding.
- Less restrictive legislation that encourages the development of this sector with significant repercussions on economic growth and jobs creation.
- Greater monitoring of the financed projects to oversee their sustainability.
- The uncertain sustainability of the platforms themselves, which requires greater effort by all players involved in order to give a drive to this form of financing.